Taxpayers have been urged to look at using two tax-free allowances as income tax bills are set to continue to rise.
Experts at Hargreaves Lansdown are predicting Chancellor Rachel Reeves may continue with the previous Government’s ‘stealth tax’ approach, freezing income tax thresholds meaning people pay more as their income increases.
You can currently have an income of up to £12,570 a year with nothing to pay in line with the personal allowance. In England, Wales and Northern Ireland, there is a 20% income tax on earnings between £12,571 and £50,270. The rates and bands are different in Scotland.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “Rachel Reeves looks set to follow in the stealthy footsteps of the previous Government, by freezing the tax thresholds for even longer, which would take money out of our pockets by sleight of hand.
“Thresholds have been frozen since April 2022, and by 2028, there will be 3.7 million more taxpayers, 2.7 million more higher-rate taxpayers, and 600,000 more additional-rate taxpayers than if allowances and thresholds had been indexed to inflation and the additional rate threshold kept at £150,000.”
The higher rate of 40 percent applies to income between £50,271 and £125,140, and your gradually lose your personal allowance on earnings above £100,000, losing it entirely once you earn £125,140, with earnings above this amount taxed at 45 percent.
Ms Coles added: “Every pay rise pushes more people into paying more tax – and means more will fall into higher tax bands. It has already been a massive cash cow, and it looks like the government is keen to milk it for even longer.”
However, for those keen to curb their rising tax bill as much as possible, there are two key tax-free allowances to look at.
One option is to pay into pensions, as you can put in up to £60,000 a year tax-free into your retirement savings.
Ms Coles explained: “You can pay into a pension or a SIPP (self invested personal pension). The annual pension allowance is now £60,000, and the fact you get tax relief at your highest marginal rate at the moment means higher earners in particular should look to take as much advantage as makes sense for their finances.”
For those building up savings that could eventually be hit with an income tax bill, another important figure to know is the £20,000 ISA allowance.
ISAs are tax-free savings accounts, with no tax to pay on any investment growth or interest from an ISA. You can save up to £20,000 a year split across multiple ISAs, including cash ISAs, stocks and shares ISAs, innovative finance ISAs, and Lifetime ISAs.
Ms Coles commented: “The best way to protect savings interest from income tax is to hold up to £20,000 a year in a cash ISA. If you have the money available now, it may make sense to open an ISA sooner rather than later, so you know where you stand.”
At the time of writing, there are several easy access ISAs offering rates of 4.8 percent or above, as listed on moneyfactscompare.co.uk.
Ms Coles pointed to another option for tax-savvy couples. She said: “If you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name.
“It means you can both take advantage of your tax allowances. You can also use all the tax-efficient vehicles at your disposal, including your ISAs and pensions, as well as the Junior ISAs and Junior SIPPs of any qualifying children.”
