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‘No surprise’ as 100,000 workers pulled into higher rate tax band

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The number of people paying the higher rate of tax has swelled by 100,000 in one year, which is ‘no surprise’ given wage growth against all but stagnant tax bands.

Between the 2019/20 and 2020/21 tax years, 100,000 people were pulled into paying the higher (40%) rate of tax.

This takes the total number of higher rate taxpayers to four million, according to the latest income statistics from HM Revenue & Customs.

Meanwhile, the number of additional rate taxpayers (45%) increased by 12,000 in the same period, taking this group’s total to 433,000.

While these latest figures relate to the 2020/21 tax year. In June 2022, HMRC estimated that for the 2022/23 tax year, there will be 5.5 million higher rate taxpayers. This would represent a 43% increased compared to 2019/20 figures.

HMRC statistics also suggested there will be 629,000 people paying the additional rate of tax – nearly 50% more than in 2019/20.

For wealth manager Quilter, the latest figures come as “no surprise” considering that since 2019, the rate at which someone starts to pay higher rate tax has “shifted minimally” despite wage growth during that time being “significant” due to a range of factors including the pandemic.

Wage growth is also likely to accelerate as worker demands for ;pay increases to counter the effects of inflation are granted.

Another big factor which will impact the number of people moving into the higher or additional rate tax is the income tax thresholds freeze until 2028.

Quilter suggested that with the extra 1.5 million people forecast to be dragged into higher tax bands by 2027, 1.13 million people will be paying tax at the 40% rate but “may not feel wealthier as their salaries have simply kept up with inflation”.

“This means that in real terms their buying power remains much the same, yet their salaries are taxed much more”, Rachael Griffin, tax and financial planning expert at Quilter said.

Fiscal drag

Griffin explained that the reason more people move into new tax bands is because of fiscal drag. This is when the income level at which taxes start to be collected and the amount of income that can be earned tax-free don’t increase at the same rate as inflation or income growth.

“This can cause a larger portion of a person’s income to be subject to taxes and can also cause more people to fall into higher tax brackets ultimately meaning they pay more in tax,” Griffin said.

Earlier calculations by Quilter revealed that if wage growth stands at an average 5% per year for the next four years but income tax thresholds remain frozen, someone earning £50,000 today will be £2,643 worse off in the 2027/28 tax year. Over the four-year period, they would be £6,463 poorer.

Griffin said: “Therefore, we should re-think the length of the freeze of income tax bands as while it is understandable the Government is keen to refill public coffers, this should be balanced with a fair tax system that is not dragging more and more people into higher taxes.”

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