The tax-free personal allowance is currently set at £12,570 a year and has been frozen at this level since 2021
There are things you can do to legally reduce your tax bill(Image: Getty/Natasha Lebedinskaya)
Millions of are being dragged into higher tax brackets are their wages rise – but there are ways to cut your tax bill.
The personal allowance is how much you can earn before you start to pay income tax. It is currently set at £12,570 a year and has been frozen at this level since 2021. Previously, tax thresholds would rise with inflation – but as it is, they are set to remain at their current levels until 2031.
The freezing of tax thresholds mean as your wages rise, you risk getting pushed into paying tax or higher rates, depending on your salary. This is known as fiscal drag, or a stealth tax, as it is a way for the government to tax people more without actually increasing tax rates.
Almost half of Mirror readers in a recent poll voted the unfreezing of tax thresholds as the help they wanted most to be announced in the Budget, which will take place on October 28.
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What is the personal allowance?
You pay 0% income tax on earnings up to the personal allowance, which is £12,570. For earnings between £12,570 and £50,270, you pay the basic 20% rate of income tax.
You pay the higher 40% rate on earnings between £50,270 and £125,140, while the additional 45% rate kicks in when you start to earn more than £125,140.
- Personal allowance – up to £12,570
- Basic rate (taxed at 20%) – £12,571 to £50,270
- Higher rate (taxed at 40%) – £50,271 to £125,140
- Additional rate (taxed at 45%) – over £125,140
How to cut your tax bill
Salary sacrifice: If your employer runs a salary sacrifice scheme, you could consider giving up part of your salary in exchange for a non-cash benefit, such as pension contributions or childcare vouchers.
The idea is that your pre-tax salary is reduced, which means less of your income is subject to tax. In some cases your take-home pay might actually go up because you are paying less tax. But keep in mind that having less salary on paper could impact your ability to borrow for a mortgage or a credit card.
Pension salary sacrifice schemes will be less generous from 2029, so that only the first £2,000 will be free of employer and employee National Insurance. You can pay up to £60,000 into a pension in the current tax year.
Pension tax relief: You also benefit from tax relief from the government on pension contributions. If you are a 20% basic rate taxpayer, for every £80 you put into a pension, the government adds £20, making a total contribution of £100. There are two ways pension tax relief can be applied.
If your pension contributions are deducted from your salary before income tax is calculated, you receive the tax relief immediately because your taxable income is lower.
If your contributions are taken from your pay after income tax is calculated, your pension provider automatically claims the tax relief from HMRC and adds it to your pension pot.
Marriage tax allowance: You may also be able reduce your tax bill if you are married. Marriage tax allowance allows you to transfer £1,260 of your personal allowance to your husband, wife or civil partner to reduce how much tax they pay.
This reduces their tax by up to £252 in the current tax year – but it is also possible to backdate your claim by four tax years.
One of you needs to be a non-taxpayer, while other needs to be paying the basic 20% rate of tax, to qualify for marriage tax allowance.
Use your ISA: Finally, you can protect your savings by considering an ISA – especially if you have earned enough in savings interest to be near the threshold for paying tax. You can pay up to £20,000 a year across ISA accounts.
Basic 20% rate taxpayers can earn up to £1,000 in savings interest each tax year before they start to pay tax on the interest earned.
Higher rate taxpayers can earn up to £500 in savings interest before they have to pay tax, while additional rate taxpayers do not receive any allowance.
