Over a million people have been dragged into paying the highest rate of tax as a result of frozen thresholds, new analysis shows. The number of additional rate income taxpayers almost doubled since the threshold was cut in April 2023, from 587,000 to an estimated 1,130,000 this year, according to Hargreaves Lansdown. The broker blamed the rise on the threshold cut and a failure to keep up with wage inflation.

The 1,130,000 figure is almost five times as many people who paid 45% on their earnings (236,000) when the rate was brought in. In 2010, the additional rate was £150,000, but it has since been cut to £125,140.

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, said: “The woes facing additional rate taxpayers can sound like nice problems to have to someone on a lower income, but if you’re among the hundreds of thousands of people dragged into the 45p rate, there’s nothing nice about it.

“It’s bad enough losing such a big chunk of your earnings, but it also has a knock-on effect on all sorts of other taxes.”

Analysis by the broker shows if the 45% threshold had risen with inflation it would now be £239,928. The freeze was introduced under the Conservatives, who extended it until 2027-28.

Chancellor Rachel Reeves chose not to unfreeze the threshold in her maiden Budget in October last year. It means hundreds of thousands more taxpayers are forced into higher tax brackets, in a process known as fiscal drag.

It doesn’t just impact people of working age, but also pensioners, the number of whom paying the 45% tax rate is likely to exceed 100,000 in April, according to former pensions minister Steve Webb.

Mr Webb, who is now a partner at pension consultants LCP, said the additional rate of tax was originally seen as something for the “super-rich”, applying to fewer than 1 in 100 taxpayers.

He added: “But the freezing and then cutting of the starting point for additional rate tax has made it a more mainstream part of the tax system, now affecting three in 100 of all taxpayers.

“From this April, more than 100,000 pensioners are likely to pay the top rate of income tax, losing nearly half of their income above the threshold in income tax.”

Ms Coles outlined steps you can take to cut the amount of additional tax you pay.

Firstly, Ms Coles said if your workplace runs a salary sacrifice scheme, you can agree to give up some salary in return for pension contributions.

If you pay additional rate tax, then on your last £1 of earnings you’ll face income tax at 45% plus National Insurance at 2%, so you’ll take home 53p.

If you sacrifice it into your pension instead, you’ll get the full £1. Some employers will pass on some of their national insurance saving too.

You can also carry forward any unused annual pensions allowance from the previous three tax years and get tax relief at up to 45%. If you paid tax at a lower rate in previous years, the tax relief will be more rewarding in the current year.

You can only use allowances that take your contributions up to the level of your income this tax year.

If there’s a time when you expect to pay a lower rate of tax, you can also consider whether you can take income then rather than now, according to Ms Coles.

For example, you can use fixed term savings which pay interest annually, instead of easy access paying more frequently. This often makes sense just before retirement.

You can also shelter as much of your income-paying assets in ISAs as you possibly can. Income tax rates are usually higher than capital gains tax rates, so it’s worth prioritising sheltering those.

If you hold income-paying assets outside an ISA, you can use the share exchange process (also known as Bed and ISA), to move them into one.

You should also consider your cash ISA. When you become an additional rate taxpayer, you lose your personal savings allowance overnight and pay 45% on your interest, so you’re better off in a competitive cash ISA than the equivalent savings account.

Ms Coles said an additional rate taxpayer paying tax on their savings would need to make 8.9% interest to match the return on an ISA paying 5%.

If you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name, so you both take advantage of your ISAs and tax allowances, and then the rest is taxed at their marginal rate rather than yours.

Finally, Ms Coles said you could consider whether a Venture Capital Trust or Enterprise Investment Scheme meet your needs. These aren’t right for everyone, because they are very high risk so should only be considered as a small part of a large and diverse portfolio.

However, if you use these schemes, you can get 30% income tax relief on the amount you invest – which will reduce your overall tax bill.