Chancellor Jeremy Hunt has announced that the 45p rate threshold will be reduced from £150,000 to £125,000, dragging more people into the highest rate of tax.
Speaking in today's Budget, Hunt said the change will mean higher earners pay around £1,200 a year a more in tax.
Income up to £12,570 a year is tax-free under the personal allowance. Workers currently pay 20% up to £50,270, 40% up to £150,000, and 45% above that.
The change to the highest rate tax threshold is estimated to pull an extra 250,000 people into the top bracket.
In today's Budget, Hunt also extended the freeze on income tax thresholds until 2028.
The freeze had previously been due to end in 2026, under proposals by former Chancellor Rishi Sunak.
Inflation rose to 11.1% in October, the highest rate in 41 years. Freezing income tax thresholds will therefore push millions of workers into paying more tax under fiscal drag.
Figures released by HM Revenue & Customs in June showed that 6.1 million people – the equivalent of one in six adults – paid the higher rate of income tax because of the freezing of thresholds, up from 4.2 million in 2019. A total of 629,000 paid the highest – 45% on earnings above £150,000 – up from 421,000 in 2019-20.
Rachael Griffin, tax and financial planning expert at Quilter, said: “As inflation rises, so too do wages, and in an era of frozen tax thresholds and allowances this will see many people tip over into the next income tax bracket or even into the realm of paying taxes they might never have previously considered. Making this stealthier move as opposed to raising actual tax rates may be an easier pill for taxpayers to swallow initially, and in the longer term it will line the government’s pockets as people will be paying more tax than they might realise.”
Paul Barham, partner at Mazars, commented: “Income tax was always going to be in the government’s sights. With a gaping hole in the public finances, it’s an easy target for the treasury. Putting the thresholds on ice, and lowering the 45p tax band, is a double whammy and will raise billions for the treasury. Millions will be in the higher and additional rate tax bands in the coming years. And high earners will really feel the hit, with a higher proportion of their income subject to the 45% tax rate. Tax bills are only going in one direction for millions of people, and that is up.
“This makes tax planning even more critical. If salary sacrifice is an option through your employer, consider using it to reduce your taxable earnings or think about increasing your pension contributions. Benefits like a season ticket loan, company car, cycle to work scheme or claiming tax-free childcare can also be used cut your taxable earnings.”
