Due to the freezing of income tax thresholds lasting for the next four tax years, 3.6 million taxpayers will pay the higher rate (40%), while half a million will be paying the additional rate (45%).
This was introduced by the previous Conservative Government in its Autumn Statement in 2022 and was confirmed to remain in Chancellor Hunt’s final Budget in March this year.
It means the more people earn through inflation and wage increases will bump up into a new tax bracket.
So far in the 2024/25 tax year, around 29-and-a-half million people pay the basic rate of tax and an extra 310,000 are set to pay the higher rate this year.
‘Tax freezes might not thaw under Labour’
At its current pace, it means there will be 6.31 million paying a higher rate, and Rachael Griffin, tax and financial planning expert at Quilter, believes that will not “thaw” under the new Labour premiership.
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Griffin said: “These frozen thresholds have given a significant boost to Government coffers, but with public finances in their current state, Labour will no doubt be quietly grateful.
“Those navigating the shift into a higher tax bracket will require a strategic approach to financial planning to help mitigate their tax liability, especially considering the considerable changes there have been to the tax landscape over the past few years.”
While a higher rate paid leads to a dent in the monthly payslip, the finance expert has highlighted benefits to paying more tax and ways to shield your earnings.
One of those is saving for retirement, which can be “particularly advantageous”.
She added: “At present, you can receive up to 40% tax relief on your contributions, making pensions an efficient way to save for retirement while also helping to reduce your overall tax liability, and can also help ensure you are eligible for certain benefits such as child benefit, if you are on the cusp of the earnings threshold where you lose some or all of it.
“The majority of people can pay up to £60,000 into their pension each year, which can help you reduce your taxable income considerably. What’s more, you can carry forward unused pension annual allowance for up to three tax years.”
Marriage allowances
For married couples or those in a civil partnership, you can transfer 10% of your unused personal allowance to your partner so your earnings aren’t hit by more tax.
But, to make the most of this, your spouse needs to be a basic-rate taxpayer, which, given Quilter’s findings of more going into the higher bracket, could be tricky.
Another method is maximising your ISA allowance, which has a sizeable annual limit of £20,000 for this financial year.
You can invest your finances with a rewarding ISA rate, often found in challenger banks, without the concern of paying income tax, capital gains tax or dividends tax.
Griffin said: “Moving into a higher tax bracket in the UK presents both challenges and opportunities.
“It’s important to note that while there are strategies to potentially bring your taxable income below the higher-rate threshold, such as maximising pension contributions, this may not always be feasible or sufficient for everyone.
“Factors such as your overall financial situation, long-term goals, and the amount by which your income exceeds the threshold will influence the effectiveness of these strategies. Seeking professional financial advice can help you make the most of your allowances and mitigate your tax position.”
