The recent budget announcement from Rachel Reeves has drawn attention to significant changes in the taxation landscape, leading to millions of workers facing higher tax bills in the coming years. With income tax thresholds frozen until April 2031, the implications of fiscal drag are becoming increasingly evident. According to the Office for Budget Responsibility, approximately one in four adults is projected to be classified as higher-rate taxpayers by 2031, a notable increase from one in seven in 2022.
The higher rate tax band remains fixed at £50,270, where earnings exceeding this threshold incur a 40% tax. Similarly, the additional tax band is set at £125,140, applying a 45% tax rate on income above this limit. As these thresholds stagnate, individuals may find themselves unexpectedly pushed into higher tax brackets. Nevertheless, there are several strategies available to mitigate the impact of these changes.
Maximizing Benefits Through Marriage Allowance
Married couples and civil partners can take advantage of the Marriage Allowance, a tax provision that allows the transfer of a portion of the Personal Allowance between partners. The Personal Allowance for the current tax year stands at £12,570, meaning individuals earning below this amount do not pay income tax.
By transferring £1,260 of the Personal Allowance, couples can reduce their tax liability by up to £252 annually. To qualify, one partner must earn less than £12,570, while the other must be a basic rate taxpayer, with earnings between £12,571 and £50,270. Applications can be completed online, with confirmation received within 24 hours. More details are available at gov.uk/apply-marriage-allowance.
Claiming Tax Relief on Job-Related Expenses
Another effective method to lower tax bills is to claim tax relief on work-related expenses. Employees can deduct costs incurred while performing their job, provided these expenses are not reimbursed by the employer. Eligible expenses include remote work costs, uniforms, tools, and travel expenses.
The relief received depends on the amount spent and the individual’s tax rate. For example, claiming £60 in expenses at a 20% tax rate would result in a refund of £12. To make a claim, visit gov.uk/tax-relief-for-employees.
Utilizing Salary Sacrifice for Tax Benefits
Salary sacrifice schemes present another opportunity for workers to lower their taxable income. This approach allows employees to exchange a portion of their salary for non-cash benefits, such as a company car, childcare vouchers, or increased pension contributions. By reducing their salary, employees can decrease their tax and National Insurance contributions.
Employers may also benefit from decreased National Insurance payments, and many choose to pass these savings on to employees by enhancing pension contributions. However, significant changes to salary sacrifice rules are set to take effect in April 2029, requiring workers to pay full National Insurance on contributions exceeding £2,000 annually.
Strategies to Maintain Child Benefit
For parents earning more than £60,000 annually, strategic financial planning can help retain full child benefit payments. The government provides child benefit to individuals responsible for raising children, currently valued at £26.05 for the eldest or only child and £17.25 for each additional child.
Earnings exceeding £60,000 trigger a repayment of 1% of the benefit for every additional £200 earned, with full clawback occurring at £80,000. To preserve child benefit, contributing to a pension or utilizing salary sacrifice can effectively lower taxable income. For instance, if an individual earns £61,000, contributing £1,000 to a pension could allow them to maintain their child benefit entitlement.
As the tax landscape evolves, individuals are encouraged to explore these strategies to navigate potential increases in tax burdens. By taking proactive steps, taxpayers can better manage their finances and optimize their tax obligations.
