Analysis indicates that frozen tax thresholds have caused an additional seven million individuals to fall into the income tax bracket.
In the tax year 2025/26, the number of income taxpayers reached 40 million, marking a surge of 1.3 million in just one year and a total of 7 million since the freezing of tax thresholds in 2021/22.
The current personal allowance, which denotes the amount one can earn before being subject to tax, stands at £12,570.
Earnings exceeding this threshold incur the basic 20% income tax rate. The higher 40% rate applies to incomes surpassing £50,270, while the additional 45% rate kicks in for earnings exceeding £125,140.
Rachel Reeves, in her Budget announcement last November, confirmed the extension of the freeze on tax thresholds for an additional three years, which means no increase until 2031.
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The phenomenon of tax bracket freezing, known as fiscal drag, results in more individuals being pushed into higher tax brackets over time as their incomes rise.
Described as a stealth tax, this approach allows the government to increase tax revenue without officially raising tax rates.
The number of income taxpayers is projected to continue growing until the freeze period concludes.
Sarah Coles, the head of personal finance at AJ Bell, suggests exploring strategies to minimize income tax payments due to the increasing number of taxpayers and higher tax rates. This could involve maximizing pension contributions for tax relief or utilizing tax-efficient savings and investment options like Cash ISAs and Stocks and Shares ISAs.
Furthermore, an additional 5,000 estates became liable for inheritance tax in the last tax year, bringing the total to 32,000 estates subject to inheritance tax in 2025/26, up by 5,000 since rates were last updated in 2020/21.
It is anticipated that the number of estates paying inheritance tax upon death will rise by 10,500 in 2027/28.
Ms. Coles highlights that while inheritance tax primarily impacts those with large estates, the growing number of taxed estates suggests considering lifetime gifts to reduce potential tax liabilities.
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