High Earners Face Growing Tax Burden As Fiscal Drag Bites

Charlotte Baroukh

Tax Expert @ Pie

3 min read

What This Means for Your Tax Bill

The number of UK taxpayers subject to the highest additional rate of income tax has surged dramatically, reflecting significant changes in tax policy and the ongoing effect of fiscal drag. Data from HM Revenue and Customs (HMRC), released in April 2026, highlight a 56.8 per cent increase equating to 324,000 more individuals entering the 45 per cent tax bracket between the 2022-23 and 2023-24 tax years.

By the end of this period, 893,000 people were paying the top rate. This shift mainly results from the reduction of the additional rate threshold from £150,000 to £125,140 in April 2023 and continued freezes to tax thresholds.

Experts warn these measures are drawing many more into higher tax bands, even without headline increases in tax rates. The overall tax burden is climbing, raising concerns about its wider economic impact.

Record Rise in Additional Rate Taxpayers

The marked increase in additional rate taxpayers, as confirmed by HMRC, stems from both an expanded definition of who is subject to the top rate and inflation-linked earnings growth.

The number rose by 324,000 in just two tax years. This followed the April 2023 lowering of the additional rate threshold from £150,000 to £125,140.

Income tax liabilities for individuals paying the additional 45 per cent rate climbed to £103 billion, a rise of £19.9 billion or 23.9 per cent.

According to David Little, partner at Evelyn Partners, ‘This data reveals how the powerful tide of fiscal drag is increasing the UK tax burden by sweeping millions into higher tax brackets, and into paying tax for the first time.’

Changing Policies and Shifting Thresholds

The expansion of the additional rate band did not originate under the current government. After Labour's July 2024 election victory, Chancellor Rachel Reeves maintained existing policies inherited from her predecessor, Jeremy Hunt, who served as Chancellor from October 2022.

Hunt’s decision to lower the additional rate threshold was a turning point, enacted after a brief attempt to abolish it entirely during the Liz Truss and Kwasi Kwarteng ‘mini-budget’.

Tax thresholds, previously frozen until 2026 and then pushed to 2028, are currently due to remain unchanged until April 2031 under Labour's extension. This freeze will draw even more earners into higher bands over time, as pay and inflation rise.

Impact of Fiscal Drag on Tax Bands

Fiscal drag occurs when earnings increase but tax thresholds remain static, resulting in more income being taxed at higher rates.

In England, Wales, and Northern Ireland, the basic tax rate is 20 per cent; higher rate is 40 per cent; and the additional rate is 45 per cent, which now applies to those earning over £125,140 annually.

A further effect of fiscal drag is the ‘60p tax trap’ for earnings between £100,000 and £125,140, as the personal allowance is withdrawn by £1 for every additional £2 earned, resulting in a marginal rate of 60 per cent.

HMRC data indicate about 1.8 million will earn above £100,000 in 2024-25, with this number forecast to reach 2.29 million by 2028-29.

Some employees are turning down pay increases to avoid breaching thresholds, with many also using pension contributions to mitigate higher tax liabilities.

As more income is pulled into higher bands, keeping track of your effective tax rate becomes less straightforward particularly around thresholds like £100,000 where marginal rates spike. Tools like the Pie app can help you monitor how changes in income affect your tax position, allowances, and overall liability.

Growing Numbers Across All Tax Bands

The effect of fiscal drag is not confined to the additional rate. The number of higher rate taxpayers those within the 40 per cent band increased by 654,000 (12.8 per cent) to 5.76 million over the last two years.

HMRC figures also show a rise of 1.15 million in the basic rate taxpayer population during this period, taking the total number of taxpayers up by 2.17 million or 6.3 per cent.

This led to a £2.59 billion increase in tax receipts from higher rate taxpayers, with this group contributing £87.6 billion in income tax.

Crossing into higher bands often means increased tax on capital gains and savings, as well as a reduction or loss of the personal savings allowance.

Financial and Economic Implications

The wider economic effects of these developments are significant. The Office for Budget Responsibility (OBR) estimates a growing proportion of taxpayers will fall into the higher and additional rate bands, projecting up to one quarter by 2030 from 15 per cent in 2021.

According to OBR forecasts, these policies could push the overall tax burden to 38.5 per cent of GDP by the 2030-31 fiscal year.

David Little commented, ‘Fiscal drag operates as inflationary pay rises pull more people across tax allowances and thresholds that have been frozen since April 2021, a process that is still in full swing and will continue to increase the tax burden.’

He added that by 2030, many who are currently middle earners will find themselves paying higher rate tax, a charge previously reserved for high earners.

With ongoing changes to thresholds and reporting requirements, taxpayers will also need to stay on top of compliance obligations particularly as initiatives like Making Tax Digital for Income Tax (MTD for ITSA) begin to roll out.

Final Summary

Recent HMRC statistics demonstrate an unprecedented surge in the number of high earners subject to the top tax rates, driven by fiscal drag and long-term freezes on thresholds.

Policies first enacted by earlier governments have expanded the highest tax bands, with continued freezes further increasing the number affected.

Projections suggest these trends will persist through the decade, redrawing the UK tax landscape and altering the definition of ‘higher earner’.

For those managing their tax affairs or concerned about future liability, tools such as the Pie app can provide clearer insight into income, allowances, and changing thresholds, with options to explore pricing or download the app to get started.