Income Tax trap to snare 17.9 million people by 2027

Recently, HMRC announced plans that would mean over 200,000 people with side hustles won’t have to complete Self-Assessment Tax Returns. Unfortunately, any administrative gains by the end of this parliament will be more than obliterated by an extra 17.9 million Britons who will fall into the Income Tax trap.

Income tax trap statistics

The huge number of people who will fall into the Income Tax trap was uncovered by a freedom of information request by financial services firm Quilter.

The problem is the result of frozen Income Tax thresholds. Since 2021/22, the tax-free personal allowance has remained unchanged at £12,570. Chancellor Rachel Reeves has said this won’t rise until 2028/29. As a result, factors such as inflation and rising incomes have – and will continue to – drag large numbers of extra people into the Income Tax trap. Quilter’s figures put this at 17.9 million people between 2022/23 and 2027/28.

Pensioners disproportionately affected

Pensioners will be disproportionately affected by the Income Tax trap: 8.2 million will be aged 60 or over. This is largely due to increases in both private and state pensions. Indeed, the ‘triple lock’ for the state pension means it will rise at least 2.5% per year. Even at that rate, the full state pension will exceed the tax-free allowance by April 2027.

Indeed, the government recently refused to reveal how many older people will be paying tax in retirement when the pension exceeds the tax-free allowance.

More people to pay higher and additional rate

Quilter’s figures not only revealed that many more people will be dragged into the Income Tax trap. They also show millions more will pay higher and additional rates. In total, 12 million extra taxpayers will be paying higher rate tax by 2027/28. The number brought into the additional rate band will be 2 million.

Calls for an Income Tax rise

The figures don’t take into account any future changes to Income Tax. However, with the upheaval of Donald Trump’s trade war (among other factors), it’s impossible to completely rule out unforeseen changes to thresholds or rates. Indeed, a top economist from the Institute for Fiscal Studies recently called on the Chancellor to raise the basic rate of Income Tax for the first time since 1975.

While it would be politically risky for the Chancellor to do this, she may have limited choices. At the moment, her fiscal rules prevent her from borrowing to fund day-to-day expenditure. They also dictate that public debt must be falling as a share of national income by 2029/30. Given that she has remarkably little fiscal headroom, Rachel Reeves may need to undertake unpopular measures to help balance the books.

Avoiding the Income Tax trap

If you are worried that you’ll get caught in the Income Tax trap, there may be things you may be able to do. This is particularly the case if you’re likely to be nudged up into the higher or additional rates of Income Tax. For example, you may be able to remain in a lower tax band by paying extra money into your pension. However, you need a strategy tailored to your particular circumstances. For help, get in touch today to ask about our tax planning services.