New data reveals a significant increase in the number of people paying higher-rate income tax in the UK. This trend is likely to continue due to a government policy of freezing tax thresholds.
The OBR and Tax Policy
The Office for Budget Responsibility (OBR) received plenty of attention leading up to the Budget. It was widely portrayed in the media as the body that placed constraints on the Chancellor’s tax-cutting options ahead of the coming election.
That portrayal of the OBR’s powers is an over-simplification. While the OBR does calculate whether the Chancellor can meet his fiscal rules, it neither sets those rules nor, crucially, the assumptions underlying the calculations.
For example, in projecting how much tax revenue the government will receive from 2025/26 onwards, the OBR is obliged to follow the Treasury’s assumption that the ‘temporary’ 5p cut in fuel duty will be scrapped and duty will rise in line with the Retail Price Index (RPI) inflation.
Nobody, least of all the OBR, believes this will happen. Fuel duty rates last rose in 2010.
The Rise of Higher Rate Taxpayers
A key finding from the OBR's report concerns the government's decision to freeze tax thresholds. This policy means the income level at which people start paying higher-rate tax won't adjust for inflation.
As a result, the OBR estimates the number of higher-rate taxpayers will jump by 2.7 million by 2028 compared to if the threshold rose with inflation. This translates to a staggering 59% increase.
Furthermore, the recent cut to the additional rate threshold will also contribute to a rise in higher-rate taxpayers. Overall, the OBR estimates that about two in nine taxpayers will be paying more than the basic rate by 2028.
Government's Response and Your Tax Band
The significant revenue generated by these freezes makes them unlikely to be reversed without major policy changes. This may explain the government's focus on reducing National Insurance rates instead.
As the new tax year begins, it's crucial to check your 2024/25 tax band. Due to the frozen thresholds, you might find yourself bumped into a higher tax bracket. Remember, tax treatment varies for each individual, and rules are subject to change.
Contact us if you would like advice on how the freezing of thresholds is affecting your tax bill.
