Millions of employees will see little income tax respite after the general election as thresholds that have failed to rise with inflation will remain “rooted to the spot”.
The Conservatives said the freeze in tax thresholds will remain in place until 2028, while Labour has refused to commit to unfunded pledges even though the party wants to increase the thresholds.
The latest data from HMRC shows that the number of taxpayers has risen dramatically with the threshold freeze in place. In the 2021/22 tax year there were 33 million income taxpayers. This increased to 36.2 million in 2023/24.
In March this year, the Office for Budget Responsibility (OBR) said that if tax thresholds had risen with inflation there would have been just 34.1 million income taxpayers in 2023/24.
This means 2.1 million people have been “dragged into paying income tax” as a result of the frozen threshold policy, said Sarah Coles, head of personal finance at Hargreaves Lansdown, adding that this was “just the start”.
The OBR has said that without policy change the number of income taxpayers will rise to 3.7 million by 2028/29.
No threshold thaw
“Most of the frozen tax thresholds look set to remain rooted to the spot, regardless of who wins the general election. Aside from a carve-out for pensioners from the Conservatives, the two main parties have said frozen tax thresholds won’t be defrosted by an incoming government,” said Coles.
“This will come as a major blow to millions of people on lower incomes,” she added.
She emphasised the findings of the OBR that show that “2.1 million people have been dragged into the realms of tax” and referenced further OBR forecasts that 3.7 million people are expected to be paying tax by 2028/29, saying that “things are going to get worse”.
“This will put lower earning households under particular pressure, as they add tax to the never-ending list of things their income needs to cover. However, it will cause headaches across the income spectrum, as people are forced into paying more tax at higher levels. It means we all need to consider whether there’s anything we can do to protect ourselves.”
To help people do this, Coles shared her four top tips.
- Savings shift
Frozen thresholds mean more people paying higher rates of tax, at which point their personal savings allowance shrinks from £1,000 for basic rate taxpayers to £500 for higher rate taxpayers or £0 for additional rate taxpayers. But if you save into a cash ISA there is no tax on interest.
- Investments protection
The best way to protect investments from dividend tax and capital gains tax is to put them in an ISA. You can move existing investments into ISAs through share exchange, so you can protect up to £20,000 in the current tax year. If you have too many investments to protect all of them, the fact you have more control over when you take capital gains than when you earn dividends means it may make sense to prioritise income-producing assets when you’re using this year’s ISA allowance.
- Pension relief
The annual pension allowance is now £60,000. The fact people can get tax relief at the highest marginal rate means higher earners in particular should look to take as much advantage as makes sense for their finances. There’s no suggestion that any future government plans to attack pension tax relief, but nothing is set in stone, so it makes sense to make the most of it while you can.
- Couple planning
If you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name. It means you can both take advantage of your tax allowances. You can also use all the tax-efficient vehicles at your disposal, including your ISAs and pensions, as well as the Junior ISAs and Junior SIPPs of any qualifying children.
