The stealth raid on middle class workers has pushed the number paying higher rate income tax over 5 million for the first time.
Shocking official figures showed that an extra 680,000 workers were dragged into the 40 per cent tax bracket compared to a year earlier.
It comes amid fears that Rachel Reeves will extend an ‘absurd’ earnings threshold freeze in her mini-Budget this month, despite promising no further tax hikes.
Economists said such a move would increase the financial burden for millions, disincentivise hard work and hit struggling households.
And the latest statistics for 2022/23 are just the ‘tip of the iceberg’, experts warned.
The total number of higher rate taxpayers is on track to hit 9million by 2028 and some economists have estimated that it could reach 10million by the end of the decade.
Income tax brackets were put on ice by then-Tory Chancellor Rishi Sunak in 2021 to help to plug the gaps in the country’s finances after the Covid-19 pandemic.
The policy was supposed to run until 2026 but was later extended by Jeremy Hunt, taking the freeze to 2028.
Chancellor Rachel Reeves out running on a spring morning in Hyde Park today
The total number of higher rate taxpayers is on track to hit 9million by 2028 and some economists have estimated that it could reach 10million by the end of the decade
Tax thresholds usually move up in line with inflation. When they don’t, more people are pulled into higher bands as their salaries rise in a process known as fiscal drag.
In October Reeves vowed to end the freeze, saying an extension would ‘hurt working people’.
But experts said the Chancellor could be forced to backtrack on March 26, when she is also expected to make huge spending cuts.
The budget watchdog is set to confirm that her £10billion of fiscal headroom has been wiped out.
Analysts at investment bank Goldman Sachs this week said they expect Reeves to extend tax threshold freezes and slash welfare spending.
Darwin Friend, head of research at the TaxPayers’ Alliance, said: ‘The idea of a higher rate level of tax is increasingly nonsensical, given the number of taxpayers who are being forced to pay it.
‘The argument for this increased tax rate is that those with the broadest shoulders should be asked to pay more, yet frozen thresholds and high levels of inflation mean even many struggling households are now being hit with it.
‘Rachel Reeves needs to urgently increase the 40p threshold to give taxpayers a break and stop this absurd disincentive to hard work.’
An income tax rate of 40 per cent – or 40p in for every pound – applies to earnings over £50,271 (file image)
An income tax rate of 40 per cent – or 40p in for every pound – applies to earnings over £50,271.
Economists said a two-year extension to the earnings threshold could double the number of Britons paying the higher rate levy to 10million by 2030.
Figures published by HM Revenue & Customs (HMRC) showed that 5.1million people were paying the higher rate of income tax in 2022/23 – 15 per cent more than the previous year.
They made up 15 per cent of all taxpayers and accounted for 35 per cent of the total amount raised by the Government from income tax during the year.
Just five years earlier, the number was 4.2million.
Economist Julian Jessop said: ‘The jump in the number of higher-rate taxpayers to more than 5million in 2022/23 is just the tip of the iceberg.
‘The continued freeze on personal tax allowances could drag another four million people into the net by 2028.
‘Moreover, there is already speculation that Rachel Reeves will extend the freeze for another two years in an emergency budget later this month. This could take the total number of higher rate taxpayers to 10 million.
Experts said the Chancellor could be forced to backtrack on March 26, when she is also expected to make huge spending cuts
‘This is a timely reminder that governments can raise more revenue in many different ways, making manifesto commitments not to increase tax ‘rates’ even less meaningful.’
Tom Clougherty, executive director at the Institute for Economic Affairs, said: ‘Since 1990, the percentage of the adult population that pays the higher or additional rate of income tax has tripled.
‘The main reason for this is that tax thresholds haven’t kept pace with earnings. Economists call this fiscal drag and it is one of the oldest tricks in the book for cash-hungry governments.
‘The current freeze on tax thresholds is particularly egregious.
‘More workers paying higher rates of tax is a problem for the economy, because it reduces the incentive for people to increase their earnings – or indeed to build up their future earning potential. The result is less dynamism and less growth.
‘The government faces a very difficult fiscal situation at the moment but there needs to be a long-term plan that would get us back to lower, flatter simpler taxes.’
HMRC figures also showed that the number of people paying the additional tax rate of 45 per cent on earnings above £125,140 hit 600,000 in 2022/23 – 9.5 per cent more than the prior year.
These 600,000 additional-rate taxpayers made up nearly 2 per cent of all taxpayers and accounted for 34 per cent of income tax raised.
And a freeze in the personal allowance threshold – which means income up to £12,750 is not taxed at all – resulted in 1.5 million more people paying income tax in 2022-23.
Andy King, a financial planning specialist at wealth management firm Evelyn Partners, said there had been a ‘marked increase in the number of taxpayers in the UK across the board’.
The process of fiscal drag is ‘still in full swing’ he said, and ‘will continue to increase the tax burden until the freeze is thawed, which will be 2028 at the earliest.’
Shaun Moore, tax and financial planning expert at Quilter, said: ‘The impact of the Government’s fiscal drag policy has been laid bare in the personal income statistics from HMRC,’ adding that the increase in overall taxpayers came as ‘wages climbed while income tax thresholds remained stagnant.’
