Tax on Britain's top 1 million earners by 2027

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According to official data, more than a million UK taxpayers will face income tax relief by 2027-28, losing their personal allowances and receiving a marginal tax rate of 60%.

In response to a Freedom of Information request seen by the Financial Times, HM Revenue & Customs said the number of people who have lost all their personal allowances is currently at 12,570 and will exceed one million for the first time in 2027-28.

Since 2010, personal allowances for those earning more than $100,000 per year have decreased. This means that for every two you earn over the 100,000 threshold, one allowance is removed.

HMRC figures show that 885,000 people have now lost all of their personal allowances for 2024-25, and a further 591,000 have lost some.

The tax-free personal allowance has been frozen at 12,570 from April 2021 and the previous government had promised to keep it in place until 2028. However, Prime Minister Rachel Reeves is expected to extend the freeze in her budget on October 30, a government official told the Financial Times. last week.

Sean McCann, a chartered financial planner at NFU Mutual, the advisory firm that requested the FOI, said if the 100,000 threshold had been increased in line with inflation, it would now be worth 149,000.

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Financial commitments are a great way to earn more. [Labours] “We promised not to increase tax rates,” he said.

Financial drag refers to a situation where the cap does not rise in line with inflation, resulting in more people being put into higher tax brackets as their benefits rise.

The effects of this measure were painful, McCann said. If you earn more than $100,000, your tax burden will be significant, as you will be taxed 60% on that income.

For every two pieces of income you earn over 100,000, you lose one tax-free allowance. This means that this tax year you will effectively be taxed at 60% on income between $100,000 and $125,140.

Adding 2% National Insurance means that of every $100 earned between these amounts, only $38 ends up in employees' pockets.

McCann said he expected Reeves to extend the freeze threshold beyond 2028, warning that this would leave more people behind by the 60% threshold.

Chris Etherington, partner at accountancy firm RSM UK, agreed the Prime Minister would face strong temptations to raise taxes through the back door.

However, he said that given the low inflation environment the country is currently in, the revenue benefit from keeping the frozen threshold longer may not be as great as it was under previous Conservative governments.

McCann pointed out that there are a variety of ways people facing a 60% tax rate can structure their work to mitigate the impact, including salary sacrifice and charitable donations.

Salary sacrifice can be a very efficient way to save on taxes, he said. If an employee earning 125,140 sacrificed 25,140 in return for an employer pension contribution of the same amount, they would see 25,140 going into their pension at a cost of 9,554.

This will save the employee 15,084 in income tax (60% paid) and 2% in NIC (502).

In the current situation, employers benefit from the scheme as they save 13.8% of their employer NIC on the amount paid into employee pensions.

However, there have been reports that Reeves could be adding employer NICs to his pension contributions at a lower rate. This will make salary sacrifice less advantageous for employers, but savings schemes will still be attractive, but not as attractive as they are today, McCann said.

Labor's manifesto pledged not to raise taxes on workers and said it would not raise national insurance, basic income tax, higher or additional rates, namely VAT.

The Treasury said: We do not comment on speculation about tax changes outside of fiscal events.

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