The number of people required to pay higher-rate tax is projected to surge this year adding billions to government coffers. The increase is driven by the decision by the last Conservative government – and continued by Labour – to freeze tax thresholds.
Some 7 million will pay 40 percent tax on some of their income through 2025-2026, according to the Office for Budget Responsibility (OBR). This is some 2.5 million more than if the tax thresholds had never been frozen by Rishi Sunak when he was Chancellor in 2021.
Initially the freeze was due to run for four years, however the Conservatives then extended it through to 2028. The Chancellor Rachel Reeves confirmed this freeze in the October budget, however she said the thresholds would then start to rise again after 2028.
The OBR watchdog forecasts that 3.5m workers will start paying income tax in the 2025-26 tax year because of the freeze that began in 2021. This is because their earnings will be over the 20 percent tax threshold of £12,570.
Meanwhile, 2.5m will be dragged into the higher tax band which applies to earnings over £50,270 because of the freeze. On top of this, 400,000 will enter the additional-rate threshold, paying 45 percent on earnings above £125,140.
Sarah Coles, of stockbroker Hargreaves Lansdown, said: “Gone are the days when being a higher-rate taxpayer was the preserve of the very wealthy – now around a fifth of taxpayers pay higher or additional rates.
“Between us, we’re paying billions more in tax than we did this time last year, and it’s only going to get worse, because those tax thresholds have been frozen until April 2028. It means the idea of generating a tax-free income has become even more attractive.”
If the Chancellor had chosen to increase the tax bands with inflation from March 2021, the 20 percent threshold would have risen to £15,540 in April while the higher rate band would hit £62,340, according to the OBR.
Instead millions are being pushed up into higher rates as wages rise, forking out £27.6bn extra in tax between 2021 and 2025.
A Treasury spokesman said: “We are committed to keeping taxes low for working people, which is why we protected payslips from tax rises and are not extending the freeze on personal tax thresholds past 2027-28.”
