Fiscal drag pulls nearly 2 million into higher tax bracket
Income tax thresholds, frozen in 2021, have pulled nearly two million Brits into higher brackets as fiscal drag bites.
The number of higher rate taxpayers has increased by 1.88m, from 4.43, to 6.31m, between 2021 and 2025, according to finance specialists Rift.
“Rising income taxes have been particularly punitive in recent years, as inflation reached double digits between September 2022 and March 2023,” managing director at Rift, Bradley Post, said.
Fiscal drag occurs when rising wages and inflation pushes taxpayers into higher tax brackets despite no official change in the country’s tax rates.
The current ‘higher rate’ tax is 40 per cent, and is charged on income between £50,271 and £125,140.
In 2021, the average estimated salary for a high earner sat at £50,201, just below the higher tax rate threshold, but the average income of a high earner has since climbed to £61,041.
Based on government and internal data, Rift found that the average high earner will see 21 per cent of their total income subject to the ‘higher rate’ of tax in 2025, a figure which has “climbed consistently since the freeze was implemented”.
Chancellor Rishi Sunak first implemented the threshold freeze in the 2021 Spring Budget, and the freeze was later extended by then Chancellor Jeremy Hunt in the Autumn Statement 2022.
Chancellor Rachel Reeves has committed to freezing income tax bands until April 2028, up from the previous timespan of April 2026.
“Many more are set to feel the pinch in the years ahead… being pulled into the higher rate of tax can also cause [Brits] to lose out on other areas of financial support, with one of the most common we see being their right to claim child benefits,” Post said.
“As it stands, a combined house income where both parents earn below the higher rate, even if it’s only marginally below, would see them eligible to claim child benefits. However, if one parent doesn’t work at all, but the income of the other creeps into the higher rate, this would see their right to child benefits stopped,” he added.