Paying more than basic rate tax in the UK was once like being part of a select club. Following the introduction of the additional higher rate tax band in 2010-2011, the percentage of taxpayers over the higher rate threshold was just 10.4%.
By 2015-2016, austerity measures were pushing this number up to 16%. After raising the threshold, the proportion of higher rate taxpayers dropped to 13.6% in 2019-2020. However, it began to rise again, and is continually increasing.
The Office for Budget Responsibility (OBR) estimates that the Personal Allowance freeze will not only make more earners liable for Income Tax, but also push more people from the basic rate band into the higher rate band.
As Income Tax allowances will be frozen until 2025-2026, while wages gradually increase in an attempt to catch up with inflation, up to 19% of taxpayers could find themselves paying double the tax they previously owed.
What does this mean for UK taxpayers?
The FT Adviser reports that wage growth has been increasing faster than expected as the economy recovers from the pandemic, which could result in 1 in 5 taxpayers becoming liable for the higher rate (40%) or additional rate (45%) by 2024-2025.
According to Steve Webb, former pensions minister, original estimates were far lower than the reality. The OBR estimated wage growth of 2.9% from 2020 to 2022, but have since revised this to reflect the 2.6%
growth in 2020-2021 and 7.5% in 2021-2022.
This average wage increase of more than 10% is likely to have pushed over a million more people across the frozen higher rate threshold than anticipated. Compared to the estimated 1 million expected to be liable for the higher rate between 2019-2020 and 2024-2025, Webb predicts the number will be closer to 2.5 million over the duration of this Parliament.
If these newer estimates are correct, this means that up to 20%
of taxpayers could end up paying more Income Tax during this period. Since this doubles the percentage from 2010-2011, it’s safe to say that being a higher rate taxpayer is no longer a select club.
What are the options for higher rate tax relief?
This type of ‘stealth tax’ is even more unwelcome than unusual as the cost of living crisis continues in the UK. Many people will find themselves passing a larger cut of their income to HMRC in the next few years, if they haven’t already been dragged into a higher tax band since the 2019 election.
It’s certainly an incentive to reassess your tax liabilities and financial habits. So, is there anything you can do to minimise your losses to the Exchequer? Here are some examples of actions to take:
- Check your PAYE code – make sure you’re being taxed correctly
- Claim full tax relief on pension contributions – this isn’t granted automatically
- Consider investing in an ISA – these are free from Income Tax and Capital Gains Tax
- Choose employee benefits carefully – some may be tax-efficient, but others won’t be
- Look into independent tax benefits and transferable marriage allowances (if you’re married)
If you’ve joined the ever-expanding club of higher rate taxpayers, or believe that you’re likely to in the next few years, you could benefit from expert financial advice. Here at GBAC, we offer a range of tax consultancy services and HMRC enquiry support for a variety of clients throughout the UK.
Call 01226 298 298
to speak to our team, or send an email to info@gbac.co.uk
with your query. Our highly qualified accountants are available to assist you from 9am to 5.30pm, Monday to Friday.