More taxpayers hit by static thresholds as Government freezes rates

The Government has opted to maintain the current levels of both the personal allowance and the higher-rate income tax thresholds, causing an increase in the number of individuals falling into the higher tax bracket this year.

This decision, a manifestation of ‘fiscal drag,’ occurs when tax thresholds do not align with inflation or salary increases, consequently increasing the ranks of higher-rate taxpayers, a trend expected to continue until 2028.

This ongoing freeze affects many taxpayers and has broader economic repercussions, potentially altering consumer spending and savings patterns by placing a heavier tax load on more people. The Government’s strategy to not adjust the thresholds for inflation effectively boosts tax revenue without a formal increase in tax rates.

Taxpayers should view these developments through the lens of the Government’s broader fiscal policies and integrate them into their personal tax planning strategies.

There are several effective strategies to relieve tax liability and manage your tax rate:

• Income splitting – Distributing income among family members can help keep individual earnings below the higher tax brackets, thus lowering the overall tax burden.
• Tax-efficient investments – Utilising tax-free savings accounts and pensions can substantially decrease taxable income and produce significant long-term savings.
• Year-end tax planning – It is beneficial to regularly reassess your financial standing as the tax year concludes, making adjustments to income and deductions to achieve the best tax results.

Being proactive in managing your tax situation is essential, especially given the static thresholds and the likelihood of fiscal drag affecting an increasing number of taxpayers.

For those looking for more detailed advice or specific information, please contact us.