Sunday, December 22, 2024

Number of UK income tax payers leaps by 4.4m in three years due to threshold freeze

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The number of people dragged into paying income tax has leapt by an estimated 4.4 million in three years because of the government’s freeze on thresholds, official data shows, a statistic likely to reignite the election debate on tax.

The figures show that a continuing freeze on income tax thresholds, seen as a stealth tax by some, has pulled an extra 1.77 million pensioners into the income tax bracket.

The Conservative party has said it would keep the thresholds unchanged until 2028, although it has promised to increase personal tax allowances for pensioners.

HM Revenue and Customs (HMRC) data shows that in 2024-25 there are an estimated 37.4 million income tax payers, up from 33 million when personal income tax thresholds were frozen in the 2021-22 tax year.

That includes 8.5 million taxpayers above state pension age, 26% more than the figure of 6.7 million recorded in 2021-22.

The Conservatives are likely to use this statistic to tout their tax offer to pensioners, known as the “triple lock plus”. This would tie an annual rise in personal allowances for pensioners to the increase in pensions under the so-called triple lock, which equates to whichever is the highest from average earnings growth, inflation, or 2.5%.

Labour has not committed to this policy. It has also said it would stick to the current plan for tax thresholds to remain the same to 2028.

Tax has been one of the main battlegrounds of the election campaign, with Rishi Sunak repeatedly claiming people would pay higher taxes under Labour. Keir Starmer and his team say they will not raise income tax, national insurance or VAT, and argue that the Conservative manifesto is not properly funded.

There has been criticism that both main parties are being opaque over tax and spending plans, with the Institute for Fiscal Studies thinktank saying this week it was deliberately not focusing on the hard fiscal choices to be made, whoever wins.

Commentators have repeatedly said the tax threshold freeze is dragging more low-income households into paying basic-rate tax, which starts at income of ÂŁ12,570 a year. Increasing numbers of people are also pulled into the higher 40% rate of tax, which begins at ÂŁ50,270 a year.

This phenomenon, called “fiscal drag”, raises billions for the Treasury and has been called a stealth tax by critics and tax experts.

Overall, the figures show that in 2024-25 there are an estimated 29.5 million basic rate taxpayers, up 2.1 million since 2021-22. The number of higher-rate taxpayers has increased to 6.31 million from just over 4.4 million over the same period.

Sarah Coles, head of personal finance at the investment firm Hargreaves Lansdown, said: “The agonising pain inflicted by fiscal drag and cuts to dividend allowances has been laid bare, with millions more people paying tax, and billions of pounds more being raked in.”

On the figures relating to older people, the former pensions minister Steve Webb said the data showed the frozen tax thresholds, combined with significant increases in the state pension, meant the number of pensioners paying tax had “continued to soar”.

It is the continuation of a long-term trend under which the number of over-65s paying tax has risen by about 4 million since 2010-11, said Webb, now a partner at the actuarial business LCP. “For a pensioner in Britain, being an income tax payer is now the norm rather than the exception,” he said.

Just under 2.5 million pensioners currently receive state pensions which, on their own, are in excess of the personal tax allowance, according to a recent LCP analysis. Most of these were older pensioners on the old basic state pension who also qualified for the “additional state pension” – also known as the state earnings-related pension scheme (Serps) or state second pension – it said.

Rachael Griffin, tax and financial planning expert at the wealth management firm Quilter, said: “This morning’s statistics from HMRC reveal the continued impact of the Conservative government’s stealth tax agenda, as the number of people being pulled into the higher and additional rate tax brackets has continued to soar as a result of frozen tax thresholds and the ongoing impact of fiscal drag.”

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