Chancellor Jeremy Hunt will drag more taxpayers into the 45p additional tax rate by cutting the income tax threshold, he announced in his Annual Statement today.
The additional-rate income tax threshold will be cut from £150,000 to £125,140, a move which will mean more higher earners will be subject to the 45p tax rate.
All other income tax thresholds are to remain frozen until April 2028, two years longer than previously planned.
An average earner with a salary of £33,000 in 2021/22 before the income tax threshold freeze began will end up paying £27,378 in income tax as a result of the policy being extended to 2027/28, according to analysis from AJ Bell. They would pay just £24,821 if income tax thresholds were linked to inflation over the same period, a difference of 10%.
Someone earning £50,000 will end up paying 14% more tax over the six year freeze from 2022/23 to 27/28, an increase of more than £6,500 compared to a system in which income tax thresholds matched inflation, according to the investment platform.
Keith Churchouse, founder at Chartered Financial Planner firm Chapters Financial in Surrey, said the income tax rise for those earning over £125,140 will not be welcome and the freezing of income tax allowances to 2028 will also see many more pushed into higher tax bands.
Shaun Moore, Financial Planning expert at Quilter, said today’s changes to income tax could push more towards taking financial advice.
He said: “With the UK government facing pressure on its finances following the pandemic and energy price guarantee, Hunt has cast aside Kwarteng’s theory that you can cut taxes to increase revenue and instead is seeking to fill the black hole by hitting the wealthy through a combination of tax increases and stealthy allowance freezes.
“However, these are often the people who can afford to plan their tax affairs and are likely to have more than one source of income, therefore it is likely to see an increase in the take up of tax advice.”
Les Cameron, head of technical at M&G Wealth, said today’s changes are likely to lead to a flurry of activity for those earning between £125,000 and £150,000.
He said: “The gradual loss of personal allowance between £100,000 and £125,140 sees an effective rate of tax of 60% for many. But what will concern them most is the £25,000 of income that will see an increase in tax from 40% to 45%. Those in that wealth zone will no doubt be looking to bring forward any taxable withdrawals to get this lower rate of tax and then look to organise their income to try and stay below £125,140.
“There are several ways this could be achieved – through pension contributions, assigning assets to others or making more use of tax wrappers. Those with a higher risk appetite may simply use the 30% relief available through venture capital schemes to reduce some of their increased tax liability.”
The changes to income tax were not a surprise to wealth manager Charles Stanley, who rated a freezing of the bands and the lowering of the 45p additional rate band as the two most likely changes to be made by the Autumn Statement.
Rob Morgan, chief investment analyst at Charles Stanley, said the freezing of the income tax thresholds will highlight the advantages of tax efficient wrappers.
He said: “This would pull more people into the income tax system for the first time, or into higher tax bands over the next six years as wages increase. It will underscore the considerable advantages of tax efficient wrappers such as ISAs and pensions as income and investment gains aren’t taxable.”
Paul Barham, partner at Mazars, said income tax was an easy target for the Treasury.
He said: “Income tax was always going to be in the government’s sights. With a gaping hole in the public finances, it’s an easy target for the Treasury. Putting the thresholds on ice, and lowering the 45p tax band, is a double whammy and will raise billions for the Treasury. Millions will be in the higher and additional rate tax bands in the coming years. And high earners will really feel the hit, with a higher proportion of their income subject to the 45% tax rate. Tax bills are only going in one direction for millions of people and that is up.
“This makes tax planning even more critical. If salary sacrifice is an option through an employer, consider using it to reduce your taxable earnings or think about increasing your pension contributions. Benefits like a season ticket loan, company car, cycle to work scheme or claiming tax-free childcare can also be used to cut your taxable earnings.”
Laura Suter, head of personal finance at AJ Bell, said: “The move means that rather than rising with (currently high) inflation, the point at which people start paying tax, and at which the higher rate tax kicks in, will be stuck at their current levels until 2027/28. With wages steadily climbing, it means millions more people will become higher-rate taxpayers and see a larger chunk of their earnings hit with basic rate tax.
“The latest Government figures show there is already expected to be a 50% increase in the number of additional rate taxpayers this year, and a 44% increase in the number of higher-rate payers – extending the freeze from the current 2025/26 to 2027/28 will only fuel these numbers.
“Those earning £50,000, and so hovering just under the current higher-rate threshold, will be hit the hardest, paying £6,570 more in income tax over the entire period of the tax freeze from 2022/23 to 2027/28. That represents a 17% increase in their income tax bill over that period – something many will find difficult to afford. But even those on lower salaries will be paying significantly more tax, with someone on the average UK salary of £33,000 paying almost £2,600 more income tax thanks to the freeze.”
