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Tax freeze drags more high earners into new tax bands

The combination of alterations to personal tax allowances and rising interest rates has led to an increasing number of individuals being impacted by fiscal drag.

Fiscal drag is the situation in which taxpayers find themselves in higher tax brackets due to wage increases that keep up with inflation.

As the UK Government has frozen most tax bands until 2028 and lowered the threshold on the additional marginal rate, fiscal drag can significantly affect the finances of people across various income levels.

Inflation

Rising inflation and, to some extent, economic growth have caused wages to increase from £406 a week to £533 on a median basis over the past decade, as reported by Money Week.

The publication also revealed that pay in the private sector, excluding bonuses, grew by 6.5 per cent between November 2022 and January 2023.

While these increases may appear positive, they are being diminished by soaring inflation and the necessity to pay income tax at higher rates as individuals move into different tax bands.

Tax bills

Money Week states that those earning £15,000, £20,000, and £30,000 will experience a 21 per cent increase in their income. However, their tax bills will grow by 106 per cent, 50 per cent, and 32 per cent, respectively.

Those with earnings exceeding £50,000 are predicted to see a 21 per cent rise in wages and a 35 per cent increase in their personal tax bill, adding £1,905 to their tax bill.

To evade fiscal drag, individuals must carefully manage their income to benefit from tax reliefs, allowances, and tax-efficient investments.

Require guidance on personal tax matters? Contact us today.

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