Millions of workers have been drawn into higher tax brackets because income tax thresholds have been frozen since 2021, according to government figures. The number of higher-rate taxpayers is projected to increase from 4.43 million in the 2021/22 tax year to 7.7 million in 2026/27.
For tax allowances and thresholds to retain their real value, they must rise with inflation or wage growth. When they do not keep pace, the amount individuals can earn tax-free or at lower rates diminishes relative to the rising cost of living. This phenomenon, known as fiscal drag, means that as wages increase over time, more lower earners are captured by the tax system, and the number of taxpayers in higher rate bands grows.
The freeze on income tax bands, initially implemented by the Conservative government in 2021 when Rishi Sunak was Chancellor, has allowed the Treasury to collect more revenue. Income tax collections are forecast to rise from £226 billion in 2021/22 to £347 billion in 2026/27, an increase of £121 billion.
"The Treasury has become increasingly reliant on the revenues generated by frozen thresholds," said Shaun Moore, tax and financial planning expert at Quilter. "What began as a temporary measure has evolved into one of the most effective revenue-raising tools available to government, but the burden falls squarely on the shoulders of UK taxpayers."
Over the past two years, more than one million individuals have been pushed into the higher tax rate of 40% for income over £50,270. These taxpayers are now expected to constitute nearly a fifth of the total income tax-paying population in the current financial year. Marianna Hunt of Fidelity noted that higher-rate taxpayers are no longer a small group of top earners, with millions earning what might seem like normal incomes now paying tax rates previously reserved for much higher earners due to frozen thresholds.
The number of additional rate taxpayers has also seen a significant increase, growing from half a million in 2021/22 to a projected 1.29 million in the current financial year. This is partly due to the freeze in the additional rate band, which was initially set at £150,000 before being lowered to £125,140 in 2023/24, pushing more individuals into the highest tax bracket.
The impact of fiscal drag is not limited to higher earners. The number of basic rate taxpayers is projected to rise to 31.4 million from 27.4 million in 2021/22. "Almost eight million more people, or a fifth of all taxpayers, have been dragged into paying tax in the years since [2021]," Moore stated. "Much of this growth is occurring within the basic rate tax band… However, what were once considered tax rates for wealthier people are increasingly reaching a much broader group."
Additionally, nearly a quarter of all taxpayers are expected to be over the state pension age by the end of the current tax year. This trend is attributed to the frozen personal allowance of £12,570 combined with a rising state pension due to the triple lock policy.
Analysis from AJ Bell suggests that if the higher-rate threshold had kept pace with inflation since 2021/22, the 40% tax band would begin at a salary of £69,504. The freeze on income tax thresholds, initially set to end in 2025/26 and later extended to 2026/27 by the previous government, was further extended to 2030/31 by Chancellor Rachel Reeves when Labour came into power.