Millions of workers and pensioners hit by extra tax

The number of workers paying additional rate tax has jumped to nearly 900,000, up 57 per cent in just 12 months.

Taxpayers paying the 45 per cent additional rate of income tax leapt from 570,000 in 2022/23 to 893,000 in 2023/24 tax year – the latest year for which data is available.

HM Revenue & Customs (HMRC) figures also show that the number of people paying the 40 per cent higher rate grew by close to 13 per cent over the same period, reaching 5.76 million.

Years of wage growth combined with frozen tax thresholds have been steadily dragging more workers into higher tax bands.

The threshold freeze was originally introduced in 2021 under then-chancellor Rishi Sunak and meant that the basic and higher-rate income tax starting thresholds became frozen at £12,570 and £50,270 respectively. Labour has since extended the policy through to 2031, meaning that as wages rise with inflation, ever more people will be dragged into higher tax brackets in a phenomenon known as ‘fiscal drag’.

Forecasts from the Office for Budget Responsibility (OBR) suggest that by 2030, one in four taxpayers will be paying either the higher or additional rates of income tax. This means a greater tax take than ever before for the Government, and more tax paid than ever before by workers.

Another major factor behind the jump in top-rate taxpayers was the reduction of the 45 per cent threshold from £150,000 to £125,140, which took effect on April 6 2023.

Although additional-rate taxpayers represented just 2 per cent of all taxpayers, they contributed almost 38 per cent of total income tax receipts in 2023/24, compared with 32 per cent in 2019/20.

Combined, those paying the higher and additional rates were responsible for more than 70 per cent of the country’s overall income tax revenues.

Pensioners aren’t getting off easy either

The number of pensioners paying income tax rose more than a million in a year, with at least 22 per cent of taxpayers now being over state pension age.

HMRC figures for the 2023/24 tax year showed that there were 8.16 million taxpayers aged over 66, up from 7.14 million in the year before. The jump came as rises in the state pension and a freeze on income tax thresholds pushed more older people into paying 20 per cent basic rate tax on their retirement income.

In 2023/24, an additional 2.17 million people fell into the basic rate income tax band compared with the previous year, while the number paying the 40 per cent higher rate climbed by 654,000 or 12.8 per cent, bringing the total to 5.76 million.

The full new state pension currently stands at £12,548 annually, just £22 short of the basic-rate income tax threshold. As a result, pensioners receiving even a modest extra income are now liable for tax. From next year, recipients of the full state pension could also begin paying income tax on that income alone, because the triple lock ensures payments increase each year by whichever is greatest: wage growth, inflation or 2.5 per cent, and due to the freeze set to remain in place until 2031, even a single year of growth at the lowest possible rate of 2.5% would put the full state pension over the £12,570 personal allowance (also known as the tax-free personal allowance).  

Although chancellor Rachel Reeves said in November that pensioners relying solely on the state pension would not be taxed on it, the details of how that pledge would be implemented remain uncertain, and it has done little to alleviate worries from some of the most vulnerable and state-dependant members of society.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. 
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.