An extra 4.5million Britons now pay income tax compared to just three years ago, thanks to PM Rishi Sunak’s tax threshold squeeze. Over the same period, number paying higher rate 40 percent tax has jumped a staggering 42.6 per cent to 6.3million.
Additional rate 45 percent taxpayer numbers have more than doubled to 1.13million.
Our tax bills will continue to climb whoever wins the election, said Rachael Griffin, tax and financial planning expert at Quilter. “The Treasury’s coffers will be topped up exponentially as more and more people are pulled in.”
Many are paying more tax despite being no wealthier in real terms due to inflation, said Wealth Club investment manager Nicholas Hyett. “Yet the government is taking a larger slice of their take home pay.”
He warned: “Unsurprisingly, neither of the major political parties looks likely to unfreeze tax bands after the election.”
Terrifyingly, income tax is only the start.
Inheritance tax (IHT) receipts have also hit new highs, said Stephen Lowe at retirement specialist Just Group. “Last year set a record with £7.5billion collected and this year is off to a racing start with more than £1.4billion paid to HMRC in just two months.”
At that rate families will pay £8.4billion in IHT this year and the Office for Budget Responsibility forecasts the total will hit £9.7billion by 2028.
It could go even higher if Labour targets IHT, say, by charging it on pensions.
And it doesn’t stop there.
Chancellor Jeremy Hunt has cut the capital gains tax (CGT) annual exempt amount from £12,300 to just £3,000 over the last two years.
Households are expected to pay £15.2billion when selling second properties, antiques and jewellery, and shares held outside of the tax-free Isa.
Labour is rumoured to be considering hiking CGT tax bands in line with income tax. If true, that may hand HMRC a further £8billion a year.
That still isn’t an end to it. Savers are in the firing line, too.
The amount of tax paid on savings interest has rocketed from £1.4billion a year to £10.4billion in just four years. It could even hit £14billion this year, a staggering tenfold increase, AJ Bell has warned.
Jeremy Cox, head of strategy at Coventry Building Society, said: “A double whammy of fiscal drag and higher interest rates has led to a surge both in the number of savers paying tax and the sums they’re having to cough up.”
Many taxpayers with modest savings might not even realise they could be taxed on their interest, thanks to the Personal Savings Allowance (PSA).
Introduced in 2016, the PSA allows basic rate tax payers to earn £1,000 free of tax, falling to £500 for higher rate taxpayers.
More than nine in 10 savers paid no tax when interest rates were close to zero, but with best buy rates topping five percent, over 2.7 million are caught.
Cox said the antidote to paying tax on savings is the cash Isa. “You can save anything from £1 to £20,000 each tax year and won’t pay a penny of tax on the interest.”
They are ways of limiting your income tax liability, too. Those still in work could make more pension contributions, as these attract tax relief.
More than 8.5million pensioners now pay income tax, and they can reduce their liability by carefully timing pension withdrawals.
These are subject to income tax. Withdraw too much in one go and you could push yourself into a higher tax bracket without realising it.
Careful gifting may can reduce inheritance tax bills, while married couples and civil partners can reduce CGT bills by sharing allowances.
Taxes are only going one way, and that’s upwards, especially if Labour wins. Act now to protect your income, savings and wealth.
