Millions more people are being dragged into paying more tax, with the number of higher-rate taxpayers topping five million for the first time.
The latest figures from HMRC show there were 5.1 million people paying the higher 40% rate of tax in 2022/23 tax year – up by 680,000, or 15.3%, compared to the previous year. In comparison, five years earlier, there were 4.2 million people paying the higher rate. You start to pay the higher rate of 40% tax on earnings above £50,271.
This threshold has been frozen since the 2021/22 tax year and will remain in place until April 2028. Previously, most thresholds rise in line with inflation – but the freeze, introduced by the previous Conservative government, mean more people are being dragged into a higher tax bracket when they earn more money. This means you’re at risk of being pushed into a higher tax bracket if you get a pay rise, or change jobs with a higher salary.
This is known as “fiscal drag” and it generates more money for the Treasury without actually having to change the level of tax rates. Economists say the total number of higher-rate taxpayers is on track to hit nine million by 2028 and could reach ten million by the end of the decade.
Higher-rate taxpayers made up 15% of all taxpayers and accounted for 35% of the total amount raised by the Government from income tax in 2022/23. The number of people paying the additional tax rate also rose to 600,000 in 2022-23 – 9.5% more than the prior year. You pay the additional 45% rate of tax on earnings above £125,140. These 600,000 additional-rate taxpayers made up nearly 2% of all taxpayers and accounted for 34% of income tax raised.
Meanwhile, a freeze in the personal allowance threshold – which means income on up to £12,750 is not taxed – resulted in 1.5 million more people paying income tax in 2022-23. Shaun Moore, tax and financial planning expert at Quilter, said: “The data indicates that higher and additional rate taxpayers, totalling 5.7 million individuals, contributed 68.7% of the UK’s income tax revenue during the period.
“In contrast, 28.2 million basic rate taxpayers and 0.6 million savers rate taxpayers account for the remaining share. This highlights the significant role higher earners play in overall tax receipts. With income tax thresholds frozen until 2028, this figure is expected to rise as more people’s salaries exceed the higher rate thresholds.”
Andy King, financial planning specialist at wealth management firm Evelyn Partners, said: “This data reveals a marked increase in the number of taxpayers in the UK across the board, with more earners drawn into paying tax – possibly for the first time – at the basic rate, and many more being drawn into the upper tax bands.
“This is of course due to the process of fiscal drag, as inflationary pay rises pull more people across tax allowances and thresholds that have been frozen since April 2021 – a process that is still in full swing and will continue to increase the tax burden until the freeze is thawed, which will be 2028 at the earliest.
“What is remarkable is the extent to which basic-rate taxpayers are being drawn into the higher-rate tax band, where there was a 15.3% increase in the number of taxpayers to 5.1 million. Their total income tax liabilities also soared by 15.6%, and this is in part due to the tapering of the Personal Allowance remaining at £100,000.
“That is another boundary that has remained unchanged and continues to create a step in the effective marginal tax rate to 60%, which many people seek to avoid by restricting earnings – either by avoiding extra work or a promotion, or by making tax-efficient pension contributions.“
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