The number of higher rate taxpayers increased by 100,000 between the tax years 2019 to 2020 and 2020 to 2021 up to a total of 4.0 million, according to new data from HMRC.
Similarly, the number of additional rate taxpayers increased by 12,000 between the tax years 2019 to 2020 and 2020 to 2021 to 433,000.
Quilter tax and financial planning expert Rachael Griffin says: “This should come as no surprise considering since 2019, the rate at which someone starts to pay higher rate tax has shifted minimally despite wage growth during that time being significant due to a range of factors including the pandemic. Wage growth is still likely to accelerate with inflation often forcing employers to pay their employees more so they can cope with rising costs.
“Despite this, income tax thresholds are set to be frozen until 2028. Our own FOI found that HMRC forecasts nearly 1.5 million more people to be dragged into higher tax bands by 2027. The majority of those (1.13m people) will become higher rate taxpayers and these people 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.
“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 cent 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.
“Therefore, we should re-think the length of the freeze of income tax bands as while it is understandable the government are keen to refill public coffers, this should be balanced with a fair tax system that is not dragging more and more people into higher taxes.”