More than one million Britons are now paying the additional 45% rate of income tax, with HMRC projections showing 1.3 million people will fall into the top bracket in the 2026/27 tax year — double the number recorded five years ago. The figures, published by the tax authority, also reveal that 7.7 million people are expected to pay the 40% higher rate this year, up 34% from the 2023/24 tax year.
The surge is driven by 'fiscal drag', a stealth tax caused by the government freezing income tax thresholds since 2021 despite high inflation. The personal allowance has remained at £12,570, while the higher-rate threshold has been stuck at £50,270. Using the Bank of England's inflation calculator, the personal allowance would need to be around £16,013 to have kept pace with rising prices since 2021.
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.' She noted that once income exceeds £50,270, every additional pound is taxed at 40%, rather than 20%, leaving workers with far less from any pay rise.
Overall, HMRC projects 40.8 million taxpayers across all bands in 2026/27, up from 36.7 million in 2023/24. For households, this means a growing proportion of income is lost to tax without any formal rate rise. A worker earning £51,000, for example, would see £730 of a £1,000 pay rise taxed at 40% — a net gain of just £438 after tax and National Insurance, compared to £800 at the basic rate.
For investors, the FTSE 100 has shown resilience, but higher personal tax bills could dampen consumer spending and reduce disposable income, potentially weighing on retail and services stocks. Savers face a similar squeeze, with interest on savings accounts potentially pushing more people into higher bands if they exceed the personal savings allowance (£1,000 for basic-rate, £500 for higher-rate taxpayers).
To reduce taxable income, experts recommend salary sacrifice into pensions, which is deducted before tax, or using workplace schemes such as the cycle-to-work programme. However, readers should consult a qualified financial adviser before making any changes to their tax arrangements.