Analysis reveals that the freezing of tax thresholds has resulted in seven million individuals being brought into the income tax system.
The number of income taxpayers for the 2025/26 tax year has reached 40 million, showing an increase of 1.3 million within a year and a total of 7 million since the freezing of tax thresholds in 2021/22.
Currently, the personal allowance stands at £12,570, defining the amount one can earn before becoming liable to pay taxes.
Earnings exceeding this threshold are subject to the basic 20% income tax rate, with the higher 40% rate applicable to incomes above £50,270 and the additional 45% rate triggered when earnings surpass £125,140.
During her Budget announcement in November, Rachel Reeves extended the freeze on tax thresholds for an additional three years, postponing any increase until 2031.
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The freezing of tax brackets, also known as fiscal drag, leads to an increasing number of individuals being pushed into higher tax brackets over time with wage growth.
This mechanism, described as a stealth tax, enables the government to boost tax revenue without officially raising tax rates.
The count of income taxpayers is predicted to continue rising until the end of the freeze period.
Sarah Coles, AJ Bell’s head of personal finance, highlighted the importance of exploring strategies to minimize income tax payments due to the larger number of taxpayers and higher tax rates.
Making pension contributions for tax relief at the highest marginal rate and utilizing instruments like Cash ISAs to shield savings interest from tax are suggested approaches. Additionally, investing in Stocks and Shares ISAs can safeguard against dividend and capital gains tax hikes resulting from changing tax brackets.
Moreover, an additional 5,000 estates became subject to inheritance tax in the previous tax year, bringing the total to 32,000 estates liable for inheritance tax in 2025/26, up