3 helpful tax relief solutions as frozen thresholds might push you into a higher tax band

Dealing with your taxes might feel overwhelming at times. Approaching them might leave you inundated with overly complicated jargon and facing a complex situation that only becomes more confusing each time the government announces new changes.

According to FTAdviser, 30% of Brits earning over £50,000 each year simply don’t know which tax bracket they fall into. It’s a worrying statistic considering the BBC reports that, by the 2027/28 tax year up to 2.6 million Brits could be pushed into the higher- or additional-rate tax bands.

This is largely due to a current imbalance between frozen thresholds and rising wages, which is leaving many households exposed to potentially higher Income Tax.

It is vital that you take the time to understand your personal tax situation and how frozen thresholds might affect you in the next few years. Read on to learn about the current tax landscape and three helpful tax relief solutions that might help stop you from being pushed into a higher tax band.

The UK government’s 2022 autumn statement froze the Personal Allowance until 2028

Chancellor Jeremy Hunt’s autumn statement froze the Income Tax Personal Allowance – the amount you can typically earn before paying Income Tax – at the current level of £12,570 until 2028.

Additionally, he took steps to:

  • Fix the higher-rate tax threshold at £50,270
  • Keep the National Insurance thresholds at their current level to 2028
  • Reduce the threshold for the 45% additional-rate of tax from earnings above £150,000 to £125,140.

As high inflation prompts employers to raise wages to protect their employees’ income, an increasing number of households may be pushed over the higher-rate or additional-rate thresholds and face a significantly higher Income Tax bill.

It’s important to stay calm as there are plenty of solutions available to you that could help reduce your Income Tax obligations.

3 useful solutions to help you pay less Income Tax

1. Take advantage of your annual ISA and pension allowances

Cash and Stocks and Shares ISAs are incredibly tax-efficient ways of growing your wealth. Both options benefit from an Income Tax exemption on interest received (for a Cash ISA) or gains (there is also no Capital Gains Tax (CGT) on profits from a Stocks and Shares ISA).

Making contributions to a workplace or private pension scheme can also be tax-efficient, a situation that has been significantly boosted by the government’s recent spring Budget.

In March 2023, Jeremy Hunt moved to remove the cap on the Lifetime Allowance (LTA) for pensions and outlined plans to abolish the LTA in its entirety in the future.

The Annual Allowance for pension contributions was also raised from £40,000 to £60,000 (as of the 2023/24 tax year) or 100% of earnings, whichever is lower.

As pension contributions attract Income Tax relief, they can be a smart way to save for your future while helping to reduce your potential tax liability in the present.

2. Consider additional pension contributions if you fall into the 60% “tax trap”

A quirk within the tax system — created by the tapering of the Personal Allowance — has the potential to exacerbate your situation further if you end up earning between £100,000 and £125,140. In this scenario you could effectively end up paying a 60% tax rate.

This 60% “tax trap” occurs because the Personal Allowance is tapered at a rate of £1 for every £2 you earn over £100,000, which creates a unique scenario at the 40% higher rate of Income Tax. The combination of taxes and a reduction in allowances leads to an effective tax rate of 60%.

For example, for every £5,000 of income between £100,000 and £125,140, you only take home £2,000 — £2,000 is lost to Income Tax, and another £1,000 is removed by the tapering of your Personal Allowance.

Once your earnings surpass £125,140, you no longer stand to benefit from the Personal Allowance, so are not affected by this overlap in tax policies anymore.

One solution to this problem is to consider paying more into your pension. If you receive a pay rise that takes you over the £100,000 earnings threshold, you could consider contributing anything above the £100,000 mark to your pension scheme — benefiting from the Income Tax relief on pension schemes.

This move will likely stop you from falling into the 60% tax bracket and could help boost your retirement savings.

Remember: In the 2023/24 tax year you can contribute a maximum of £60,000 into your pension each year (or 100% of earnings if lower) while still enjoying the associated Income Tax relief.

3. Consider a bit of philanthropy and donate money to charity

Embracing your inner philanthropist could be another potential tax relief option. The government allows charities to claim 25p in additional support for every £1 you donate to charity through Gift Aid.

If you’re a higher- or additional-rate taxpayer, you could claim the difference between your respective tax rate and the basic rate on the charitable donation through your self-assessment tax return.

For example, if you donate £500 to charity and they claim Gift Aid to make your donation £625, you’d be able to claim back £125 in tax relief.

Additionally, if you opt to donate through a payroll giving scheme, donations are typically made directly from your gross income or pension scheme, which means you’ll pay less tax on your remaining income.

Donating to charity might allow you to put your wealth to good use, while simultaneously benefiting from much-needed tax relief.

Get in touch

If you have any concerns regarding your Income Tax situation — especially in light of the government’s decision to freeze thresholds for the foreseeable future — you should consider reaching out for advice by email at helpme@aspirellp.co.uk or calling 0117 9303510.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

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