Two million extra people will pay higher rate tax by 2024
More people than originally forecast are expected to have come under the net of the higher rate tax threshold, with more expected to pay income tax at 40% or 45% than previously predicted.
Analysis by consultancy Lane, Clark & Peacock revealed one in five taxpayers will be paying at the higher rate in 2024/25, compared with fewer than one in 10 in 2010/11.
Overall, it suggested up to 2.5 million extra people could be brought into higher rate tax between the general election in 2019 and an election in 2024/25.
Steve Webb, partner at LCP, explained that a combination of faster than expected wage growth and the freezing of tax thresholds means more people are dragged into paying more tax. Though on the flip side, it means more people can claim the higher 40% tax relief on their pension contributions.
It’s all to do with figures which suggested that at the time of the last election in 2019/20, there were 4.3 million people paying higher or additional rate of tax. This was revised up by HMRC to 4.6 million by 2021/22 and was based on OBR estimates for wage growth published in March 2021.
However, since then, the OBR has increased its estimates of wage growth (some figures have tripled) and Webb said the increase in taxable incomes between 2019/20 and 2021/22 means the number of higher rate taxpayers in 2021/22 is likely to be closer to 5.2 million – one million more since the election.
And as the OBR expects further increases in total wages and salaries of over 12% in the three years to 2024/25 (election year) when the higher rate of income tax will remain frozen at £50,270, Webb said an extra 1.5 million will pay higher rate tax.
‘Ultimate stealth tax’
He said: “HMRC admitted last year that it thought over a third of a million extra people would be brought into higher rate tax in the first two years of this parliament. But that was before the surge in wage levels as the economy has bounced back from the Pandemic.
“As a result, it is likely to be closer to a million people who have been brought into higher rate tax so far. In addition, three more years of relatively rapid wage growth coupled with a freeze on tax thresholds could bring a further 1.5 million people into higher rate tax by the time of the next election, making a total of 2.5 million more over the whole parliament.
“There is no doubt that freezing tax allowances and thresholds is the ultimate stealth tax. No minister has to announce a rise in tax rates, but tens of millions of people pay more tax, and millions of those will even be dragged into higher tax bands purely because of wage inflation. However, it does mean that millions of people now have a much bigger incentive to put more money into their pensions, potentially enjoying double the rate of tax relief on any contributions.”
Related: See YourMoney.com’s Pension tax relief guide for more information.