You are here: Home -

Millions more to pay higher-rate tax

Written by: Rebecca Goodman
In the next four years the number of higher-rate taxpayers will rise 65%, from 4.1million to 6.8million, according to predictions from the Office for Budget Responsibility (OBR).

The rise is due to a freeze to tax thresholds and increasing inflation levels.

Thresholds have been frozen for everyone, and for higher-rate taxpayers paying 40% tax, the level has been held at £50,270 until April 2026. This was announced in the Spring 2021 budget by the Chancellor Rishi Sunak.

The personal allowance, the amount everyone is allowed to earn before paying tax, was also frozen until 2026.

These measures are expected to save the government £8.1billion by 2026.

At the same time inflation is soaring, to 7% for the 12 months to March, and is predicted to rise further.

Without these conditions, the number of people starting to pay the higher-rate of tax would have risen steadily, by 4.1million to 4.8million over the four years.

Tax changes for new higher-rate taxpayers

As so many more people will start paying the increased rate of tax, NFU Mutual has issued a warning on the traps and pitfalls to watch out for.

Higher-rate taxpayers, for example, are entitled to extra tax relief on pension contributions. Yet unless your employer deducts your pension contributions before you pay tax, you will need to claim the benefit via a self-assessment tax return.

The amount earned in tax-free interest will also reduce, by 50%.

Sean McCann, chartered financial planner at NFU Mutual, says: “Basic-rate taxpayers can receive up to £1,000 of tax-free interest on their bank and building society accounts.

“Once you become a higher rate taxpayer this reduces to £500 and disappears completely once you become a 45% taxpayer.”

You will also pay more tax on dividends. Everyone has an allowance of £2,000 for dividends before they start paying tax. For basic-rate taxpayers, the rate you pay after this is 8.75% while for higher-rate taxpayers it’s 33.75%.

If you receive child benefit and you or your partner’s income reaches £50,000, for every £100 you then earn, you’ll need to repay 1% of child benefit, through a tax return. .

There are benefits of paying more tax, and one is claiming it back on charity donations if you use the gift aid scheme.

McCann adds: “If you donate £100 to charity via gift aid, the charity can claim an additional £25 from HMRC.

“Once you begin paying 40% income tax you can claim up to an additional £25 for yourself via your tax return. This is an additional 20% tax relief on the total value of the gift including the gift aid amount.”

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Your right to a refund if travel is affected by train strikes

There have been a wave of train strikes in the past six months, and for anyone travelling today Friday 3 Febru...

Could you save money with a social broadband tariff?

Two-thirds of low-income households are unaware they could be saving on broadband, according to Uswitch.

How to help others and donate to food banks this winter

This winter is expected to be the most challenging yet for the food bank network as soaring costs push more pe...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week