The strain on Britain’s highest earners has been laid bare in new data published by HM Revenue & Customs today.
The number of additional rate taxpayers rose 56.8 per cent – or 324,000 – between the 2022/23 and 2023/24 tax years.
It means the number of additional rate taxpayers, in the 45 per cent bracket, jumped to to 893,000 by the end of the period.
Income tax liabilities of additional rate taxpayers rose by £19.9billion or 23.9 per cent to £103billion.
If you live in England, Wales or Northern Ireland, there are three marginal income tax bands which set the rate of tax you pay.
These include the 20 per cent basic rate, the 40 per cent higher rate and the 45 per cent additional rate.
The additional rate of income tax kicks in once your annual income tops £125,141. The additional rate threshold was cut from £150,000 to £125,140 from 6 April 2023, by the previous Conservative government.
On the up: HMRC figures showed the number of additional rate taxpayers rose by 56.8% or 324,000 in the 2022 to 2023 and 2023 to 2024 tax years
There is also a freeze on thresholds. The previous government said this was until 2026, then moved the goalposts to 2028 – and now Labour has frozen them until April 2031, dragging more people into higher bands.
As a result, and given the HMRC data takes us to the end of the 2023/24 tax year, thousands more are likely to have found themselves as an additional rate taxpayer, or will do in coming years.
David Little, a partner at Evelyn Partners, said: ‘This data reveals how the powerful tide of fiscal drag is increasing the UK tax burden by sweeping millions into higher tax brackets, and into paying tax for the first time.’
HMRC has estimated that 1.8million taxpayers earned above £100,000 in the 2024 to 2025 tax year, adding that this was expected to rise by 493,000 to 2.29million by the 2028 to 2029 tax year.
Some well-paid workers are already turning down pay rises in a bid to keep their income below the additional rate income tax threshold.
Many are also using tax relief on pension contributions to keep their tax liability in check.
As well as a spike in the number of additional rate taxpayers in the period, the figures from HMRC also pointed to a rise in the volume of higher rate taxpayers.
The number of higher rate taxpayers increased by 654,000 or 12.8 per cent to 5.76million in the relevant tax years.
This upturn raked in an additional 3 per cent or £2.59billion for the Treasury, with higher rate taxpayers stumping up £87.6billion in income tax.
Moving into a higher tax band also increases the tax people pay on capital gains and savings interest, and reduces, or in some cases, eliminates, the personal savings allowance available.
HMRC figures also revealed a 1.15million rise in the number of basic rate taxpayers in the period, with the overall number of taxpayers surging by 2.17million or 6.3 per cent.
Little said: ‘Both the number of taxpayers in each band and the amount of income tax being paid to the Treasury are surging every year – exactly as Chancellors past and present have intended.
‘It’s worth remembering this data pertains to a time when the Conservative government was still in charge and Jeremy Hunt was Chancellor.’
Last year, Labour Chancellor Rachel Reeves confirmed an extension of existing freezes so that personal tax thresholds remain fixed in cash terms until 6 April 2031.
Freezing income tax thresholds until 2031 will increase people’s tax liabilities through fiscal drag, despite no headline rise in tax rates.
As wages increase, a greater proportion of income is taxed and more income will be pulled into higher tax bands.
The Office for Budget Responsibility has previously said it expects a quarter of all taxpayers to be paying the higher and additional rates by 2030, against 15 per cent in 2021.
Little said: ‘Fiscal drag operates 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 to 38.5 per cent of GDP by the 2030/31 tax year, according to Office for Budget Responsibility (OBR) estimates.’
He added: ‘In real terms, everyday middle earners will be higher rate taxpayers by 2030, as opposed to the situation a decade or two ago when this band was confined to individuals regarded as “high earners”.
‘Anyone considered in real terms a “high earner” will by 2030 be in or staring at the top rate of tax, a charge that used to be reserved for the very highest paid elite.
‘The effect on the UK’s productivity and economic growth is hard to quantify but consensus is emerging that we are approaching a point where the tax burden could be having serious consequences.’
Earlier this year, the OBR warned that the higher and rising tax burden ‘increases the risk that incentives within the tax system distort or constrain economic activity by more than expected’.
Are you a worker who has been swept into the additional rate bracket? Or have turned down a pay rise to avoid it? editor@thisismoney.co.uk
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