According to a new Freedom of Information (FOI) request submitted by Quilter, the wealth manager and financial adviser, HMRC forecasts 1,130,000 more people will pay higher rate tax by the 2027/28 tax year.
Additionally, the FOI reveals that HMRC predicts 301,000 more people will become additional rate taxpayers by the 2027/28 tax year.
The higher rate of tax is levied on anyone with an income between £50,271 to £150,000 at a rate of 40%, while the additional rate is taxed on an income over £150,000 at 45%. Usually, the bands increase with inflation.
However, Jeremy Hunt in the Autumn Statement in 2022 extended the freeze on the higher rate of tax up to 2027/28, previously frozen in the Spring 2021 Statement until 2026 under the then chancellor, now Prime Minister, Rishi Sunak.
The reason more people move into new tax bands is because of fiscal drag. Fiscal drag happens when the income level at which taxes start to be collected and the amount of income that can be earned tax-free do not 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.
Previous calculations from Quilter found that if wage growth is on average 5% per year for the next four years but income tax thresholds remain frozen then someone earning £50,000 today will be £2,643 worse off in the 27/28 tax year and in total be £6,463 poorer over the four-year period.
Rachael Griffin, tax and financial planning expert at Quilter says:
“These figures illustrate HMRC is well aware of the power of fiscal drag and exactly how many people they expect to be dragged into paying more tax due to the frozen thresholds.
“Over a million more people will be subject to higher rate tax due to wage inflation and many of those 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. Freezing income tax bands is a form of stealth tax as you’ll end up paying considerably more tax during the time bands are frozen, which will be on top of higher energy and food costs.
“The new tax-year presents no better time to plan for efficient use of allowances for the tax-year ahead. If you are unsure about where to start, a financial adviser can help you identify how to make better use of the tax allowances available to you and while April may feel like a long time off it is worth starting to think about this sooner rather than later.
“One option might be to make additional pension contributions via salary sacrifice essentially lowering the taxable portion of your salary and potentially reducing it under the higher rate of tax threshold.”
For more information, or to be sent the FOI please contact Alex Berry on 07741151931