41% rise in higher-rate taxpayers as fiscal drag bites hard
29th June 2023 12:04
by Alice Guy from interactive investor
HMRC figures show 99% increase in additional rate taxpayers and 25% more pensioners paying tax.
HMRC figures on the projected number of taxpayers in 2023-24 reveal the chilling cost of fiscal drag.
Key HMRC figures:
- 5.6 million higher-rate taxpayers in tax year 2023 to 2024, which is a 40.7% increase compared to 2020 to 2021.
- 8.5 million over 65 years paying tax in tax year 2023 to 2024 compared to 6.8 million in 2020 to 2021, and increase of 24.8%
- Higher-rate taxpayers make up a projected 15.6% of the overall income-tax paying population in 2023 to 2024
- Projected to be 862,000 additional rate income taxpayers in tax year 2023 to 2024, which is a 99.2% increase from 2020 to 2021. Additional rate income taxpayers make up a projected 2.4% of the overall income-tax paying population in 2023 to 2024
- Top 50% of income taxpayers were liable for 90.5% of total income tax in 2020 to 2021, or £177 billion out of a total £196 billion, indicating the progressive nature of the income tax system
Interactive investor calculations:
- Someone earning £20,000 in 2022-23 will pay £870 extra due to fiscal drag by 2028, equivalent to a 10p rise in income tax
- Someone earning £50,000 in 2022-23 will pay £1,924 extra due to fiscal drag by 2028, equivalent to a 5p rise in income tax
interactive investor calculations showing fiscal drag equivalent to 10% rise in income tax for lower earners
Current earnings Mar 23 | Earnings by 2028 (adjusted for inflation) | Tax payable by 2028 | Tax payable by 2028 if thresholds increased with inflation | Tax payable by 2028 if thresholds increased and income tax rises to 21%/41% | Tax payable by 2028 if thresholds increased and income tax rises to 25%/45% | Tax payable by 2028 if thresholds increased and income tax rises to 30%/50% | Extra tax due to fiscal drag |
£15,000 | £18,244 | £1,816 | £946 | £975 | £1,094 | £1,241 | £870 |
£20,000 | £24,326 | £3,762 | £2,892 | £2,982 | £3,344 | £3,796 | £870 |
£30,000 | £36,489 | £7,654 | £6,784 | £6,996 | £7,844 | £8,904 | £870 |
£50,000 | £60,815 | £16,493 | £14,568 | £15,024 | £16,845 | £19,121 | £1,924 |
£100,000 | £121,629 | £46,361 | £40,078 | £41,141 | £44,576 | £51,038 | £6,283 |
£150,000 | £182,444 | £75,470 | £71,735 | £73,560 | £80,039 | £90,306 | £3,735 |
Assumptions and sources: wage and tax thresholds adjusted in line with ONS CPI for Mar 23, OBR inflation forecast for 23/24 and then 2%.
Alice Guy, Head of Pensions and Savings, interactive investor says: “We’re living through worrying times when, despite rising costs, more pensioners than ever are expected to pay tax this year. The stark figures demonstrate the chilling effectiveness of freezing tax thresholds. The personal allowance has been frozen at around £12,500 since 2019 and is expected to remain at the same level until at least 2028. We often focus on how fiscal drag affects higher earners, but it actually costs lower earners more as they will see more and more of their income taxed at 20%. Someone earning £20,000 in tax year ending 2022-23 will see their tax bill rise by the equivalent of a 10p increase in income tax by 2028 as the frozen tax thresholds mean a much higher portion of their income becomes taxable as their income rises with inflation.
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“Pensioners have limited options to increase their income and may wonder why they feel poorer each year. Yes, it’s partly due to the cost-of-living crisis, but it’s also because they are paying more tax as their pension rises with inflation. It feels like the taxman is squeezing the last dregs from the tube of toothpaste.
“With wages stagnating in real terms since 2008, the taxman is taking a bigger and bigger slice from the pie as time goes by.
“Freezing tax thresholds is the government’s preferred way of increasing the tax burden and tax thresholds are expected to remain frozen until 2028. This policy has a painful impact in times of high inflation, as more of us are dragged into paying higher-rate tax.
“Not many people are going to sit down and check their pay slips, so fiscal drag largely slips under the radar. But it’s actually a huge deal, with income tax expected to rise the equivalent to a 5p tax rise for someone currently earning £30,000 by 2028 as more and more of their income becomes taxable.
“Someone who has inflationary pay rises and sees their pay rise from £50,000 to £60,000 between now and 2028, won’t feel any richer due to inflation, but that extra £10,000 will be taxed at 40%. In real terms they’ll actually feel a lot poorer.
“So, if you’re feeling a little bit poorer this year, it’s partly due to increasing prices, but also in part because you’re probably paying a lot more tax than last year.
“If you can afford to, then one of the best ways to keep more of your money is to pay more into your pension. It only costs £80 to put £100 into your pension and £60 for a higher-rate taxpayer to put £100 into their pension. Pensioners can still receive tax relief on pension contributions until they reach 75 years old. Pensioners who only receive pension income are limited to £3,600 gross pension contributions each year.”
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