- In 2023/24 there were 36.7 million taxpayers – that’s up 2.2 million in a year (source: Personal Incomes Statistics for the tax year 2023 to 2024 – GOV.UK)*
- Eight-in-ten (80.1%) taxpayers are basic-rate taxpayers, who account for 29.9% of all tax paid, while 15.7% are higher-rate taxpayers accounting for around a third (32%) of tax
- Just 2.4% are additional-rate taxpayers, but they account for nearly two-fifths (37.7%) of the government’s tax take
- Earning £67,400 before tax puts you in the top 10% of earners, £93,600 puts you in the top 5%, and £207,000 in the top 1%
- Taxpayers earning at least £70,000 (roughly the top 10% of earners) account for 57.8% of all tax
- There were almost 8.2 million people of state pension age paying tax (up more than a million in the year) and 7.8 million people paying tax whose main source of income was their pension
- Within the latter group, 7.2 million were basic-rate taxpayers, 494,000 were higher-rate taxpayers and 31,000 were additional-rate taxpayers
- The peak median age for income is 45-49, which may be earlier than you expect and could have implications for your pension planning
*The latest Personal Incomes Statistics release from HMRC is a treasure trove of incomes and tax data. If you’d like to discuss what else is hidden in there, please get in touch.
Sarah Coles, head of personal finance at AJ Bell, comments:
“Almost 8 million people relying on their pension for their main source of income are handing over £24 billion in tax every year – nearly half a million of whom are paying higher-rate tax. Meanwhile, higher earners are shouldering an incredibly hefty tax burden – with higher and additional-rate taxpayers handing over almost 70% of all tax between them.
“Frozen tax thresholds mean this is only going to get worse for everyone. In this environment, it’s vital to make plans to ensure you don’t pay more than your fair share of tax.
Higher earners shoulder huge tax burden
“Higher earners are firmly in the frame for tax attacks. The better your income, the worse your tax bill, and the more that frozen tax thresholds will have syphoned from your pay packet. The highest earners, including the so-called ‘Henrys’ (high earners, not rich yet) shoulder a huge tax burden – in fact those earning over £70,000 pay almost 58% of all tax.
“And it’s not just the tax on income that higher earners have to worry about. On average, savers earning £50,000 or more make over £1,000 in savings interest. If that’s outside a Cash ISA, it means income tax bills. Similarly, investors earning £50,000 or more earn on average more than £19,500 in dividends. For those doing so outside a Stocks and Shares ISA it means some significant bills. The more you earn, the more interest and dividends you’re likely to make, and the higher the rate you pay on them.
“The stealthy income tax creep has already devoured thousands of pounds of your money, but it’s going to consume more as time goes on. With income tax thresholds frozen until 2031, even if all your pay does is keep pace with inflation, you stand to hand over more of your income in tax with every passing year.
“It’s why tax planning has become so important for people on larger incomes. Pension contributions are one of the most effective ways to control a tax bill. You get tax relief at your highest marginal rate, so contributions over the higher rate threshold are particularly rewarding. It won’t leave you with more money in your pocket today, but it means giving less of it to the taxman, and squirrelling away more of it for a better quality of life later on.
“If you risk paying tax on savings interest, it’s worth considering a Cash ISA, where your savings can grow completely free of tax. If you’re likely to pay dividend tax, then a Stocks and Shares ISA is a sensible first port of call, because it protects against both dividend tax and capital gains tax.
“You can also consider tax planning with the wider family. If your spouse or civil partner pays a lower rate of tax, you can transfer assets between you, so you both take advantage of your pensions, ISA allowances and other annual allowances. The lower earner can then hold income-producing assets, so at least some of that income is taxed at a lower rate.
Pensioners paying more tax
“Nearly 8.2 million people of state pension age are paying income tax. At this stage, a significant proportion of this is income from generous final salary pensions. Over time they will be overtaken by defined contribution pensions. Incomes from these are typically lower, but while it means less pension income will be taxed, it’s also likely to result in more people working later in life to close the income gap – and paying tax on their earned income too.
“The tax bill for pensioners is only going to increase. By the time this data was collected, tax thresholds hadn’t moved for three years, so annual rises in some pension incomes pushed more people into tax-paying territory. These thresholds are going to stay put until 2031, by which time they will have done even more damage.
“It’s going to make it even more essential for people to consider their retirement income in the round. While the pension is the bedrock of retirement, often people will hold ISAs alongside them. This gives people the freedom to draw some tax-free income alongside their pension, so they can manage their tax bill and may be able to stay below a key tax threshold.
Pension planning and the peak age for income
“Income tends to peak in our late 40s. This is partly because there are still plenty of higher earners actively choosing early retirement, which automatically brings down the average. However, there are also those who are forced out of the workplace or have to scale back their working hours and commitments, due to caring responsibilities or health issues. Plenty more will lose work and struggle to find another role, while some of them will have to take a pay cut in order to get back into employment.
“If you plan for this, there’s no reason for it to send you off track. The trouble is that many people feel they have other priorities earlier in life, so may focus their finances on buying a property or meeting the needs of a growing family. They could get to their 50s and feel they are miles away from where they need to be, and with their peak earnings behind them.
“The answer is to do as much as you can afford, as soon as you can, and to keep a close eye on where you stand. Using a pension calculator regularly should show you what you’re on track to receive, and whether you need to do more to avoid falling behind. These calculators will sometimes assume your pay will keep rising, so you need to consider what would happen if it doesn’t. It could mean choosing to work later in life, reconsidering your investment strategy to target more growth, or considering using other assets if needs be. There’s nothing to say you’ll necessarily find yourself facing a pay cut in your 50s, but if you do, you’ll be grateful to have a backup plan.”