Millions of new taxpayers will be created by the extended freeze on the income tax thresholds.
In the Autumn Statement, the Government froze the thresholds until 2028 – two additional years on its original plans.
The income tax thresholds for basic (20 per cent) and higher rate (40 per cent) taxpayers will remain unchanged, while the £12,570 personal allowance, the amount you can earn before you start to pay tax will also remain the same.
In addition, for those paying the additional rate of 45 per cent, the threshold has been reduced from £150,000 to £125,140 from 6 April 2023.
In what has been described as a stealth tax, the freeze is likely to lead to many taxpayers being fiscally dragged into higher tax bands by inflation, and with it many individuals’ wages and income.
There are many tax-efficient ways of mitigating what you pay in tax, including:
Pension top up
You can reduce your income tax by topping up your pension using your annual tax-free allowance. Personal pension contributions within the annual £40,000 pension allowance lower your ‘adjusted net income’, which HMRC uses to calculate your tax bill.
ISAs are a tax-efficient way of saving. You don’t pay income tax or Capital Gains Tax (CGT) on investments inside an ISA, and you can withdraw money whenever you like, tax-free. You can currently invest up to £20,000 in ISAs.
Double your tax allowance
If you’re married or in a civil partnership, your tax allowances can, in some cases, be combined to increase your household’s income tax allowance. For example, the Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner if they haven’t used it.
If you are unsure of the tax-saving opportunities available to you, please get in touch with our tax experts for help and advice.