Olly Cheng, of wealth manager Rathbones, said: “Frozen thresholds are quietly pulling more people into higher tax bands, meaning more households will pay more tax, often without realising it.”
By the time thresholds finally rise – which, based on current plans, won’t happen until April 2031 – the income tax system will have been in deep freeze for a decade.
Every single taxpayer with earnings over £12,570 is impacted by the freeze, though the exact amount will depend on your earnings.
Charlene Young, of wealth manager AJ Bell, said: “That includes those with salaried earnings as well as pensioners receiving taxable income in retirement. It also impacts savers with cash interest that exceeds their combined personal allowance and savings allowance, as well as investors and company directors with dividend income in excess of their personal allowance and dividend allowance.”
As frozen tax thresholds punish taxpayers by stealth, it can pay to be proactive and keep an eye on your total earnings.
Emma Wall, chief investment strategist at Hargreaves Lansdown, said: “If your income rises with an annual uplift or a promotion, you could find yourself pushed into a higher tax bracket. Jumping up a bracket can have a knock-on effect beyond income tax: reduced allowances, and higher tax rates on dividends and gains.”
Higher earners should pay particular attention to the 60pc tax trap, affecting those earning between £100,000-£125,140 due to the gradual loss of the tax-free personal allowance.
There are some simple ways to reduce your salary, and therefore your tax bill. Ms Wall said: “One of the most effective ways to keep more of what you earn is by making pension contributions. You either do this by increasing contributions to a workplace scheme, or salary sacrifice where you swap some of your annual earnings for extra pension contributions.”
Alternatively, you can contribute separately to a self-invested personal pension (Sipp). A Sipp is great, flexible choice if you’re self-employed, plus providers will often have a ready-made pension plan, meaning you can ensure your money is in expert hands.
Ms Wall added: “Just remember to adhere to the annual allowance for pensions, which for most people is the lower of £60,000, or 100pc of your earnings.”
Alternatively, giving to charity and reducing your hours could also help to reduce your tax bill.
