UK’s Highest Earners Face Significant Tax Increases
Britain’s top earners are now paying substantially more in annual income tax compared to the period following the financial crisis. This rise, estimated at £100 billion more each year, is largely due to frozen tax thresholds and increasing incomes among high earners. The analysis highlights how these factors, combined with changes in tax policy, are pushing more income into higher tax brackets.
Frozen Thresholds Drive Bracket Creep
A key reason for the increased tax burden is the freezing of income tax thresholds. The threshold for the UK’s additional rate, the highest income tax rate, was lowered from £150,000 to £125,140 in April 2023 and has remained at that level. When incomes rise, but the threshold does not, more people find their earnings falling into higher tax bands. This phenomenon, known as fiscal drag or bracket creep, means taxpayers can face higher liabilities even if the headline tax rates haven’t changed.
The impact of this policy is significant. It is projected that around 1.3 million people will be paying the 45% additional rate in 2026. This number is more than double the figure recorded in the 2021/22 tax year, illustrating the growing number of individuals affected by the frozen thresholds. Data from HMRC shows a rise in income tax receipts, with frozen thresholds being a contributing factor to this increase.
| Measure | Figure |
|---|---|
| Previous additional-rate threshold | £150,000 |
| Threshold from April 2023 | £125,140 |
| People expected to pay 45% rate in 2026 | 1.3 million |
| Comparable period | 2021/22 |
Potential for Wealth Taxes
Beyond income tax, there is discussion about potential wealth taxes. The UK finance minister is considering various options for the upcoming budget, including a possible annual levy on assets exceeding £10 million. Such a tax would target accumulated wealth rather than income, affecting a different group of taxpayers. This proposal adds another layer to the tax concerns for wealthy individuals who are already facing higher income tax obligations.
The debate around wealth taxes is separate from the income tax changes but adds to the overall tax discussion for high earners. Whether the focus remains on income or expands to include assets will be a key point in future budget decisions.
Income Growth and Tax Bands
The structure of income tax bands means that income growth alone can push taxpayers into higher tax brackets. When combined with frozen thresholds, this effect becomes even more pronounced. For the 2023 to 2024 tax year, the income threshold for the top 1% of earners in the UK was £207,000 before tax. The additional-rate threshold, however, is set at £125,140. This gap highlights how income increases can lead to higher tax payments without any change in tax law itself. The current 45% rate remains a significant point of pressure for the UK’s wealthiest taxpayers.
Frequently Asked Questions
Why are the UK’s highest earners paying more income tax?
Highest earners are paying more because income tax thresholds have been frozen, meaning as incomes rise, more money falls into higher tax brackets.
What is fiscal drag or bracket creep?
Fiscal drag, or bracket creep, happens when incomes rise but tax thresholds don’t, causing taxpayers to pay more tax without any change in the tax rates themselves.
How has the additional rate threshold changed?
The threshold for the additional rate (45%) was lowered from £150,000 to £125,140 in April 2023 and has stayed at that level.
Are there discussions about wealth taxes in the UK?
Yes, there is discussion about potential wealth taxes, such as an annual levy on assets over £10 million, which would affect accumulated wealth rather than just income.
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