Over one million Brits are set to be additional rate taxpayers in the 2026/27 tax year, with record numbers paying above the basic rate of income tax according to the latest HMRC projections.
The number of people in the highest tax bracket is set to reach 1.3 million this year, double the number in 2021/22, as a record 3.2% of the population have an income of at least £125,140.
The number of additional rate taxpayers has ballooned by 33.8% since the 2023/24 tax year as tax thresholds have not increased in line with inflation.
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Meanwhile, the number of higher rate (40%) taxpayers is also rising rapidly. An estimated 7.7 million Brits are set to pay tax at this rate in the 2026/27 tax year as they earn between £50,270 and £125,140 – up by 34% compared to figures from the 2023/24 tax year.
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The overall number of people paying tax in the UK is up too. There are projected to be a total 40.8 million taxpayers across all bands in the 2026/27 tax year, up from 36.7 million in 2023/24.
Frozen thresholds are dragging more Brits into higher tax bands
The higher and additional rate tax bands are seeing fast increases as more people’s incomes rise above the thresholds.
But many of them are paying tax at higher rates than they would have in 2021/22 when adjusted for inflation.
This is a result of a process called ‘fiscal drag’, where tax thresholds are frozen by the government and not uprated with inflation. That means that when workers’ earnings rise (even just to keep up with inflation), they are ‘dragged’ into higher tax brackets.
Fiscal drag is often called a stealth tax because, while tax rates have technically not increased, more people start to pay income tax at higher rates despite their purchasing power not increasing significantly.
For example, the tax-free personal allowance has remained at £12,570 since 2021 and has not increased with inflation. If it had, then, using the Bank of England’s inflation calculator, it should have risen to around £16,013 by May 2026.
Thanks to frozen thresholds, workers are paying tax on their earnings between £12,570 and £16,013 when they wouldn’t be if thresholds had increased in line with inflation.
Laura Suter, director of personal finance at AJ Bell, said: “Frozen tax thresholds are affecting almost everyone who pays income tax, from pensioners to anyone earning more than the £12,570 personal allowance. But the biggest impact is felt by those pushed into a higher tax band.
“Once your income exceeds £50,270, every additional pound you earn is taxed at 40%, rather than the 20% basic rate. That means a much larger slice of any pay rise goes to the taxman, leaving you with far less extra money in your monthly payslip.
How to lower your tax bill
Fiscal drag can be damaging to your personal finances as it means you are keeping less of your earnings than you otherwise would have if thresholds had increased with inflation.
It can be particularly difficult for people whose earnings sit on the edge between tax bands. For example, someone who earns £50,000 will today pay the basic 20% rate of income tax. However, if their earnings increase by just 2% (£1,000), £730 of this will be dragged into the higher 40% tax band.
In this situation, the only way you can lower your tax bill is to reduce your taxable income. That does not mean saying no to a pay rise – it means using the extra cash in a more tax-efficient way.
The simplest way of doing this is to put more money into your pension through salary sacrifice as this is deducted from your pre-tax income.
If you earned £51,000, you would need to pay 40% income tax on the £730 of your income that sits in the higher rate tax bracket. However, if you put this into your pension through salary sacrifice instead you would be taxed 0% on that £730.
There are other salary sacrifice schemes in the workplace too where you can pay for certain things out of your pre-tax income. The most common of these is the ‘cycle to work’ scheme where you can pay for a bike with tax relief, but schemes exist to pay for electric cars and other goods and services.
