Two million people facing 60% income tax rate by 2028

Approximately two million people face being subject to the 60% marginal income tax rate by 2028 following Chancellor Jeremy Hunt’s freeze on tax thresholds.

This would be as a result of people losing part or all of their personal allowance, according to analysis by financial advice firm, NFU Mutual.

A Freedom of Information request has revealed that 1.29 million people lost part or all of their personal allowance in 2021/22 because they had income over £100,000. This figure is expected to climb to 1.47 million this year, which would be an increase from 893,000 just three years ago.

Once an individual’s income exceeds £100,000, their £12,570 tax-free personal allowance is reduced by £1 for every £2 of income over £100,000, until it completely disappears at £125,140. By 2028, as a result of the Chancellor’s announcement in his Autumn Budget last week, the £100,000 threshold will have been frozen for 18 years.

Projections obtained before Hunt froze the personal allowance for a further two years until 2028 suggested that by 2026/27, more than 1.9 million people would lose part or all of their personal allowance.

Now the £12,570 personal allowance and the taper threshold at £100,000 are frozen for two further years, however, NFU Mutual has estimated that approximately two million people will be affected by the time the freeze ends in 2028.

“By then, the threshold will not have changed for 18 years, dragging increasing numbers of people into higher marginal rate of tax as salaries increase to keep up with inflation,” said Chartered financial planner at NFU Mutual, Sean McCann.

“Income between £100,000 and £125,140 is effectively taxed at 60%, and when you add in national insurance of 2% this means that only £38 of every £100 earned between these amounts ends up in the employee’s pocket.”

McCann also stated that as a result of Hunt reducing the 45% income tax threshold from £150,000 to £125,140, earnings above that amount will be taxed at 45% rather than 40%.

“For many of those caught, ‘salary sacrifice’ can be a very tax efficient way to mitigate the impact,” he added. “An employee with earnings of £125,140 who ‘sacrificed’ £25,140 in return for an employer pension contribution of the same amount would see £25,140 going into their pension at a cost to them of £9,554.

“The self-employed or employees without access to a salary sacrifice arrangement can also benefit by making pension contributions, although they won’t save on national insurance costs they could still see £25,140 into their pension at a cost of £10,056.

“This can be particularly attractive for those nearing retirement in the knowledge that they can currently access the money in their pension from age 55 if needed.”

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