People could end up paying more tax in several ‘painful’ ways this year, a financial expert has warned.
Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, explained frozen thresholds and cuts to tax breaks are among the pressures people should be aware of.
She said: ‘For most people, the lion’s share of the rise will come from the freeze in income tax thresholds.’
Frozen income tax thresholds mean people could pay more tax when their salary is increased to take account of inflation.
‘The personal allowance – how much you earn before paying tax – has been frozen at £12,750, and the higher rate threshold – the point at which you start paying 40% – has stuck at £50,270 since April 2021,’ Sarah added.
‘As incomes rise, employers are under pressure to raise salaries, so their staff can afford to live.
‘Salaries rising automatically increases the amount of tax we pay, but the frozen thresholds also mean that the more wages rise, the more people will cross the frozen thresholds to pay a higher rate of tax.’
As the additional threshold rate will drop from £150,000 to £125,140, anyone earning between this will lose an average of £621 a year as more people enter this tax bracket.
Those with big mortgages will also pay more from higher mortgage rates.
Business owners could also end up paying more tax on profits and dividends, Sarah warned.
Frozen inheritance tax thresholds could also drag more people into paying this tax.
But there are ways in which people may be able to make their finances more tax efficient – such as making the most of tax-free Isa savings accounts, paying into pensions and making the most of the marriage allowance.
Workers can also explore salary sacrifice options, with the Government letting people give up a portion of their salary and spend it on things free of tax, including childcare vouchers and pensions.
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