It was a stealth tax hike buried in the Budget which will lead to an income tax rise for everyone across the earnings spectrum.
But financial experts have explained how households can beat Rachel Reeves’ income tax threshold freeze, announced in last week’s Budget.
Rachel Reeves chose to extend the freeze on income tax bands for another three years, until 2031, following the freeze first put in place by the Conservatives in 2021 which had been due to end in 2028.
This costs people money, because as wages increase each year, from minimum wage right up to average and above average salaries, more and more people are dragged into higher tax bands, and either made to pay tax for the first time or moved into a higher 40% or 45% band, whereas they may have avoided it if the thresholds had been moving too.
Ruth Curtice, chief executive of the Resolution Foundation think tank, said the Chancellor has extended “Britain’s biggest stealth tax rise”, meaning that, unlike a rise in income tax rates, the move is not immediately obvious to the taxpayer.
Craig Hughes, head of private client services for advisory firm Menzies LLP, said the effect was “incremental but significant”, explaining: “Rather than adjusting tax rates directly, freezing thresholds quietly increases tax liabilities for millions, including those who would otherwise not be considered higher-rate taxpayers.”
But according to finance firm AJ Bell, there is a way to beat Rachel Reeves’ extra three-year income tax bands freeze.
Laura Suter, Director of Personal Finance at AJ Bell, said: “The chancellor has frozen income tax bands for another three years, with the result tax bands will remain where they are until 2031.
“It means more people will be pushed into the next tax bracket if they get a pay rise and will see more of their income hit by tax than if these thresholds had been increased in line with inflation.
“What’s more, there are lots of tax traps that may catch you out if you move into a new tax bracket or over certain earnings levels.
For example, someone with an adjusted net income of £60,000 or more will start to see any child benefit clawed back and someone breaching the £100,000 limit starts to lose their tax-free personal allowance for the year. In both cases, their extra earnings face an effective tax rate of 62% if you include National Insurance.
“Equally if you move into the next tax band, you could face higher tax rates on dividends, capital gains or your savings income.”
However, Ms Suter set out how you can counteract this. She said: “You can dodge these traps by contributing money into your pension, to bring your taxable income below the different thresholds.
“You just need to work out what extra contributions you need to make to reduce your ‘adjusted net income’. This will involve a little bit of extra admin but will still be well worth it when you consider the potential tax savings on offer.”