Insights

When Budgets come and go and tax rates are not increased but tax allowance thresholds are frozen, you might breathe a sigh of relief, but actually this is a clever way to increase tax. Rishi Sunak did this in the April 2021 budget, freezing all UK income tax thresholds for four years. It is a move that the OBR estimates will generate £18bn for the Treasury and it means that a record number of people are now paying income tax at the higher rates.

In the 2022-23 tax year, there will be over six million people paying income tax at the higher rate of 40% on income over £50,270. The rise is significant; in 2019 there were 4.3 million people paying tax at the higher rate. The number paying the 45% additional tax rate on income over £150,000 has also increased, from 421,000 to 629,000.

Contrast this with the tax landscape of the Nineties and Noughties. In 1990 only 1.7 million people paid 40% tax with the figure rising to 2.1 million when Tony Blair came into power in 1997. By 2010, 3.3 million people were higher rate taxpayers.

This crafty strategy to freeze income tax thresholds is a useful source of revenues and it occurs whilst salaries, and the cost of living, have continued to increase, pushing more people into a higher marginal tax bracket. Taxpayers won’t be paying these higher rates on the bulk of their income, but the amount is enough for the relative salary increase to be eroded away in higher tax and now, higher prices, due to inflation.

Generally, the starting threshold for higher-rate tax brackets has not remained proportionate to people’s incomes, so more people find themselves paying 40% tax regardless of whether they would traditionally be regarded as ‘rich’. Economists are forecasting that before long 20% of all taxpayers will be paying income tax at the higher rate of 40% on a portion of their income. Clearly it is a very effective stealth tax.
Added to the effect of freezing income tax brackets, the threshold for paying national insurance has hardly increased, whilst rates have increased. These actions will result in the total personal tax burden rising to its highest level since the 1940s. Read more about increases to national insurance and the Health and Social Care levy in our previous articles. These changes mean that finding ways to take advantage of various tax advantaged initiatives and make your money go further are more important than ever.

If you would like advice on how you can legally reduce your tax bills using government approved policies, contact us via partners@rjp.co.uk