The chancellor Jeremy Hunt has lowered the threshold at which people start paying additional rate tax from £150,000 to £125,000, while also freezing all other income tax thresholds for a further two years, until 2028.
This change to the additional 45p tax rate will affect around 200,000 people who will pay an extra £1,200 in tax each year.
Hunt also confirmed that the triple lock will be retained for the state pension, which means pensioners will see a 10.1 per cent increase in this benefit in April, the largest single rise since this protection was put in place. The Pension Credit will also be increased by 10.1 per cent.
Other thresholds, including the lifetime allowance on pensions and the inheritance tax nil rate band have also been frozen for a further two years.
These fiscal drag, combined with higher inflation will result in more people falling into these higher rate tax bands, helping raise more money for the Treasury.
Hargreaves Lansdown senior personal finance analyst Sarah Coles says: “The change to higher rate tax means over 200,000 more people will be dragged into the 45 per cent bracket.
“With regular pay up an average of just 5.7 per cent, and inflation at over 11 per cent, our wages are already falling behind inflation in real terms, so the taxman taking an extra slice leaves us with an even harder struggle to make ends meet.”
She adds that the cut to the higher rate threshold from £150,000 to £125,140 is not a massive money-spinner but is likely to be more significance as a signal by the government that higher earners will bear some of the burden of filling the black hole in the government’s finances.
She adds: “Those on higher wages tend to have more wiggle room in their budgets, but rising prices have already created an awful lot of headaches for top earners. Those with big mortgages may well be feeling the pain from higher mortgage rates too, so this additional tax blow is likely to squeeze their incomes harder.”
