The tax ‘addiction’ hammering the UK

Frozen tax thresholds have pulled almost eight million more Britons into paying income tax since 2021, equal to a fifth of all taxpayers, new HMRC figures show.

HMRC expects 40.8 million people to pay income tax in 2026/27, according to its latest income tax liabilities statistics. That compares with 36.7 million in 2023/24 and 33 million in 2021/22, the year the government first froze thresholds.

The freeze holds the personal allowance and tax bands flat while wages rise, so each pay increase pushes more of a worker’s income into the taxman’s reach.

Much of the growth sits in the basic rate band, where HMRC projects the number of taxpayers to climb from 29.4 million to 31.4 million. Rates once aimed at the wealthy now reach a far broader group. HMRC projects 7.7 million higher rate taxpayers by 2026/27 and expects the number paying the additional rate to reach 1.29 million.

A type of tax addiction

Shaun Moore, Tax and Financial planning expert at Quilter, said the mechanism has become an addiction for the government.

“Fiscal drag has become the Treasury’s bad habit. Every year frozen thresholds deliver another hit of painless revenue, but the longer governments rely on it, the harder it becomes to quit,” he said. “Ministers can raise billions without ever having to announce a tax rise.”

Pay rises that buy nothing extra

Workers are not necessarily getting richer. Moore said much of the wage growth of recent years has simply tracked higher inflation and living costs.

“People are paying more tax not necessarily because they have become significantly wealthier, but because frozen thresholds mean a greater proportion of their income is being captured by the tax system,” he said.

Retirees are feeling the squeeze too. HMRC projects that 9.58 million taxpayers will be above state pension age by 2026/27, almost a quarter of the total.

Rising state pension payments, frozen allowances and private pension income mean more retirees now pay tax in retirement, and many are entering the tax system for the first time.

Higher earners still carry the load, but the definition is shifting

The figures show income remains concentrated at the top.

The top 10% of taxpayers account for around a third of all pre-tax income, while the top 1% account for more than 12%, and the highest earners continue to shoulder a significant share of the income tax bill.

Moore said the steady rise in higher and additional rate taxpayers suggests “the definition of what constitutes a higher earner is gradually shifting.”

Thresholds are set to finally thaw in the 2030s, a decade after the freeze began. Moore warned the Treasury may struggle to let go.

“What began as a temporary measure has evolved into one of the most effective revenue-raising tools available to government, but the burden falls squarely on the shoulders of UK taxpayers,” he said.

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