Inflation and frozen tax bands mean that more than one million people will pay the higher rate of tax by 2027, new figures released by HMRC show.

The tax authority is forecasting that 1.13 million people will be pulled above the 40% tax threshold by 2027/28, as wages rise quickly and tax bands stay at the same level.

Latest figures show that wages have grown at their fastest rate in more than 20 years. Private sector wages grew 7.2% annually in the three months to November 2022.

The higher rate band is currently levied on income between £50,271 and £150,000.

Previously, the £50,271 threshold has risen in line with inflation. But the threshold was frozen, initially until 2026, and then until 2027/28 in Jeremy Hunt’s Autumn Statement last year.

The new Chancellor also announced that the additional rate income tax threshold would be lowered from £150,000 to £125,140.

HMRC said this would pull an additional 301,000 taxpayers into the additional rate income tax band.

HMRC released these forecasts as part of a Freedom of Information request submitted by Quilter.

Feeling worse off

Although wages have risen quickly in recent months, figures indicate that they aren’t keeping up with inflation, which reached 10.7% in November 2022.

Quilter tax and financial planning expert Rachel Griffin said that many people won’t feel wealthier - even with a big bump in pay.

“This means that in real terms their buying power remains much the same, yet their salaries are taxed much more.

“Freezing income tax bands is a form of stealth tax as you’ll end up paying considerably more tax during the time bands are frozen.”

Miles Grady, Director of Umbrella.co.uk said: “At a time when rising prices are leaving people worse off, a stealth tax on incomes will make life even tougher.

“It’s important to remember that the threshold for the basic rate of income tax has also been frozen, so this doesn’t just apply to higher earners.”

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