The UK tax landscape is set for a significant shift as 4.4m more people are expected to be drawn into paying income tax in the current tax year, thanks to the continued freeze on tax thresholds. According to data from HMRC, the total income tax revenue is projected to reach £272.6 billion this year, an increase of £16.3bn from the previous year.

The decision to freeze the personal allowance at £12,570 since 2021 has notably affected pensioners, with 1.77m individuals over the state pension age now required to pay income tax. This number is expected to grow as the thresholds remain unchanged until at least 2028.

Increase in higher and additional rate taxpayers

The freeze on tax thresholds has also led to a significant rise in higher and additional rate taxpayers. An additional 1.9m people have been drawn into the 40% tax bracket since the thresholds were frozen, with 310,000 more expected to join this year alone.

Moreover, the number of additional rate taxpayers paying the 45% tax rate is set to surpass a million for the first time. The additional rate taxpayers are expected to reach 1.13m, marking a 117% increase since 2021. This surge is attributed to lowering the additional rate tax threshold to £125,140, pulling an extra 180,000 people into this bracket this year alone.

Impact on savings and investment taxes

In addition to income tax, the freeze on thresholds is projected to increase the tax burden on savings and investments significantly. HMRC is expected to collect an additional £10.4bn from savings interest in the 2024/25 tax year, a stark rise from the figures reported at the start of the pandemic.

Higher rate taxpayers with a savings account yielding 5.25% interest would need a balance of just £9,525 to see their savings interest hit £500, utilising their entire Personal Savings Allowance. Any additional interest earned would be taxed at 40%. Basic rate taxpayers would pay 20% on savings interest exceeding £19,050.

Financial analysts have suggested that using a cash ISA could mitigate this tax burden, allowing savers to shield up to £20,000 each tax year from taxation on the interest earned.

Stealth tax agenda and fiscal drag

The increasing tax burden due to frozen thresholds has been described as a "stealth tax agenda" by experts.

In summary, the freeze on tax thresholds is leading to a significant increase in the number of taxpayers and the amount of tax revenue collected by HMRC. With the thresholds set to remain frozen until at least 2028, this trend is expected to continue, affecting millions of UK taxpayers and their financial planning strategies.

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