Higher earners are impacted in three ways: 500,000 more people are forced into 40 percent tax brackets

Even though tax rates aren't going up, higher earners' tax bills are still going up because of fiscal drag

An additional half a million people have been forced into higher tax brackets as a result of the ongoing tax threshold freeze, and this number is expected to rise.

Although the government has so far remained true to its pledges not to raise income tax rates, chancellor Rachel Reeves has kept tax thresholds frozen, forcing more people to pay higher rates as their incomes increase.

According to new HMRC projections, there are currently 7.08 million higher rate income tax payers, which represents a 38.7 percent increase over the 2022 - 2023 tax year.

HMRC reports that there are now 1 point23 million additional rate income tax payers, an increase of 115 point3 percent.

At 30 point 8 million, the majority of people pay basic rate taxes, although this number has increased by just 6 point 8 percent.

From 7,100 in 2022/2023 to 8,270 this tax year, HMRC predicts that the average income tax liability across all income ranges will rise by about 1,170.

This has been accomplished through the use of stealth taxes, a technique known as fiscal drag, rather than tax increases.

HMRC.

What does fiscal drag mean?

Tax increases are never popular, but the previous Tory government found a covert method to increase revenue by freezing thresholds in 2022 until at least April 2028.

In addition to increasing capital gains tax and levying VAT on private school tuition, the Labour government has continued to implement this policy.

Previously, income tax thresholds increased in tandem with inflation; however, by freezing them, workers can be swiftly shifted into higher tax brackets when their pay increases without the actual tax rate moving up.

Higher earners have also been negatively impacted by declining dividend and capital gains allowances as well as a smaller personal savings allowance.

HMRC's receipts from these covert taxes have increased by 78 billion since 2022, according to research by AJ Bell, and the tax collector is anticipated to collect an additional 20 billion this year.

AJ Bell's director of personal finance, Laura Suter, stated: "The Treasury tax take is still on the rise due to the severe freeze on income tax thresholds.

Rachel Reeves made a repeated pledge to keep working people's income taxes unchanged during the general election last year. The effects of the stealth tax, which was first implemented by the previous government, are still being felt by taxpayers even though the government has so far kept its word.

Suter stated that although the frozen tax thresholds affect everyone, from basic rate taxpayers to pensioners, the people who end up in higher tax bands suffer the most.

According to Suter, once you surpass the 50,270 threshold, your subsequent earnings are subject to a 40p deduction instead of the 20p that basic rate taxpayers pay. This means that you will see a significantly smaller amount of any pay raises on your payslip at the end of the month.

"A staggering 1 in 23 million people are currently paying taxes on incomes above the additional rate threshold, even though the 45 percent additional rate tax bracket is only theoretically applicable to extremely high earners.

Here's how the ongoing frozen tax thresholds are affecting higher earners.

Profit.

Despite an increase in average salaries, more people are becoming higher rate taxpayers as a result of the frozen thresholds.

Income tax revenue collected by HMRC in 2022 - 2023 was 228 billion; this is expected to rise by 30% to 298.6 billion.

Rachael Griffin, a tax and financial planning specialist at Quilter, points out that Labour has promised to remove thresholds in 2028, but cautions that it is unclear if it will be able to afford to do so.

"The Treasury has grown more and more dependent on the silent revenue boost these freezes provide after four years of fiscal drag," she said. That would be very expensive to reverse, especially given the strain on public services and already high spending.

Wealth taxes.

People are being forced into higher tax brackets for reasons other than their salaries.

Over the previous ten years, dividend allowances have decreased from 10,000 in 2016 to 2,000 in 2019 and are currently only 500.

Anyone receiving dividends from a limited company or receiving income from shares outside of an ISA is impacted by this.

However, the Treasury has benefited from it; according to HMRC data, its dividend tax revenue is expected to rise by 26% to 18 trillion pounds.

This is before you even take into consideration the reductions made to the capital gains allowance, which is currently at 3,000 after falling from 12,300 to 6,000 in 2023.

As a result, HMRC will receive a larger portion of the proceeds from the sale of assets like a second property.

In a different piece, we examine strategies for reducing your capital gains tax liability.

Rates of savings.

Higher earners already receive a smaller tax-free personal savings allowance (PSA) of £500, but since savings interest earned outside of the PSA is taxable, any advantages they may have had from investing in the best high-interest savings accounts have since vanished.

HMRC has tripled its tax revenue from savings to £6.05 billion as a result of this.

Adam French, a consumer expert at Moneyfactscompare . co . uk, stated that higher rate taxpayers who have more than 14,500 saved could anticipate earning more than 500 in interest this tax year and may face an unforeseen tax bill because the Moneyfacts average savings rate is currently at 3.53 percent.

According to the most recent data from HMRC, it is crucial for savers to understand their tax obligations, he stated. Those who have been forced to pay the higher rate of 40 percent, in particular, have seen their PSA cut in half, from 1,000 to 500.

How to get your taxes paid less.

It is unlikely that you will be able to reduce your pay, but you can reduce your tax liability by increasing your pension contributions through salary sacrifice.

Utilizing tax-free allowances for dividends and capital gains, planning your income, and using tax-free savings accounts like an ISA are all crucial.

French continued: "Many savers can use their annual ISA allowance to avoid this tax bill, with cash ISAs keeping millions of people's savings tax-free.

"They shouldn't anticipate a raw deal either, as some of the best-paying easy access cash ISAs can pay up to 5% interest after introductory bonuses are deducted.