Warning for 1million Brits facing hidden tax rise – are you affected?
MORE than one million Brits are facing a hidden tax rise by 2027/28.
A total of 1,130,000 people will be pushed into paying a higher tax rate, according to figures released by HM Revenue and Customs (HMRC).
The figures were released through a Freedom of Information request to Quilter, the wealth manager and financial advisory firm.
Quilter says that the increase of people pushed into paying higher tax rate in the year 2027/28 is a result of “fiscal drag”.
Rachael Griffin, tax and financial planning expert at Quilter said: “These figures illustrate HMRC is well aware of the power of fiscal drag and exactly how many people they expect to be dragged into paying more tax due to the frozen thresholds.”
Fiscal drag happens when the income level at which taxes can be collected doesn’t increase at the same rate as inflation or income growth.
This can cause a larger amount of a person’s income to be subject to taxes and can also mean more people to fall into higher tax brackets ultimately meaning they pay more in tax.
At the moment, the highest rate of tax is applied to anyone with an income between £50,271 to £150,000 at a rate of 40%.
The additional rate of tax is levied on income over £150,000 at 45%.
Additionally, the FOI revealed that HMRC predicts 301,000 more people will become additional rate taxpayers by the 2027/28 tax year.
Usually, the bands increase with inflation.
But, Jeremy Hunt extended the freeze on the higher rate of tax up to 2027/28 in the Autumn Statement last year .
It was previously frozen in the Spring 2021 Statement until 2026 under the then chancellor, Rishi Sunak.
Quilter has previously calculated that if wages grow by an average of 5% a year for the next four years, but income taxes stay frozen, then someone earning £50k will be £2,643 worse off in real terms by 2027/28.
Over the four-year period they would be £6,463 worse off in total.
Ms Griffin said that many of the people shifted into a higher tax bracket “may not feel wealthier” as their salaries have just kept up with inflation.
She said: “This means that in real terms their buying power remains much the same, yet their salaries are taxed much more.
“Freezing income tax bands is a form of stealth tax as you’ll end up paying considerably more tax during the time bands are frozen, which will be on top of higher energy and food costs.”
How to avoid paying too much tax
There are ways for keeping your tax under control.
You might want to consider a salary sacrifice scheme.
This is where the government will let you give up a portion of your salary and spend it on certain things free of tax – in some cases, national insurance for example.
It could include pensions, childcare vouchers and bike-to-work schemes.
You don’t pay tax on the portion of your wages that goes towards paying for these schemes, lowering the amount of income tax you pay overall.
Contributing to your pension could be another way of bringing you back below the higher rate tax threshold.
When you pay into your pension, some of the money that would have been paid as tax goes towards your pot – and this reduces the amount of tax you pay.
Make sure to look into marriage allowances if you are a married couple.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk