Tax warning as millions of Brits to pay higher rate - how to reduce your bill

Britons are urged to check if they can benefit from tax allowances, as the number of estimated higher-rate taxpayers is set to surge by millions in the years ahead.

A new analysis by Quilter, based on HM Revenue and Customs (HMRC) data, shows 4.1 million under-40s in the UK will pay higher or additional rate tax by 2028 due to the Government's frozen income tax thresholds.

This is quadruple the initial target, as the number of higher-rate taxpayers was only intended to rise by one million. However, this was also when income tax thresholds were only meant to stay frozen until 2022.

The extension of frozen threshold thresholds until 2027/28 has created a stealth tax. By not adjusting tax brackets for inflation, more people are pushed into higher tax brackets over time, increasing their tax burden without raising the actual tax rates.

However, there are ways people who are at risk can avoid this, an expert has said.

Rachael Griffin, tax and financial planning expert at Quilter, said: “Pension contributions are particularly advantageous for higher rate taxpayers. At present, you can receive up to 40 percent tax relief on your contributions, making pensions an efficient way to save for retirement while also helping to reduce your overall tax liability.”

Ms Griffin said pension contributions can also help ensure people are eligible for certain benefits, such as child benefit if they are on the cusp of the earnings threshold where they lose some or all of it.

She explained: “The majority of people can pay up to £60,000 into their pension each year, which can help you reduce your taxable income considerably. What’s more, you can carry forward unused pension annual allowance for up to three tax years.”

Similarly, Ms Griffin said the marriage allowance “can be beneficial” for couples who are married or in a civil partnership, where one partner has an unused personal allowance. At present, people can earn up to £12,570 a year without paying tax.

Ms Griffin said: “They can transfer up to 10 percent of this to their spouse to help shield more of your household income from tax. However, your partner also has to be a basic rate taxpayer, and given more people are getting dragged into higher rates of income tax it is important to check if you are eligible.”

Additionally, Ms Griffin said maximising an ISA allowance for investments is an “excellent way” of mitigating any tax liability on investments.

She explained: “With a generous annual limit of £20,000 for the 2024/25 tax year, ISAs allow you to save or invest without worrying about income tax, capital gains tax, or dividend tax on the returns.

“Maximising your ISA contributions can significantly mitigate the tax impact of moving into a higher bracket.”

Finally, opting for salary sacrifice is another “useful tool” that can help save people money on purchases, such as protection policies, and in some cases, it can also help reduce their overall tax burden.

Ms Griffin explained: “Employees can lower their overall income tax liability by giving up a portion of their earnings in return for a non-cash benefit from their employer, reducing the amount of money you take home, and subsequently the amount of tax and national insurance you pay on it.”

However, Ms Griffin added: “While there are strategies to potentially bring your taxable income below the higher rate threshold, such as maximising pension contributions, this may not always be feasible or sufficient for everyone.

“Factors such as your overall financial situation, long-term goals, and the amount by which your income exceeds the threshold will influence the effectiveness of these strategies. Seeking professional financial advice can help you make the most of your allowances and mitigate your tax position.”