A jump in the number of new higher rate taxpayers amid faster than expected wage growth and frozen tax thresholds could prompt renewed interest in boosting pension savings, according to analysis from LCP.

Research from the consultancy showed that a combination of faster than expected wage growth and the freezing of tax thresholds could result in millions more people pushed into a higher rate of income tax during the course of this parliament.

However, it clarified that these people will also potentially benefit from 40 per cent tax relief on their pension contributions.

According to figures from HMRC in June 2021, there were 4.3 million people paying income tax at the higher rate of 40 per cent or the additional rate of 45 per cent at the time of the last election.

HMRC previously predicted an increase of around 300,000 people by 2021/22, based on the Office for Budget Responsibility (OBR) estimates for wage growth, published in March 2021.

However, LCP pointed out that the OBR has since dramatically increased its estimate of wage growth to date and into the future, estimating that wages and salaries could grow more than three times as fast as thought.

LCP suggested that this much greater than expected increase in taxable incomes between 2019/20 and 2021/22 means the number of higher rate taxpayers in 2021/22 is likely to be closer to 5.2 million, an increase of just under 1 million higher rate taxpayers.

In addition to this, the analysis revealed that rapid pay inflation is likely to bring an extra 1.5 million people into higher rate tax, as OBR is assuming a further cumulative increase in total wages and salaries of over 12 per cent in the three years to 2024/25, while the threshold for higher rate income tax will remain frozen at £50,270.

In total, the research showed that up to 2.5 million extra people could be brought into higher rate tax ahead of an election in 2024/25, meaning that than one in five taxpayers will be paying at the higher rate in 2024/25 compared with fewer than one in 10 in 2010/11.

However, LCP argued that this could also lead to a boost in pension saving amongst this group, arguing that these savers will have a much bigger incentive to put more into their pension as they could enjoy double the rate of tax relief.

LCP partner, Steve Webb, commented: “HMRC admitted last year that it thought over a third of a million extra people would be brought into higher rate tax in the first two years of this parliament. But that was before the surge in wage levels as the economy has bounced back from the pandemic.

“However, it does mean that millions of people now have a much bigger incentive to put more money into their pensions, potentially enjoying double the rate of tax relief on any contributions."

Share Story: