Income Tax Freeze Extended until 2028

13 June 2023

The government decided to freeze personal Income Tax thresholds until 2028 which means millions of people on low and middle incomes in England, Wales, and Northern Ireland will have to pay basic or higher-rate tax.

According to the Institute for Fiscal Studies (IFS) thinktank, through freezing UK Income Tax allowances and thresholds, the government’s on track to raise £30 billion a year by 2026 because of the impact of high inflation. This is known as ‘fiscal drag’ – a result of holding Income Tax thresholds steady whilst both prices and earnings increase.

WHAT THE TAX FREEZE MEANS FOR TAXPAYERS

It essentially means that more people have to pay more of their income in tax. 

The freezing of Income Tax is referred to as a stealth tax, rather than a tax increase. As a result of this stealth tax, The Office for Budget Responsibility (OBR), which independently assesses the government’s economic plans, estimates 3.2 million new taxpayers will be created.

From April 2023, the additional rates of tax of 45% were reduced from £150,000 to £125,140, bringing many more taxpayers into paying these additional rates. Approximately 250,000 more people would fall into the top rate, costing them £620 each, on average and the 629,000 people already within the higher rate bracket will pay just under £1,250 more in tax [source: HM Treasury].

These are the Income Tax levels in England, Wales, and Northern Ireland*:

BAND EARNINGS RATE
Personal Allowance First £12,570** 0%
Basic Rate £12,571 to £50,270 20%
Higher Rate £50,271 to £125,140 40%
Additional Rate Over £125,140 45%

 

*Scotland has its own bands and rates.

**Reduced by £1 for every £2 earned between £100,000 and £125,140.

The Centre for Economics and Business Research estimated the number of Brits paying the 45p top rate of Income Tax on earnings will reach 850,000 by 2026/27, up from 400,000 in 2019/20.

The frozen Income Tax thresholds are likely to be most noticeable for those earning around £50,000 a year as earnings above £50,270 are taxed at 40%, on top of National Insurance of 2%. So, any pay rise would see almost half go on taxes.

Here’s a table outlining the impact on take home pay of reduction higher rate tax threshold to £125,140…

SALARY TAX BEFORE TAX AFTER IMPACT
£130,000 £44,460 £44,703 £243
£135,000 £46,460 £46,953 £493
£140,000 £48,460 £49,203 £743
£145,000 £50,460 £51,453 £993
£150,000 £52,460 £53,703 £1,243
£160,000 £56,960 £58,203 £1,243
£170,000 £61,460 £62,703 £1,243
£180,000 £65,960 £67,203 £1,243
£190,000 £70,460 £71,703 £1,243
£200,000 £74,960 £76,203 £1,243

 

SO, WHAT CAN YOU DO TO MITIGATE WHAT YOU PAY IN TAX?

Some tax-efficient options include:

1. Topping up your pension – reduce your Income Tax by making contributions to your pension, using your Personal Allowance. Contributions that fall within the annual £60,000 pension allowance lower your adjusted net income which is what HRMC uses to calculate your tax bill. 

2. Investing in an Individual Savings Account (ISA) – the good thing about ISAs is you don’t pay Income Tax or Capital Gains Tax (CGT) on investments inside them. Plus, you can withdraw money whenever you like, tax-free, and you can invest up to £20,000 in ISAs (correct at time of writing). 

3. Doubling up your tax allowance – married or in a civil partnership? In some cases, your tax allowance can be combined. Or you could make investments as a couple to reduce your dividend tax bill. 

4. Sacrificing salary – if you’re not too far over the threshold, you could look at using some of your salary in exchange for a benefit.

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An important note: Content correct at time of publishing.

 

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