HM Revenue & Customs released Personal Incomes Statistics for the financial year 2022 to 2023 today, revealing that:
- The number of additional rate taxpayers increased by 49,000 (9.5%) between the tax years 2021 to 2022 and 2022 to 2023 to 0.6 million. Income Tax liabilities of additional rate taxpayers increased by £2.6 billion (3.2%) to £83.4 billion.
- The number of higher rate taxpayers increased by 680,000 (15.3%) between the tax years 2021 to 2022 and 2022 to 2023 to 5.1 million with an increase of £11.5 billion (15.6%) of tax to £85.1 billion.
- There was an increase in the number of basic rate taxpayers of 790,000 (2.9%) and the overall number of taxpayers increased by 1.5 million (4.6%).
Andy King, financial planning specialist at wealth management firm Evelyn Partners, comments:
“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 [see below].
“The number of additional rate taxpayers also increased by nearly 10% and this was even before the additional rate threshold was cut from £150,000 to £125,140 from April 2023. So expect a huge influx of taxpayers into the highest rate of tax when 2023/24 figures are finalised this time next year.
“Measures to mitigate higher income tax bills are thin on the ground, although it must be the case that many thousands of earners just below the £100,000 and £125,150 income levels are purposefully not trying to increase their earnings because they don’t think the extra work is worth the relatively meagre increase in post-tax income – especially for those who also lose tax-free child-care above £100,000. That can’t be good for economic growth or productivity in the UK.
“The main option open to many is to pay into a pension or to consider increasing those contributions as, while those funds will be locked away until age 55 or 57, this can afford tax relief at their top rate of income tax. Salary sacrifice pension schemes are particularly effective in this respect as not only do they offer additional relief from National Insurance (and possibly an extra boost from the employer’s NI saving), but also could prevent the saver stepping up into a higher tax bracket.
“These issues are particularly salient as we draw to the end of the tax year. There is still time for people to make one-off contributions to their pension, or possibly even to sacrifice a bonus into their pension if their payroll allows, to use up some of their annual allowance before it expires on 5 April. While the pension AA is not totally lost each year, as it can be possible to carry forward previous years’ allowances, that is a complication many people would rather avoid, and so using this year’s allowance rather than pushing the can down the road can make sense.
“Unfortunately the complex and restrictive tapered annual allowance means these steps are severely limited for the highest earners. Those with a threshold income over £200,000 and adjusted income of £260,000 need to take special care to calculate their allowance and should seek professional advice before making a large contribution.
“Beyond making pension contributions, more esoteric schemes to reduce income tax include subscribing to Venture Capital Trusts and Enterprise Investment Schemes, both of which provide a 30% income tax credit, but are not going to be suitable for most people due to the higher risks involved.
“Finally, this biggest tax change arriving on 6 April is the increase to employer NICs. One possible by-product of this is an increase in the attractiveness to firms of salary sacrifice pension systems, which can greatly reduce NICs for both parties. Employees at firms that do not offer such a scheme could potentially lobby for one to be introduced, particularly if they work for a small or medium-sized firm, as this could give them a significant tax-efficient boost.”
