Hundreds of thousands of workers have been pulled into a higher tax rate band due to the effect of frozen thresholds, while there are 8.95 million people aged 65+ who are paying income tax, the latest Government data reveals.
In the 2024/25 tax year, an estimated 29.5 million people are set to pay the basic rate of tax, up from 28.8 million in the previous tax year.
Meanwhile, an additional 310,000 people will be dragged into the higher rate tax band, taking the number from six million in 2023/24 to an estimated 6.31 million for the current fiscal year.
And for the first time ever, the number of those with the highest earnings paying the additional rate of tax is expected to surpass one million. In 2023/24, HM Revenue & Customs revealed there were 950,000 additional rate taxpayers, but this number is expected to swell to 1.1 million in the current tax year.
According to Laura Suter, director of personal finance at AJ Bell, “these figures lay bare the real impact of freezing income tax bands during a period of high inflation and wage growth”.
Since thresholds were frozen in the 2021/22 tax year, 4.4 million more people will be dragged into paying income tax in the current tax year as people’s earnings have exceeded the frozen personal allowance of £12,570.
There has also been a “dramatic shift” in the number of people paying higher rate tax, with almost 1.9 million more people expected to be dragged into the 40% tax bracket by this tax year when compared to 2021/22.
“The impact of the additional rate tax threshold being lowered during a period of soaring wage growth means an extra 180,000 people are expected to breach the £125,140 limit for additional rate tax this year alone. This will take the total number of additional rate taxpayers to 1.13 million for the current tax year – a whopping 117% increase since 2021,” she said.
Rachael Griffin, tax and financial planning expert at Quilter, added: “This continued upward growth in higher and additional rate taxpayers comes as no real surprise given income tax thresholds are set to be frozen until 2028. The pandemic had a profound impact on the economy, and so too has the subsequent cost-of-living crisis, both of which caused a surge in wage growth due to a combination of factors including increased demand for certain jobs, supply chain disruptions, and inflationary pressures.
“However, despite this wage growth, the rate at which someone starts to pay higher rate tax has barely changed, moving from £50,000 to only £50,270 for the tax year 2021-22, and remains that way. What’s more, the additional rate threshold was lowered from £150,000 to £125,140 from April 2023, which will have contributed heavily towards this rise.”
Pensioner income tax
But it’s not just the working-age population pulled into paying more tax.
The HMRC figures revealed that 8.27 million people aged 65+ paid income tax in 2023/24, but this figure is estimated to rise to 8.95 million in 2024/25. This compares to 4.9 million in 2010/11.
Steve Webb, partner at LCP, said: “These new figures from HMRC are very timely and help to inform the debate about pensioners and tax. They show that a combination of frozen tax thresholds and significant increases in the state pension means the number of pensioners paying tax has continued to soar.
“But this is a continuation of a long-term trend [that] has seen the number of over-65s paying tax rise by around four million since 2010/11. For a pensioner in Britain, being an income taxpayer is now the norm rather than the exception”.
Related: Two million retirees to pay tax on pensions despite Tory ‘triple lock plus’ policy
