Strategies for a high tax environment
Tax burdens change as you earn more
The income tax system has changed significantly in recent years. Until the spring 2021 Budget, governments had concentrated on increasing the personal allowance. Then, the focus switched to freezing the allowance (and the higher rate tax threshold), a covert way to raise additional revenue at a time of high inflation. As a result, the population of income tax payers today is 18% more than in 2020/21 and is projected to increase another five percentage points by 2028/29. At the same time, the number paying higher rate or additional rate tax has risen more rapidly. Between 2020/21 and 2024/25 the rise was 69%. By 2028/29 the Office for Budget Responsibility (OBR) estimates that nearly one in four of all income taxpayers will be paying more than basic rate.
The figures reflect a truth often felt by some – that the tax burden increases as you start to earn more. The previous government’s focus on cutting individual national insurance contribution (NIC) rates underlines how politically difficult it is to reduce income tax rates at high income levels. Those NIC cuts did not fully counter the increased future tax burden resulting from measures such as:
- an extension to April 2028 of the freeze applied to the personal allowance and higher rate threshold;
- a near £25,000 reduction in the additional rate tax threshold from 2023/24;
- a halving of the dividend allowance to £1,000 for 2023/24 and a further halving to just £500 in 2024/25; and
- a similar approach to capital gains tax annual exemption, more than halving it to £6,000 now and then cutting it again to £3,000 in 2024/25.
In any case, the Autumn Budget 2024 largely nullified the individual NICs’ decreases with employer NICs increases, by both raising the rate and reducing the starting threshold.
The Scottish Budget in December 2023 contained further turns of the tax screw, including the introduction of a new ‘advanced rate’ at 45% on income above £75,000 and a 1% addition to the top rate of tax, taking it to 48%.
This guide looks at ways to mitigate that high-tax environment.
