1.35 million Brits are now affected by the ‘personal allowance stealth tax’, which sees them paying 60% effective tax on income over £100,000 and up to £125,140.
This is according to information supplied to RSM UK from HRMC as part of a freedom of information request, showing that many people in the UK are now being dragged into this tax bracket as inflation rises and tax bands remain frozen.
The ‘personal allowance stealth tax’ refers to the reduction in a person’s personal allowance once their income exceeds £100,000. For every £2 they earn over this amount, the taxpayer’s personal allowance is cut by £1 until it is completely withdrawn.
This means that on income earned over £100,000 and less than £125,140, taxpayers are effectively paying 60% in tax on that portion of their income. For Scottish taxpayers, this may be as high as 63%.
Frozen thresholds mean pain for taxpayers
RSM noted that when this measure was first introduced, only 588,000 taxpayers were earning a taxable income of £100,000 or more.
However, this tax threshold has never been increased and, as a result, many more have now been dragged into this bracket, with the number of affected taxpayers now standing at 1.35 million.
Of this number, 379,000 of the affected taxpayers live in London and 297,000 in the South East.
It is not only the tax threshold that has remained frozen, but also the personal allowance, which has not increased since 2021 and will not rise until 2027/28, despite increases in inflation.
“The freeze on allowances has significant implications for taxpayers. As wages increase over time, more people find themselves paying higher rates of tax or start paying tax for the first time, even if their incomes have not grown sufficiently to keep up with inflation,” RSM UK said.
“The recent Spring Budget did little to alleviate the impact of years of tax by stealth, with the announced reduction in NIC rates only beneficial to those with earned income, and many will feel the pain of these measures for years ahead.”
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