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The decision by Chancellor Rishi Sunak to freeze the UK income tax threshold in 2021 has had a profound effect. It has resulted in a record number of UK taxpayers having to pay higher rates of income tax. The number of UK taxpayers paying the higher rate of tax has increased from 4.25 million people in 2019 to 6.1 million people in 2022.

What is Income Tax?

Income tax is applicable to the majority of types of income. This includes the salary people earn from jobs, profit earned by businesses, rent received by landlords, and pensions. Large companies, estates, and other relevant entities also pay tax on their profits. There are tax-free allowances available. An example of the tax-free personal allowance is shown below.

Personal Allowance

  • Taxable Income: £0 – £12,570
  • Tax rate: 0% No income tax payable

Basic Rate

  • Taxable Income: £12,571 – £50,270
  • Tax rate: 20%

Higher Rate

  • Taxable Income: £12,571 – £50,270
  • Tax rate: 40%

Additional Rate

  • Taxable Income: Over £150,000
  • Tax rate: 45%

Detailed information is available on GOV.UK.

Impact of Decision To Freeze Income Tax Thresholds

The Chancellor’s decision to freeze all income tax thresholds in 2019 has resulted in a record number of taxpayers paying higher rates this year. HMRC report in the tax year 2022-23, 6.1 million people will pay either the higher rate of tax or the additional rate of tax.  This is compared to only 4.3 million taxpayers when Boris Johnson came into power. The number of people paying the additional rate of 50% has increased by 50% since 2019. The actual increase is from 421,000 people to 629,000.

Although the majority of people in the UK still pay the basic rate of tax, the government is under pressure to review the tax brackets. It is common practice for example for governments to increase personal allowances each year. The personal allowance threshold is currently frozen, along with all other thresholds. This means people who received pay rises may fall into the higher bracket. Considering inflation has hit record highs of 9.1%, salaries are expected to increase. This will result in people having to pay higher levels of tax, ultimately bringing in more money to the government.

It is estimated 1 in 5 taxpayers will soon enter into the higher tax rate bracket.

If you would like advice on your tax affairs please contact us. on 0800 471 4546.