The UK Personal Allowance and the start of the Higher Rate tax threshold have been frozen at £12,570 and £50,271 until April 2028.
These thresholds have been frozen since April 2021 and many feel they are long overdue an update. While this means that taxpayers below the Additional Rate tax threshold (those that do not have taxable income exceeding £125,140) do not have to track any changes to their tax bands, there are many who are at risk of fiscal drag.
This is when inflation pushes more people over the thresholds without them facing any notable increase in wealth.
For those who are experiencing the fiscal drag, the increasing tax liabilities can feel particularly unfair.
There are some tax-efficient strategies that can be deployed to mitigate the frozen thresholds, and these may prove useful for those wanting to keep their tax bill low.
How can I avoid fiscal drag?
While there is little that one can do to fully avoid fiscal drag, there are a number of ways to stay below the thresholds.
Pension savings remain one of the easiest, tax-efficient ways to save money.
By sacrificing salary increases and putting more money into pension savings, an employee can remain rewarded for their hard work without incurring steeper tax bills.
Pension savings are not subject to Income Tax and thus generally provide greater value than wages in terms of tax efficiency.
This can be paired with Gift Aid charitable donations for those who are feeling particularly altruistic.
For every £1 donated, charities reclaim 25p, and higher-rate taxpayers reclaim an extra 20p via self-assessment.
To utilise this effectively, it is important to keep a record of when you donated and how much. Note that you can only make Gift Aided Donations if you are a taxpayer.
What do I need to do to make my finances more tax-efficient?
We know that neither the Personal Allowance nor the Higher Rate thresholds will change for the next few years.
This allows for the careful planning of finances and early provisions for steeper tax bills.
Seeking professional advice is the best way to make effective plans so that you can keep as much control over your finances as possible.
Embracing software that allows you to record and track your money is also wise, as this can highlight where best to save and invest to stay compliant and tax-efficient.
If you want to stay ahead and have greater control over your finances, then speak to our team today!
