Two ‘legitimate’ ways to reduce your tax bill as 3.2 million set to pay more | Personal Finance | Finance
New figures released by HMRC show that 3.2 million taxpayers are set to become higher-rate taxpayers by 2027. The figures show that additional-rate taxpayers are also projected to rise sharply, with 7.7 million set to be dragged into the higher tax band.
Currently, people in England, Wales and Northern Ireland start paying income tax at a rate of 20%, and national insurance (NI) at a rate of 8%, once they earn £12,570. They then start paying higher-rate income tax of 40% once they earn £50,270, but at this point, their NI rate is lowered to 2%.
Marianna Hunt, Personal Finance Expert, Fidelity International believes that the figures underline the growing importance of tax-efficient saving and investing, including making full use of pension contributions and ISA allowances.
She said: “These figures show just how dramatically the tax landscape has changed in recent years. The number of higher-rate taxpayers has risen from around 4.43 million in 2021/22 to a projected 7.7 million in 2026/27 – an increase of 3.27 million people (74%) in just five years.
“The number paying the additional rate is also projected to more than double over four years. It’s striking that the four biggest annual increases in higher-rate taxpayers since HMRC‘s records began have all occurred since 2021.
“For many people, this hasn’t happened because they’ve suddenly become wealthy. Income growth and population growth have both contributed to the rising number of higher-rate taxpayers, but frozen tax thresholds have also played a significant role by steadily pulling more workers into higher tax bands – a phenomenon known as fiscal drag.
“Higher-rate taxpayers are no longer a small group of top earners. Because of frozen tax thresholds, millions of workers bringing home what probably feels like a relatively normal income are now paying rates of tax that would once have been reserved for much higher earners.
“The good news is that there are still legitimate ways to reduce your tax bill. Pension contributions can be particularly valuable because they not only help build your retirement savings but can also reduce your taxable income. If you’ve only recently become a higher-rate taxpayer, increasing your pension contributions could bring some of your income back below the higher-rate threshold. Making full use of your ISA allowance can also help shield future investment growth and income from tax.
“As more people are drawn into higher tax brackets, it’s becoming increasingly important to review your finances regularly rather than assuming tax planning is only something that matters to the very highest earners.”
Burnham told the Times over the weekend that the “frustration about the personal allowance” he had heard while campaigning in the Makerfield by-election was “lodged in my mind”.
