Frozen tax-free allowances and tax-rate thresholds for Income Tax are increasing the amount working people pay to the Exchequer each year as inflation pushes them into higher tax brackets. Meanwhile, allowances for other taxes have dropped and some tax rates – Capital Gains Tax in particular – are higher. More than ever before it pays to avoid falling into paying higher brackets and to use everything at your disposal to minimise your taxable income.

When the top rate of Income Tax was created back in 2010, it was set at £150,000. Inflation means that pounds aren’t as valuable as they used to be – try find a Freddo for 15p nowadays! If the threshold for Additional Rate tax were set at the same level in terms of purchasing power today, it would be £225,000. Instead, the level where this highest tax rate kicks in has been reduced to £125,140. The chart below shows this effect, along with the reduction in the Higher Rate tax threshold. This squeeze hasn’t finished either: the freeze on thresholds won’t stop until at least 2028 and there’s a chance that this will be extended yet again.

Your pay may be rising, but your taxable pay doesn’t have to

This means you can save a lot on your tax bill by reducing your taxable income wherever possible. Working people can do this by saving more into their pension, which is deposited before tax. You can transfer up to £60,000 to your pension each year. This avoids Income Tax (and National Insurance Contributions if you use salary sacrifice), so the savings can be significant. Married people may be able to shift income from one spouse to another to make best use of tax-free allowances and avoid breaching higher-tax thresholds. Everyone can reduce their taxable income by giving to charity as well. Just remember to keep the evidence for when you come to claim it back on your tax return.  

Any interest and dividend-paying investments held outside an ISA also count as income, so be careful that they don’t tip you over into a higher tax band. These could be swapped for lower-yielding alternatives, but there may be broader investment implications on doing this. If you haven’t already, consider moving any spare money you have into an ISA: you have a £20,000 allowance for this each year.

People approaching an income of £100,000 should be extra careful. Because of quirks in how the £12,570 tax-free Personal Allowance is tapered, the effective tax rate paid between £100,000 and £125,140 is 60% (in Scotland, it’s even higher at 68%). It’s more punitive for parents with young children: the Child Benefit is tapered to nothing between £60,000 and £80,000 and if one spouse earns more than £100,000 they lose access to free childcare for workers that can be worth thousands per child.

Again, this shows the importance of keeping an eye on your taxable income to ensure you don’t get a nasty shock.  

Taxes get complicated, advice helps

The main Capital Gains Tax (CGT) rates have risen too, from 10% to 18% for Basic Rate payers and from 20% to 24% for Higher Rate and Additional Rate payers. The Basic Rate taxpayer will pay almost twice as much CGT as before, with the effective rate on the £5,100 average annual capital gain rising from 4.1% to 7.4%.

The rate at which you pay CGT depends heavily on your taxable income, but even a Basic Rate payer who makes a big gain could end up paying the Higher Rate of CGT. Being a lower income earner managing large capital gains can be common for pensioners. Making savvy use of capital losses to offset gains – which can include those from past years – can be very powerful indeed.

Of course, there are many complicated rules that accompany all these tax mitigation methods, so it often pays to get financial advice. There are also other, more complex tools to improve your financial affairs that we haven’t gone into here. A bit of planning and guidance can set you on the right path to hit your goals and remove any stress you have about the future.

Get in touch with us today for a free chat to see if we can help you. We’d love to hear from you.