Are you going to be paying more tax?

The government assured us that there would be no tax increases as part of their election manifesto.

To be fair, despite the huge treasury deficits from all the spending to keep the economy from collapsing during lockdown, there have been no across the board increases in key rates such as income tax.

However, it still looks as though many of us will be paying very much more of the money we earn over to the taxman.

Households are already paying an extra £821 in tax. A total of 7.8million people will be paying tax at 40p in the pound – five times the number in the 1990s – by 2027.

At Continuum we are looking at why – and what you might be able to do about it.

Stealth tax – the tax rises you don’t see

HM Revenue and Customs statistics reveal the Exchequer raised £553bn between April and December, an annual increase of 10%. When this is averaged out across the 28.1m UK households, the cost per family is an additional £821.

Some of this has been from straightforward increases in National Insurance payments, capital gains tax and corporation tax.

But the bulk of the increases come from stealth tax.

The Treasury abandoned annual increases to the £12,570 and £50,270 income tax thresholds. These thresholds – which determine how much you can earn before paying income tax, and who will pay at the higher 40% rate – historically rise with inflation. Since the 2021/22 tax year, the thresholds have been frozen, and the freeze is set to continue to 2028.

But although thresholds have been frozen, prices and wages have not. Inflation means that you are certainly paying out more for everything you buy, and the chances are you have a higher income too.

More money coming in means that you will be paying more tax. But the real problem is that you could find yourself moved into a higher rate tax band. It is a tax increase, by stealth.

You could find yourself in a higher tax bracket

The Office for Budget Responsibility (OBR) has said that a stronger jobs market meant more people were dragged into paying the 40p rate of income tax rate than previously thought, pushing up employee tax and National Insurance revenues.

You no longer need to be a high earner to pay higher rate tax. People in routine jobs are suddenly finding they are crossing the threshold. The Institute for Fiscal Studies said one in five of all taxpayers will soon pay income tax at 40% or above. It warns that a quarter of all teachers and one in eight nurses will be paying the higher rate by 2027.

The numbers paying the 45p top tax rate has already increased over the past few years with the £150,000 threshold frozen for more than a decade. This threshold has actually been cut to £125,140, again dragging thousands more people into paying more tax.

People who earn between £100,000 and £125,140 face a marginal tax rate of 60%. This is because the tax-free personal allowance begins to be tapered away at this level, which has been frozen since 2010.

What can you do to pay less tax?

There could be ways to reduce your tax burden, even if the government seems set on increasing it. 

Use your pension. Contributions to your employer’s pension plan, including any additional voluntary contributions, can be deducted from your gross salary before taxes are deducted.  You have less income to pay tax on – and used carefully, this could help you avoid slipping into a higher tax bracket. 

Plus, the more you save into your pension, the more the government saves you in the form of tax relief. Your eventual pension pot could be much larger as a result.

Use the marriage allowance. You can transfer any unused personal allowance from a lower-earning partner to a higher-earning partner if you’re married or in a civil partnership. In 2023-24, you can transfer up to £1,260, which might save you up to £252. The higher earner must be a basic-rate taxpayer to qualify.

Prepare your tax return on time. If you miss the deadline, you’ll be fined £100, even if you don’t owe any tax. 

Get some expert help. Tax is inevitably complicated. Understanding the rules and regulations, and spotting the loopholes is a job for an expert.

At Continuum we can provide the expertise you need. So, if you want to pay less tax, a call to us could be a good place to start.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice, you should seek independent financial advice before embarking on any course of action.

Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.

The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.

The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.

Households pay extra £821 in tax after Tory stealth raid (telegraph.co.uk)

One in five workers will be higher-rate taxpayers by 2027 – IFS | Income tax | The Guardian

Treasury rakes in extra £12bn as stealth taxes hit higher earners (telegraph.co.uk)

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