Experts are sounding the alarm over the Government’s decision to extend the freeze on income tax thresholds. As a result of this, more people will be pushed into higher tax brackets which could end up with them paying more to the Government. However, those who chose to make additional pension contributions could prevent this from happening to them.
When Prime Minister Rishi Sunak had the keys to Number 11, the allowance threshold for income tax was frozen until 2026.
Under Jeremy Hunt’s reign as Chancellor, this deadline has been extended to last until the 2027/28 tax year as part of the Government’s new fiscal agenda.
Currently, employees on a lower income pay 32 percent tax on any money they earn over the tax allowance, which stands at £12,570.
This overall amount is separated into 20 percent for income tax and 12 percent for National Insurance contributions.
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Those on a higher income pay 42 percent on any earnings over £50,270 with households on a £150,000 salary being placed into a 45 percent income tax rate.
Since 2019, these tax allowance thresholds have been in place which means the income tax freeze will have been the same for almost 10 years until this extension comes to an end.
Due to fiscal drag, taxpayers are likely to end up paying more under Mr Hunt’s revised tax plan for the country.
This is the term given to describe the impact of peoples’ earnings going up with inflation while tax thresholds remain the same.
The result of this is everyday taxpayers giving more money to HM Revenue and Customs (HMRC) and losing the benefit of any pay rises from work.
However, experts are highlighting how making pension contributions could significantly help those looking to avoid further income tax rises in the years ahead.
Steven Cameron, the pensions director at Aegon, outlined why the income tax allowance threshold freeze will hurt taxpayers more than help them for the foreseeable future.
The retirement expert explained: “With inflation particularly high, and pay increases for many also higher than in recent times, the freezing of income tax thresholds again in April will mean more people find a wage increase takes them into a higher rate tax band.
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“While times are very tight, if you can afford to, one way to avoid this is to pay more into your pension.
“Personal contributions to pensions are deducted from your earnings before you’re assessed for income tax.”
The finance expert gave a hypothetical scenario as how to people can avoid the tax hike via pension contributions.
He added: “So for example, if you are in England and are earning £50,270, you’ll just escape paying higher rate tax.
“But if you received a £2,000 increase, you’ll pay a higher rate tax of 40 percent on the pay rise, leaving you with £1200 a year extra in take home pay.
“But if you can afford to increase your pension contributions by £2,000, you’d no longer pay higher rate tax.
“Put another way, your £2,000 pension contribution costs you £1,200 in terms of take-home pay.”
Under Jeremy Hunt’s current plan, the income tax allowance threshold will remain frozen until 2027/28.