100,000 more people dragged into paying higher rate tax in 2020/21
Wage growth is still likely to accelerate, with inflation often forcing employers to pay their staff more, one finance expert suggested.
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Your support makes all the difference.Thousands more people ended up paying higher tax rates between the tax years 2019/20 and 2020/21, according to HM Revenue & Customs (HMRC) figures.
The number of higher rate taxpayers increased by 100,000 between the two tax years, to 4.0 million, with an increase of £2.5 billion-worth of tax to £64.9 billion.
And the number of additional rate taxpayers increased by 12,000 over the same period, to 433,000.
The income tax liabilities of additional rate taxpayers increased by £2.8 billion, to £63.7 billion, mainly driven by increases in employment income, HMRC said.
It said the growth is also partly due to the additional rate threshold remaining unchanged at £150,000.
The figures, released on International Women’s Day (March 8), also showed that in 2020/21 there were more male than female taxpayers in every age bracket, and men had higher median average income throughout.
For men, the number of taxpayers peaks in the 30 to 34-year-old age bracket, at 1.8 million.
Among women, the numbers paying tax peaks later in life, aged 50 to 54, at 1.4 million.
Wage growth is still likely to accelerate, with inflation often forcing employers to pay their employees more so they can cope with rising costs
The median average income across all age groups was £28,700 for men and £23,600 for women.
The highest median average income for men was found in the 45 to 49 age range (at £35,600) and for women it was in the 40 to 44 age range (at £27,800).
Rachael Griffin, a tax and financial planning expert at Quilter, said of the increase in people paying higher tax rates: “This should come as no surprise considering since 2019 the rate at which someone starts to pay higher rate tax has shifted minimally, despite wage growth during that time being significant due to a range of factors, including the pandemic.
“Wage growth is still likely to accelerate, with inflation often forcing employers to pay their employees more so they can cope with rising costs.”
She continued: “The reason more people move into new tax bands is because of fiscal drag.
“Fiscal drag happens when the income level at which taxes start to be collected and the amount of income that can be earned tax-free do not increase at the same rate as inflation or income growth.
“This can cause a larger portion of a person’s income to be subject to taxes and can also cause more people to fall into higher tax brackets, ultimately meaning they pay more in tax.
“Previous calculations from Quilter found that if wage growth is on average 5% per year for the next four years but income tax thresholds remain frozen then someone earning £50,000 today will be £2,643 worse off in the 27/28 tax year and in total be £6,463 poorer over the four-year period.”