Millions pay more tax as income tax thresholds are frozen

Millions of new taxpayers will be created by the extended freeze on the income tax thresholds announced by Chancellor Jeremy Hunt.

In his Autumn Statement, he further froze the thresholds until the tax year 2027/28.

Now income tax thresholds for basic (20 per cent) and higher rate (40 per cent) taxpayers are frozen for a further two years, while the £12,570 personal allowance, the amount you can earn before you start to pay tax, has also been frozen for the same period.

In addition for those paying the additional rate of 45 per cent, the threshold has been reduced to £125,140 from April 2023.

In what has been described as a stealth tax, gradually more low-income households will be dragged into paying basic rate tax which kicks in at £12,570 and those with earnings nearing £50,000 into the higher 40 per cent rate. For some, the 9.7 per cent rise in the minimum wage next year will affect them straight away.

There are tax-efficient ways of mitigating tax bill increases including:

Pension top up

You can reduce your income tax by topping up your pension. Personal pension contributions lower your ‘adjusted net income’ which HMRC uses to calculate your tax bill.

ISA allowances

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 invest up to £20,000 in ISAs in the 2022/23 tax year.

Double your tax allowance

If you’re married or in a civil partnership, your tax allowances effectively double. For example, if you both open an ISA, that’s a combined £40,000 that you can shield from income tax and CGT each year.

We can guide you through these sometimes complicated issues.