Rachel Reeves' Fiscal Drag Race

Frozen tax thresholds have turned one million Britons into top-rate taxpayers

(Wes-Hillebrand)

Wealth has never been just about an abundance of money — scarcity and provenance matter at least as much. Purchasing expensive goods can be satisfying to short-term egos, but the real joy lies in possessing something others do not, because it is exclusivity that creates cultural capital and drives status. This, in part, explains why an increasing number of Londoners have been spotted sauntering around town with tote bags from a middle-market American grocer.

Trader Joe’s boasts more than 600 stores across 43 US states, yet not a single one exists in the UK. Hence, to sport one on your shoulder, you need either the means to travel to the US or a firm grip on internet culture. The canvas totes, which retail for $2.99, are finding their way to the secondary market for as much as $2,000. I suppose this is the inevitable consequence of a tax system where to be a top-rate payer is no longer a signifier of exclusivity, let alone wealth.

Who wants to be an additional rate taxpayer?

It is unlikely to quite command the political significance of 20 January 1972, when UK unemployment topped one million for the first time since the 1930s. Still, the number of Britons paying the highest rate of income tax hit one million in 2024-25, according to calculations by Bowmore Financial Planning, an advisory firm, and reported in the Financial Times.

Here’s the thing. Had tax thresholds risen in line with inflation, the additional rate would only kick in at around £210,000, which would exclude a remarkable two-thirds of the people currently paying it. But to be fair, that is rather the point of fiscal drag. The Office for Budget Responsibility’s most recent estimate is that the freeze will raise more than £38bn a year by 2029-30.

And while fiscal drag is hardly uncommon, its impact is highly dependent on a few elements that have come together in recent years. First, the thresholds themselves. Second, the rise in prices (that is, inflation). And third, the growth in earnings. As you will no doubt be aware, inflation and wage growth has been unusually high in recent years, exacerbating the impact of fiscal drag.

A brief history of the additional rate

In his 2009 Budget, chancellor Alistair Darling announced a new 50p rate on incomes above £150,000. In the wake of the Global Financial Crisis, this was an attempt to raise more revenue and ensure the broadest shoulders carried the heaviest burden. Nonetheless, it represented a significant departure by a Labour government that had previously been keen to at least avoid being seen to tax the wealthy. By 2010-11, HMRC estimated that 256,000 individuals were paying the additional rate.