Seven million workers dragged into higher income tax bands

Telegraph

a day ago

Seven million people have been dragged into paying higher rates of income tax as a result of a stealth raid on wages, figures show.
Frozen thresholds have forced an extra 520,000 taxpayers into the 40p bracket in the last year, according to estimates by HM Revenue & Customs (HMRC).
It brings the total to just over seven million in 2025-26, a 60pc rise from the 4.4 million in 2021-22 when income tax thresholds were first frozen under the Tories.
The sharp rise in higher-rate taxpayers comes despite Labour's manifesto pledge not to raise taxes on working people.
The number of 45p additional-rate taxpayers has more than doubled from 520,000 to 1.2 million over the same period.
The figures also reveal that an extra two million pensioners have been pulled into the tax net in the last four years. Some 8.7 million people aged 66 and over are now paying tax on their income, up by a third in 2021-22.
Income tax thresholds, including the £12,570 tax-free 'personal allowance' have been frozen since 2022.
Keeping thresholds frozen means earners lose a larger share of their incomes to tax, as inflation pushes up wages in a process known as fiscal drag.
Chancellor Rachel Reeves has committed to maintain the freeze until 2028 – the deadline under the Tories.
However, there are fears that the Chancellor may choose to extend the freeze beyond this date in a bid to plug gaps in the country's finances.
Expectations are mounting that the Chancellor will be forced to raise taxes in the October Budget despite stating that the slew of tax rises last October was a 'once in a generation' event.
Labour's winter fuel payment about-turn, a rumoured end of the two-child benefit cap, higher government borrowing costs and a possible productivity downgrade have all piled pressure on Ms Reeves to raise revenue.
Jon Greer, head of retirement policy at Quilter, said: 'The sharp rise in the number of people who are state pension age and now paying income tax is a direct consequence of the decision to freeze the personal allowance since 2021 and a textbook example of fiscal drag in action.
'Many of these individuals are not high earners but are simply victims of a frozen threshold in a period of rising prices. For some, it's their first experience of paying income tax in retirement, and it's leading to confusion, frustration, and unexpected bills.'
Laura Suter, director of personal finance at AJ Bell said both pensioners and working people were feeling the impact of the stealth tax raid.
She added: 'Rising incomes and frozen thresholds mean the taxman is set to rake in an extra £20bn this year, with the total income tax haul set to rise to £323bn.
'In contrast, in the first year of the income tax threshold freeze, the Government collected £245bn in tax. The staggering £78bn climb in the nation's annual income tax bill illustrates the huge impact the tax freeze has had on our finances.'
A Treasury spokesperson said 'This Government inherited the previous government's policy of frozen tax thresholds.
'At the Budget and the Spring Statement, the Chancellor announced that we 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.
'That's the plan for change – protecting people's incomes and putting money into people's pockets.'