Why the higher rate income tax threshold should be £75,000

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

If you think you’re paying a lot of tax, you’re probably right.

The tax burden is at its highest level since the Second World War¹ and shows no signs of letting up. A big driver of that is ‘fiscal drag’, the effect where wages rise but the levels at which higher tax rates become due stay the same. The effect is to drag more of us into higher tax brackets, hence the name.

In October 2024, Chancellor Rachel Reeves announced that Income Tax and National Insurance thresholds will remain frozen until the tax year 2027-28. At a time when wage inflation is soaring, the higher rate tax threshold will have remained at £50,270 for eight long years. And it could be longer. With worsening public finances, which will be highlighted in the Spring Statement next week (26 March), the government could consider extending the freeze in Income Tax thresholds.

The drag effect of such freezes is significant. As our analysis below shows, had the £50,270 higher rate threshold kept pace with rising wages over the past two and a half decades it would now be close to £75,000, and on track to be nearly £80,000 by 2028.

To put it another way, someone earning twice the average wage in 2000 would have paid almost no higher-rate tax. Today, had their pay risen in line with average wages, 36% of their income would fall into the 40% rate.

• Read: What can we expect from the Spring Statement?

What is fiscal drag?

Fiscal drag works by freezing tax thresholds so more of our income is dragged into higher tax brackets over time.

As our wages rise on the tide of inflation, thresholds don’t keep pace, so more of us become higher-rate taxpayers.

Fiscal drag has proved a favourite policy for successive governments because it largely flies under the radar. Despite slowly crushing our take-home pay, we’re much more likely to notice a rise in the headline rate of income tax than the gradual squeezing of thresholds.

That’s excellent news for HMRC but not so great for us if we’re trying to build long-term wealth.

What is a high earner?

Like most countries, the UK tax system is designed so the rich pay more - not just higher cash amounts but a higher share of their income as well.  As your salary climbs into “higher earner” territory, the slice over the higher rate threshold is charged at 40% Income Tax, with 2% National Insurance on top.

The problem is that being a “high earner” is subjective and the definition is gradually changing. To breach the higher-rate tax threshold has become much easier over the last 25 years.

By 2027, the IFS predicts one in four teachers will pay higher-rate tax, with one in seven adults classed as a “high earner”². OBR records show that the number of higher-rate taxpayers will soar to 7.2 million by 2027, up from just 2.9 million in 2000³.

In an alternate universe, had the higher rate threshold kept pace with rising wages, it would now be £75,000, and on track to be nearly £80,000 by 2028. Instead, it remains stuck at a modest £50,270, pulling more of us into higher rate tax.

This table shows the impact of fiscal drag over the last 25 years.

How fiscal drag works in practice

Let’s look at an example to illustrate the impact of fiscal drag in more detail.

In 2000, Sally earned £32,785, equal to the higher rate threshold. Over the next 25 years, she stayed in the same role and her wages rose in line with average earnings. By 2025 she earned £74,986 - the increase reflects the rise in wages over 25 years, rather than feeling like a genuine pay rise.

Now for her tax bill! In 2000, Sally paid no higher rate tax as her wages equaled the higher rate tax threshold. But now in 2025 she pays tax on 33% of her income, with a £24,716 gap between her income and the higher rate threshold.

Despite no real pay rise, a big chunk of her wages has been pulled into higher rate tax.

Escalating impact since 2020

Although fiscal drag is a long-term policy, it really got going after 2020 after the Covid pandemic left a painful £300bn hole in government finances.

Spiraling wage inflation made fiscal drag especially effective, with rising wage bills pushing more income into higher tax brackets. We may have received pay rises, but our take-home pay and disposable income felt decidedly less rosy.

The table below shows the startling impact of fiscal drag since 2000, when frozen tax thresholds really began to take hold.

Here are four key stats on the impact of fiscal drag:

1. Despite average wages more than doubling since 2000, the higher rate threshold has risen by just 53% during the same period.
2. In 2000 an average earner would need to double their pay with a 101% pay rise to attract higher-rate tax, however by 2027-28 an average earner could trigger higher rate tax with a pay increase of 30%.
3. By 2027-28, a high earner whose salary kept pace with rising wages since 2000 could end up with nearly £28,000 and 36% of their income above the higher rate tax threshold.
4. By 2027-28, that same high earner would pay over £11,000 high-rate income tax, compared to none in 2000.

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How to protect your wealth

Unfortunately, we’re stuck with frozen tax thresholds until at least April 2028. And it’s not just Income Tax and National Insurance that are rising. The deep freeze on thresholds also affects Capital Gains Tax (CGT), dividend tax, interest and Inheritance Tax (IHT), where frozen and reduced thresholds are pushing up our tax bills.

If you’re facing a rising tax bill, here are some simple strategies to minimise the impact of fiscal drag and keep more of your hard-earned wealth.

• Make the most of your pension and ISA allowances to keep more of your wealth protected from Capital Gains Tax, dividend tax and tax on interest.
• Claim available tax rebates to help trim your bill - eg. higher earning pension savers could be owed an additional rebate on pension payments.
• Make lifetime gifts to minimise your Inheritance Tax bill.
• Boosting your pension contributions can help you save Income Tax as well as boosting your long-term wealth.

These three articles will also help you invest more tax-efficiently.

• Read: 5 tax hacks: how to make financial gifts without a big tax bill
• Read: The tax hacks to help you keep more of your money
• Read: The hidden 60% tax rate – and how to avoid it

Source:

¹ OBR, March 2023
² IFS, 16 May 2023
³ OBR, March 2024