One in three high earners unwittingly risk being dragged into 45pc tax
One in three high earners unknowingly faces paying the top 45pc tax rate next month, research suggests.
In April the 45pc tax threshold will drop from £150,000 to £125,140. But, alarmingly, one third of those affected may be unaware of the change.
A survey of 3,000 higher earners carried out by Barclays Wealth found that one third who have an income of over £125,140 do not know their tax band and may therefore be unprepared for the rise in their tax bills when the additional rate threshold is reduced.
The research shone a light on "persisting confusion around tax changes", with two in five of those who will be in the 45pc bracket from April are unaware of the lowering of the threshold announced in the autumn.
Complex tax rules such as “the personal allowance taper” have added to taxpayers’ confusion. In the survey, a third of those surveyed said they did not know what the personal allowance taper was. This confusing part of the tax system means that for every £2 earned over £100,000, £1 of the personal allowance is lost.
The allowance then disappears completely once a person’s income exceeds £125,140. The tapering means workers caught in this bracket are effectively taxed at a rate of 60pc.
Clare Francis, of Barclays, said "millions" of people would see their tax bills rise from next month, putting further pressure on households "at a time when money is already tight for many".
Donating to charity and transferring high-yielding investments to a spouse with lower earnings are some of the other ways that 45pc and 60pc taxpayers can reduce their taxable income and protect their wealth, she added.
It comes as the Office for Budget Responsibility forecast this week that the lowering of the additional rate band will drag an extra 350,000 workers into the top rate over the next five years.
The number paying 45pc tax on their income will now exceed one million for the first time in 2025-26 as wage inflation pushes workers over the £125,140 threshold, in a process known as fiscal drag.
Meanwhile other tax bands will be frozen, resulting in workers being dragged into higher tax brackets as wages rise. This "stealth tax" raid is expected to rake in £120bn over the next five years. The freezing of income tax thresholds will cost individual basic rate taxpayers £500 in 2023-24, according to the Institute for Fiscal Studies (IFS), and higher earners £1,000.
Paul Johnson of the IFS said in the think tank’s assessment of Wednesday's Budget tax rises would cause living standards to fall more over two years than "at any point in living memory”.