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The Government continues to freeze both the personal allowance and the higher-rate income tax thresholds – leading to an increase in the number of higher-rate taxpayers this year.
The result of ‘fiscal drag’ – a phenomenon where tax thresholds fail to keep up with inflation or wage growth – the freeze will continue to increase the number of higher-rate taxpayers until it is due to end in 2028.
This freeze not only impacts numerous taxpayers but will also have broader economic implications by increasing the tax burden on a larger segment of the population – potentially influencing consumer spending and savings habits.
By not adjusting the thresholds for inflation, the Government has effectively increased tax revenue without the need to formally raise tax rates.
Taxpayers must consider this in the context of the Government’s long-term fiscal strategies and align it with their personal tax planning.
Future policy adjustments will likely be influenced by broader economic conditions and political change, underscoring the importance of staying informed and discussing the issue with us.
We often recommend a few simple ways to reduce your tax liability and manage your marginal rate, including:
- Income splitting: This strategy involves distributing income among family members to keep individual earnings below the higher tax thresholds, thus reducing overall tax liability.
- Tax-efficient investments: Leveraging tax-free savings accounts and pensions can significantly reduce taxable income, providing long-term financial benefits.
- Year-end tax planning: Regularly review your financial situation as the tax year draws to a close, making any necessary adjustments to income and deductions to optimise tax outcomes.
Being proactive in managing your tax position is crucial, especially with the thresholds remaining static and fiscal drag likely to impact more taxpayers.
For those seeking more comprehensive guidance or specific information, reaching out to a specialist is advisable.
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