Record number hit by 45p top rate of tax

Thousands dragged into ‘unfair’ bracket by wage inflation and cuts to pension relief

A RECORD number of people are now paying the highest rate of income tax, new figures show.

This is due to wage inflation sending incomes above the top-rate tax threshold of £150,000 a year and reductions in the pension tax relief available to high earners.

By the end of this tax year HMRC expects 364,000 workers to be paying 45 per cent income tax, a 10 per cent rise on the previous year and a 54 per cent rise since the tax band was introduced seven years ago.

Meanwhile, the number in lower tax bands has fallen or remained static.

Last night experts described the tax regime for top earners as “unfair” and drew parallels between it and the 40 per cent “higher rate” tax bracket, which has trapped millions of middleclass employees.

In the run-up to the General Election all political parties have suggested that they would implement some form of tax rise for higher earners.

The commitment is likely to prove most problematic for the Conservatives, and their claims to be the “low tax” party.

The 45 per cent “additional rate” threshold has remained at £150,000 since its introduction but wage inflation has led to thousands more workers being dragged into the bracket each year, despite them being no better off in real terms.

An extra 128,000 high-earning workers including consultant doctors, lawyers and finance professionals have found themselves dragged into the tax band since its implementation, the HMRC report says. The number of basic-rate taxpayers has remained virtually static for the past three years while the number of higher rate taxpayers paying 40p income tax is set to fall by 350,000 (8 per cent) between 2015-16 and 2017-18.

In addition, some 600,000 low-earners will have been taken out of tax over the course of the last and current tax year, the data shows.

Tom Mcphail, head of policy at Hargreaves Lansdown, said: “The 45 per cent rate is now trapping high earners just as the 40 per cent rate did in the past. High earners are already contributing a larger proportion of income tax than ever before and cuts to pensions have unfairly removed their opportunity for them to use tax efficient savings products to reduce their tax bill.”

Until recently the 40 per cent rate threshold had caused anger by failing to rise along with wages, therefore capturing thousands more workers.

To quash these concerns the Government announced plans in 2016 to raise the 40pc tax threshold from £42,385 to £50,000 by 2020.

As a result, by the end of this tax year

the number of workers caught in the 40 per cent tax bracket will have fallen by 350,000, or 8 per cent, since 201516, HMRC said.

The Conservative Party manifesto contains no plans to change the additional rate threshold, but in the runup to election day Theresa May is refusing to rule out tax rises for higher earners. Labour’s manifesto outlines plans to raise taxes for workers earning £80,000 a year, while pledging not to raise taxes for people with earnings below this level.

In recent years high earners have been hit with pension benefit cuts which have led to many giving up on pensions. A string of subsequent cuts to the pensions lifetime allowances has seen the total amount savers can amass in a pension reduce from £1.8million to £1million. Last year the Government went further by drastically cutting the annual amount people earning £150,000 or more can put into a pension each year and claim tax relief.

Following the change many workers with salaries above £120,000 have erred on the side of caution and opted out of pensions and are receiving higher salaries instead, pushing some above the £150,000 threshold.

Meanwhile, the data shows the total tax paid by average basic-rate taxpayers fell below 10 per cent of salary for the first time last year. The fall comes despite rising average basic-rate taxpayer earnings. This year an average basic-rate taxpayer earns around £22,900 and is expected to pay £2,250 (9.7 per cent of their salary) in income tax, the data showed. This compares to £22,100 in 2014-15 when they would have paid £2,230 (10.2 per cent of their salary) in income tax.

In 1999-2000 an average basic-rate taxpayer earned around £16,000 and paid £2,180 (13.7 per cent) of their salary in tax.