The Chancellor has inadvertently gifted Financial Planners an almost unending stream of frazzled new clients by freezing the tax thresholds, if the latest HMRC data and some fresh predictions on the number of higher rate taxpayers are anything to go by.
It’s worth looking back first and I can recall some years ago regularly quoting the fact that only 10% of UK taxpayers paid the higher rate of 40%.
Paying higher rate tax was seen as a badge of honour – you were one of the elite, perhaps driving an upmarket German or British car, holidaying in exotic locations and enjoying an enviable existence in your spacious, double-garaged 5-bedroom detached home in Surrey or Cheshire.
Fast forward to today and it looks like within a few years well over 20% of all taxpayers could be paying higher rate tax, even 25% or more is not impossible.
The number of higher rate taxpayers could be well over 7m by 2025.
Most Financial Planners have told me that higher rate taxpayers are often the bedrock clients of their Financial Planning business. One of the key elements of good Financial Planning is to help clients plan ahead and avoid any unnecessary tax to maintain a good standard of living. That applies particularly to higher rate taxpayers who often have the most to benefit from Financial Planning advice.
While it is vital planners help clients build a robust, long-term financial plan, clients naturally also want to see cash value from their Financial Planner, whether that be moving their money into more tax efficient products or saving them and their families’ inheritance tax.
{loadposition hidden2}
According to the latest HMRC figures, since the last general election in 2019 nearly 2m new higher rate taxpayers have been created with the numbers rising from 4.25m to over 6.1m now. That’s due to both rising wages and frozen tax thresholds and these factors are likely to continue for some time.
Using HMRC figures, Sir Steve Webb of pension actuaries LCP suggests that 3m or more higher taxpayers will be created during this Parliament, pushing the total to over 7m by 2025. He may well be right.
Interestingly the number paying the highest 45% rate has risen very rapidly in three years from 421,000 to 629,000. This could top 1m by 2025.
LCP predicts that the number of higher rate taxpayers will mean 1 in 5 people paying higher rate rate by 2024/25. Based on a UK workforce number of 32.7m I would go even further and suggest 1 in 4 could be paying higher rate tax by then. No wonder Sir Steve called the figures “stunning.”
With inflation heading towards 10% we are already in an inflationary wage spiral which will push up most wages significantly over the next 12-18 months and mean many more people caught by higher rate tax.
The changes to how higher rate tax is viewed will be profound as millions more are caught in this expensive tax net, forced to hand over more and more of their cash to the government. Higher rate tax will be paid by millions more who consider themselves just average workers, not the elite of society.
Unless he makes changes to his threshold freeze, which seems unlikely at present, Mr Sunak is in for an income tax windfall which will help fill the government’s coffers.
At the same time Financial Planners should brace themselves for a rush of business from fed-up taxpayers eager to avoid handing increasing chunks of their earnings to the Treasury. Many planners will no doubt be whispering: ‘Thank you Mr Sunak’ as they calm down the queue of annoyed taxpayers at their doors.
• If you are not already registered for Financial Planning Today website take a minute now to register. Just click a couple of stories and you’ll see the registration pop up. Registering is free, takes seconds and gives you access to more stories. Subscription upgrades provide more access and our regular Financial Planning Today magazine. Our Premium Package also includes our high quality printed edition of Financial Planning Today magazine.
{loadmoduleid 444}
Leave a Reply