Why your UK pay rise just made you poorer until 2031

British workers are discovering an uncomfortable truth around their pay.

The latest HMRC personal income statistics reveal that 2.17 million additional people were dragged into paying income tax in 2023/24, with higher-rate taxpayers swelling by 654,000 to reach 5.76 million and additional-rate payers surging by 324,000, a rise of almost 57%.

Rachael Griffin, tax and financial planning expert at Quilter, notes that frozen thresholds are reshaping the tax profile of the British public, and with no changes scheduled until 2031, the squeeze looks set to intensify rather than unwind.

Personal allowances and tax band thresholds remain stuck at levels set years ago, while wages climb to keep pace with inflation.

Workers receiving pay rises find themselves crossing into higher tax bands without any genuine improvement in their standard of living.

Griffin notes that much of the recent wage growth was simply to match high inflation, leaving many taxpayers with materially higher tax bills and no real gain in spending power.

The middle-class tax trap

Higher-rate tax was once the preserve of genuinely high earners, but that picture has fundamentally shifted, said Griffin.

“Experienced teachers, senior nurses and police officers are increasingly being pulled into higher‑rate tax through incremental pay rises, overtime or progression, rather than genuinely high earnings.”

What was once a marginal issue is now becoming a mainstream experience across large parts of the workforce, she said.

“As a result, one in five taxpayers now earns over £50,000, yet higher‑rate taxpayers account for more than 70% of all income tax receipts. That concentration highlights just how reliant government finances have become on pulling more people into higher tax bands rather than on underlying growth in real incomes.”

Pensioners are being caught in the same net. Around 22% of all UK taxpayers are now over state pension age, with roughly one million pensioners dragged into paying income tax in 2023/24 alone.

Griffin points out that the triple lock, designed to protect retirees from inflation, is interacting awkwardly with frozen personal allowances.

State pension increases meant to preserve living standards are increasingly being clawed back through tax, particularly where even modest private pension income tops up the state payment.

Salary sacrifice changes coming in 2029

For workers still building retirement pots, pensions have long been the most effective shelter from rising tax bills, but that advantage is narrowing.

From 6 April 2029, the government will cap National Insurance exemptions on salary sacrifice pension contributions at £2,000 per year, with contributions above that level attracting both employer and employee NICs.

Income tax relief on pension contributions remains unchanged, but the NI saving has been one of the most powerful tools for managing tax liabilities and is now being meaningfully eroded.

Savings tax catches millions off guard

Higher interest rates delivered an unexpected windfall to HMRC as taxable savings interest more than tripled, catching millions of savers who had grown used to negligible returns.

Rates have since eased and are unlikely to revisit recent peaks, but the episode underlined why ISAs matter for sheltering cash from income tax.

For savers with a longer time horizon, it also raises questions about relying too heavily on cash returns that may already have peaked.

What workers should do now

• Check whether your latest pay rise has tipped you into the 40% or 45% band and model the take-home impact before celebrating.
• Maximise pension contributions through salary sacrifice before the £2,000 NI cap arrives on 6 April 2029. Move savings into a Cash ISA or Stocks and Shares ISA up to the £20,000 annual limit to shelter interest from tax.
• Review whether private pension drawdown is pushing your total income above the personal allowance and adjust withdrawals if needed.
• Speak to a qualified financial adviser if you are within £5,000 of a higher tax band, as small changes can produce outsized savings.

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