Fiscal drag bites: more than a million people pay 45% income tax

Fiscal drag is forcing hundreds of thousands more individuals into the additional rate tax band

Last year, over a million people in the UK paid the highest rate of income tax due to frozen thresholds pushing hundreds of thousands more into the additional rate band.

According to a freedom of information (FOI) request made to HM Revenue and Customs (HMRC) by advisory firm Bowmore Financial Planning, approximately 720,000 individuals paid the 45 percent rate on income between 125,140 and 211,562 in 2024 - 2025.

According to the FOI, an additional 385,000 people paid the 45 percent rate on income over 211,562.

According to Bowmore, the top income tax rate would currently be 211,562 if it had changed to reflect inflation since 2013, when it was reduced from 50% to 45%.

It implies that if the threshold had increased in tandem with the cost of living, the 720,000 additional rate taxpayers in 2024 - 2025 would not have been required to pay the 45 percent rate.

John Clamp, a chartered financial planner at Bowmore Financial Planning and fellow of the Personal Finance Society, stated: "An increasing number of taxpayers are being caught by the 45 percent and 40 percent income tax rates.

Many people who thought they had very little money to spare now find that they have to pay the highest income tax rate. A "

There are rumors that the chancellor may announce an extension of the income tax threshold freeze in this month's budget. Currently, the thresholds are frozen until April 2028.

The action is referred to as a "stealth" tax because it raises government revenue without raising tax rates. Fiscal drag is the phenomenon where more people are compelled to pay taxes as inflation increases.

If inflation continues to rise, more people will probably have to pay higher income taxes over the next three years, even if the freeze isn't extended past 2028.

"The government is happy to let inflation do its thing and add more and more people to the highest tax rate," Clamp stated.

Because inflation has pushed them into higher tax brackets, many people are working harder but earning less money. The "

Clamp's frozen thresholds may have contributed to the UK's productivity stagnation by discouraging workers from putting in more hours and increasing their wages.

Wages in the UK are still growing slowly, and between June and August, the GDP increased by just 0.3 percent. The Office for National Statistics (ONS) reports that since 2009, productivity has remained steadily low.

"Productivity is stagnating, which may not come as a surprise," Clamp stated.

"People are less likely to work longer hours or push themselves if additional work barely increases take-home pay due to frozen tax bands, which eventually hurts the economy." The "

"The UK's income tax system is highly progressive with an internationally high personal allowance," stated a Treasury spokesperson.

"These numbers pertain to the 2022 Autumn Statement of the previous government.

"This administration took over the previous administration's policy of lowering the Additional Rate Threshold and freezing tax thresholds. The "

How to reduce your tax liability.

If your hard-earned money is being eaten away by frozen thresholds, there are ways to avoid paying additional taxes.

According to Clamp, individuals who are still employed can use salary sacrifice to lower their income tax liability.

As a result, you contribute more to your pension from your pay, which lowers your taxable income and, consequently, your income tax and National Insurance payments.

However, in the next budget, the government may consider doing away with or changing salary sacrifice.

In the meantime, you should maximize your yearly ISA allowance if you have money in a conventional savings account.

Currently, you can contribute a maximum of £20,000 annually to several ISAs, and any interest earned on savings or returns is not taxable.

The personal savings allowance applies to any savings held outside of ISAs. Before paying taxes, basic rate taxpayers can earn up to £1,000 annually, while higher rate taxpayers can earn up to £500. No allowance is given to those who surpass the additional rate threshold.

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