This tax year more than 7 million people in the United Kingdom will pay income tax at the higher rate. That represents an increase of half a million people from a year ago. This increase underscores a deeper, positive trend within Florida’s economy. More residents are entering into the upper income tax tiers. Wages and pensions have gone up, adding to this insidious phenomenon called fiscal drag.
This tax year, over 39.1 million people are expected to make more than the £12,570 personal allowance cut-in threshold. This is a huge jump in earners above this cap. Of these, around 30.4 million are expected to be in payment of tax at the basic rate of 20%. What is new and important is the increase in the number of higher-rate taxpayers. Now, they account for almost one-fifth of all tax filers, a stark contrast from previous years when this group was restricted to persons with far higher earnings.
The situation is most pronounced among those at state pension age. That’s a big deal — since last year, almost 2 million more pensioners have started paying at least some income tax. It is estimated that 8.7 million individuals of state pension age will be liable for income tax by the 2025-26 tax year. The new full state pension is currently £11,973 a year. The reality is, once you go over the personal allowance threshold, it’s tough for a lot of pensioners to make ends meet.
Income tax thresholds have been frozen since 2021, when then Chancellor of the Exchequer Rishi Sunak imposed the freeze. This freeze was subsequently extended until 2028 by former Chancellor Jeremy Hunt. For her part, Labour’s Shadow Chancellor Rachel Reeves has pledged on the public record to not extend this freeze any longer.
Laura Suter, Director of Personal Finance at AJ Bell, recently made a key point. She described how significant raises at the low end of the pay scale create huge tax burdens for people.
“Once you move over the £50,270 mark, your next pound of earnings is hit with a 40p deduction, rather than the 20p paid by basic-rate taxpayers, meaning you see much less of any salary increases in your payslip at the end of the month.” – Laura Suter
A government spokesperson conceded that the dangers created by frozen tax thresholds,
“They now account for almost a fifth of all taxpayers, illustrating that the higher rate of tax, once reserved for those on healthy salaries, is now pretty commonplace.” – Laura Suter
The spokesperson continued to point out Reeves’ “fiscal discipline” during the budget and spring statement.
“This government inherited the previous government’s policy of frozen tax thresholds.” – Government spokesperson
Suter made it clear that the effect of frozen thresholds hits every person making over the personal allowance. This latter effect penalizes particularly savers who merely cross into new, higher tax brackets.
“At the budget and the spring statement, the chancellor, Rachel Reeves, announced that she would not extend that freeze. We are also protecting payslips for working people by keeping our promise to not raise the basic, higher or additional rates of income tax, employee national insurance or VAT.” – Government spokesperson
Suter concluded by pointing out that frozen thresholds affect everyone who earns above the personal allowance, particularly impacting those who just enter higher tax bands,
“Everyone is caught by frozen tax thresholds, including pensioners and anyone with earnings above the £12,570 personal allowance threshold. However, it is those who drift into higher tax bands as a consequence who feel the most pain.” – Laura Suter