Frozen thresholds drive millions into higher tax bands | Additional rate taxpayers rocket 57%

HM Revenue & Customs today released Personal Incomes Statistics for the financial year 2023 to 2024:

David Little, Partner in financial planning at wealth management firm Evelyn Partners, notes that:

•          The number of additional rate taxpayers increased by 324,000  (56.8%) between the tax years 2022 to 2023 and 2023 to 2024 to 893,000. Income Tax liabilities of additional rate taxpayers increased by £19.9 billion (23.9%) to £103 billion.

•          The number of higher rate taxpayers increased by 654,000 (12.8%) between the tax years 2022 to 2023 and 2023 to 2024 to 5.76 million with an increase of £2.59 billion (3.0%) of tax to £87.6 billion.

•          There was an increase in the number of basic rate taxpayers of 1.15 million  (4.1%) and the overall number of taxpayers increased by 2.17 million (6.3%).

“This data reveals how the powerful tide of fiscal drag is increasing the UK tax burden by sweeping millions into higher tax brackets, and into paying tax for the first time. Both the number of taxpayers in each band and the amount of income tax being paid to the Treasury are surging every year – exactly as Chancellors past and present have intended. It’s worth remembering that this data pertains to a time when the Conservative government was still in charge and Jeremy Hunt was Chancellor of the Exchequer.

“Fiscal drag operates as inflationary pay rises pull more people across tax allowances and thresholds that have been frozen since April 2021 – a process that is still in full swing* and will continue to increase the tax burden to 38.5 per cent of GDP by the 2030/31 tax year, according to Office for Budget Responsibility estimates. By then the demography of the country’s taxpayers will have been reshaped in the space of a decade, with the OBR expecting a quarter of all taxpayers to be paying the higher and additional rates by 2030, compared to 15 per cent in 2021.

“In real terms, everyday middle earners will be higher rate taxpayers by 2030, as opposed to the situation a decade or two ago when this band was confined to individuals regarded as ‘high earners’. Anyone considered in real terms a ‘high earner’ will by 2030 be in or staring at the top rate of tax, a charge that used to be reserved for the very highest paid elite.

“The effect on the UK’s productivity and economic growth is hard to quantify but consensus is emerging that we are approaching a point where the tax burden could be having serious consequences. Even the OBR itself felt the need this year to warn that the higher and rising tax burden ‘increases the risk that incentives within the tax system distort or constrain economic activity by more than expected’.

“The detail in the data shows the number of additional rate taxpayers increased by an eye-watering 57 per cent, as it was turbo-boosted by the additional rate threshold being cut from £150,000 to £125,140 from 6 April 2023. This cohort the previous year increased by 10 per cent through fiscal drag alone and by now will have grown yet more, so the additional rate taxpayer is no longer a rare or privileged beast.

“What is also remarkable is the extent to which basic-rate taxpayers are being drawn into the higher-rate tax band, where there was a 12.8 per cent increase in the number of taxpayers to 5.76 million. Their total income tax liabilities also rose by 3 per cent, and this is in part due to the tapering of the Personal Allowance remaining at £100,000. That boundary has remained unchanged for longer than another, having been in the deep freeze at £100k since April 2010, affecting many thousands more families each year that goes by.

“HMRC has estimated that 1.8 million taxpayers earned above £100,000 in 2024/25, and that this is expected to rise by 493,000 to 2.29 million by 2028/29, while estimates suggest that the figure in April 2010, when the £100,000 threshold for the PA taper was introduced, was just 588,000. Hundreds of thousands will have incomes just below this threshold and are avoiding the tax step by restricting earnings – either by turning down extra work or swerving a promotion, or by making tax-efficient pension contributions.”

The options for relieving the income tax burden

David continues: “Measures to mitigate higher income tax bills are thin on the ground, and the bluntest one is not increasing income. Many earners just below the £100,000 and £125,150 income levels are purposefully trying not to increase their earnings because they don’t think the extra work is worth the meagre increase in post-tax income – especially for those who also lose tax-relieved child-care above £100,000. That cannot be good for economic growth or productivity in the UK.

“The main option open to many is to increase pension contributions as, while those funds will be locked away until age 55 or 57, this means the earner keeps more of their gross income by taking advantage of tax relief at their top rate of income tax. Salary sacrifice pension schemes are particularly effective in this respect as not only do they offer additional relief from National Insurance (and possibly an extra boost from the employer’s NI saving), but also could prevent the saver stepping up into a higher tax bracket. Salary sacrifice schemes are due to be limited from April 2029, so those who can should think about taking advantage while the going is good.

“Even where salary sacrifice is not available, making extra pension contributions will still retain more earnings, and can help those on the edge of the £100,000 threshold by restricting adjusted net income.

“Unfortunately the complex and restrictive tapered annual allowance means tax-relieved pension contributions are limited for the highest earners. Those with a threshold income over £200,000 and adjusted income of £260,000 need to take special care to calculate their allowance and should seek professional advice before making a large contribution.

“Beyond making pension contributions, more esoteric schemes to reduce income tax include subscribing to Venture Capital Trusts and Enterprise Investment Schemes, but these are not going to be suitable for most people due to the higher risks involved.

“Finally, drifting into a higher tax band will raise the rate of tax you pay on capital gains and savings interest, and also reduce your personal savings allowance, so those looking to minimise their tax burden must ensure they are sheltering savings and investments where possible in ISAs and using their annual tax exemptions. Couples can use their combined allowances strategically, especially where one is in a lower tax band for earnings.”

* The OECD las week reported that tax rates for a typical single worker rose more in the UK last year than in any other rich country. In 2025, a single worker with no children earning the average national wage faced a UK tax burden of 32.4 per cent. The figure was up 2.45 percentage points compared with 2024. This marked the largest rise across all 38, mostly industrialised, members of the OECD.
Taxing Wages 2026: United Kingdom