Jump in people paying higher rates of tax

ended 30. June 2022

This morning, HMRC published data showing that there are now there are a projected 5.5 million higher rate Income Tax payers in tax year 2022 to 2023, which is a 43.9% increase compared to 2019 to 2020. You can see the full report here. We asked IFAs and accountants why this is happening and what, if anything, people can do to mitigate paying higher tax rates.

7 responses from the Newspage community

More people paying higher rates of tax has been influenced by the freezing of the personal income tax thresholds. So, as incomes rise as employers seek to balance the cost of living with sustainable business practice, tax thresholds have not moved up. This takes more people over the threshold. Also, the UK economy is proving more resilient than perhaps is widely reported. Business confidence may be low, but activity levels have not been as affected as sentiment. To mitigate the effects of higher rate income tax, people should look to make pension contributions where possible. The contribution made will attract income tax relief at the highest marginal rate, subject to annual allowance and earnings limits.
Whilst the figures are shocking I don't think we should be too surprised. The government has been using 'Fiscal drag' as a stealth tax for some time. Fiscal drag is when governments freeze tax bands, or increase them at a lower rate than wages or prices are rising. This has the effect of people paying more tax despite their real wages not raising. Consequently, more and more people will become higher-rate taxpayers despite not necessarily earning any more in real terms.
If you earn over £50,270 you are taxed as a higher rate tax payer. With many industries being a candidate market it has meant that there has been a race to the top to raise salaries to retain, or attract new staff. As an employee you can look at salary sacrifice schemes such as starting to invest more in your pension, or an electric car salary sacrifice scheme. Make sure if you don't get paid your mileage you claim the tax relief for it, and same if you're required to work from home. Every little helps. If you're a business owner you have more ways to extract money out of your business to help with the tax bill of earning more, from electric cars, pension contributions, dividends and salary all the way through to trivial benefits! We've counted 32!
"If the Chancellor does not increase the threshold at which Higher Rate tax kicks in, then more and more people are going to end up paying 40% Income Tax. A good way to combat this is to make a contribution to your pension. This will provide you with the 40% back, with 20% going into your pension and 20% coming off your tax bill. Other ways to reduce your tax bill are by making charitable donations, and sharing certain income with a spouse."
It is no surprise that following income threshold freezes in the government budgets that there are more people now edging into the next tax bracket. From the governments perspective its quite a simple way of raking in more tax however with small increases in wages and salaries the majority of workers are now being hit with increases in National Insurance, increased tax for those who have just gone over the next tax bracket along with the inflation rate and cost of living crisis this will feel for many just another attack on hardworking people. Where is the incentive to work hard? It is now perhaps more important than ever to seek independent advice on pensions and salary sacrifice schemes with tax relief in order to mitigate this and bring those earnings back down into the lower bracket.
Annual inflation stood at 9.1% in May, yet income tax thresholds have remained frozen so it’s little wonder more and more people are being pushed into the higher rate tax threshold . A great way to reduce your tax bill can be by making pension contributions. Personal contributions are paid net of basic rate tax and if you’re a higher rate taxpayer you can reclaim a further 20% through self-assessment. Once your earnings pass £50,000 you may also become subject to the higher income child benefit tax charge if you have children. Pension contributions can also help mitigate this charge.
If you pay a higher rate of tax you are earning more than £50k. If the number of higher rate tax payers has increased by 43% then wages have gone up for those people. Great news for them. Let's be clear, you only pay a higher rate of tax on the money you earn over the higher tax threshold which is set at £50k. I think it is great news that more people are being paid more. I think it is sad that many are not earning enough to pay their basic bills. When it comes to earning £50K+ there are many more choices available and it is worth noting, at that level, it is not how much you earn but what you do with it that counts.