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.

With a UK General Election looming in 2024 the focus on personal tax levels will be even higher than normal. 

Both main parties must balance promises on tax cuts with the need to invest in public services. And with the UK currently in recession, potentially lowering the Treasury’s tax-take, the margin for either tax giveaways or significant investment is narrow. 

The burden will inevitably fall on those with the broadest shoulders. In a progressive tax system it’s right that the rich pay a greater share of their income in tax than the poor.  

But who counts as rich? And how much is already being taken from them? 

One way to answer that is to examine the data on Income Tax receipts, and specifically the proportion of taxpayers whose income means they fall into higher tax bands.    

HMRC data going back more than three decades reveals that the share of UK taxpayers who pay the higher rate of 40% tax - or above - on their income has risen from just 6.5% in 1990/91 to 18% in 2023/24. To put that another way, around one-in-15 taxpayers paid the higher rate in 1990, but that has grown to more than one-in-six today.  

While the number of income taxpayers overall has grown by 38% since 1990 - largely thanks to population growth - the number of higher rate payers (and additional rate payers in the years it has applied) has grown by 280%. 

The animated graphic below helps tell the story. Have a watch for yourself.

These rises are the result of successive governments failing to uprate the thresholds at which higher rates apply in line with the rise in wages - an effect known as fiscal drag. The results are a multi-decade, slow-motion tax rise that is incredibly lucrative for the Treasury. 

Fiscal drag has accelerated in recent years and there’s reason to assume it will rise even further from here. Since 2021 the rates at which you start paying higher (40%) and additional (45%) rate tax have been frozen. Our animated graphic shows the effect of this, with the proportion of higher rate payers jumping in recent years.  

The freeze was extended in 2022 meaning - unless plans change - you will pay 40% tax on earnings above £50,270, and then 45% rate on earnings above £125,140, until at least 2028. 

While a burden on those paying tax, fiscal drag is a potent weapon for governments looking to raise money. That’s particularly true in periods when wages rise quickly - as they have recently - because even more income will fall above the frozen tax thresholds. The Office for Budget Responsibility now expects the Income Tax band freeze to pull in an extra £29.3bn by 2028.1 

For now, there is little employees can do about frozen income tax bands - but it doesn’t mean there’s nothing you can do mitigate their impact. Using earnings to make contributions to a pension is one way to reduce the sum being taken in tax each month. Any contributions you make are boosted with 20% tax relief by the government – with a bigger benefit available to higher and some additional rate taxpayers if this is claimed via Self-Assessment.  

With your 2023/24 tax year Annual Allowance you can receive tax relief on contributions up to a maximum of £60,000, capped at the amount you earn if this is less. Your pension contributions can grow free of Capital Gains Tax (CGT) and then, once they are eligible to be accessed, 25% of your pot (up to a limit of £268,275) is available tax-free. Withdrawals in excess of that are taxed as income. 

Got a burning question you want to ask? Why not drop us a line. Click here to ask an expert your question.  


1 Office for Budget Responsibility, March 2023

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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