As inflation reaches 9% in the UK, the freeze on the income tax rate bands will inevitably push more taxpayers into higher brackets.
It was announced in the Budget last year that the income tax personal allowance and higher rate threshold will be frozen from 6 April 2022 to 5 April 2026, rather than increasing with inflation. During this four-year period, it is expected that more individuals will be pulled into the higher and upper rate bands as wage growth will attempt to keep pace. Similarly in Scotland, it is anticipated that the number of taxpayers crossing into the intermediate, higher and top rate bands will increase.
The total income tax paid by additional rate earners has already increased by 77% in the last decade. The tax collected by those earning in excess of £150,000 was up from £34.5bn in the 2010/11 tax year to £60.9bn in 2019/20. HM Revenue & Customs now receive 32% of all income tax from those earning in excess of £150,000 per year, compared to 23% a decade before.
This type of revenue collection can be seen as a stealth tax, as receipts are raised as a result of inflation and wage growth, rather than by increasing tax rates or lowering the bandings.
In real terms, taxpayers are climbing into the next tax bracket at a lower level of income than in previous years.
Top talent may consider overseas relocation
The UK can no longer be seen as a highly competitive jurisdiction in terms of a low tax regime, with increases to National Insurance and the freeze on tax rate bands.
This increased tax burden on the highest earners in the country, may well lead to an exodus of top talent overseas to mitigate their tax burden. This could also have implications for the UK in attracting skilled workers from overseas into the market.
Relocating overseas is a significant step to take and of course, lifestyle and family factors must all be taken into account, not just the tax position. It seems increasing likely however that many additional and higher rate earners based in the UK may seriously consider relocation options, particularly now that digital communication and remote home working provides unprecedented geographical choice.
There are countries such as the UAE and Portugal, who very deliberately set low or zero tax policies to help attract higher paid individuals or investors. These regimes, and other key, low tax jurisdictions, may also attract key investors or pensioners with large pension pots who wish to move overseas and draw down on UK pensions at more favourable tax rates, whilst also enjoying a higher standard of living.
Professional tax planning is key to any potential move overseas. AAB can provide clear and concise guidance in relation to the tax implications of any relocation, including bespoke tax mitigation strategies.
If you would like further information on the implications of inflation on your personal tax position or would like to discuss tax planning opportunities including a move overseas, please contact either Lynn Gracie, Lyndsey Russell, or any member of our Private Client International Tax Team.
