New figures released this week by HMRC on the estimated numbers of taxpayers per marginal rate in 2023-24 have highlighted the significant impacts of fiscal drag – particularly on pensioners and the ‘squeezed middle’.

Commenting on this, BDO tax partner, Paul Falvey, said: “These latest figures show that compared to 2020/21, an additional 4.2m people will have been pulled into paying tax for the first time. Many of these are likely to be relatively poor pensioners who are having to pay tax on their savings interest for the first time.

“Not only does this place a burden on those pensioners who may not have had to file a tax return before, it also causes an administrative headache for HMRC who will have to chase millions of pensioners for very small amounts of tax. This will be a particular challenge when it comes to pensioners without occupational pensions who won’t be paying tax at source. Given these administrative challenges – which look set to get harder as interest rates increase – there is a strong argument to raise the £1000 savings interest allowance for all.

“The figures also show the impact on the ‘squeezed middle’. Since 2020/21, an additional 1.6m people will have been pulled up into higher rate tax through a combination of inflationary wage increases and frozen thresholds. Many of these are not people you would typically consider to be high earners. In addition to paying the 40% rate, parents earning over £50K will also start to lose their entitlement to child benefit. Again, this pulls more people into Self Assessment and the prospect of having to pay what many consider to be the very unfair High Income Child Benefit Charge.

“The cliff edges these thresholds create now mean those who are offered a promotion and a pay rise need to get out their calculator to see if it’s financially worthwhile.”

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