New analysis of freedom of information data from HM Revenue and Customs, gathered by Quilter, the financial adviser and wealth manager, has revealed that 4.1 million or one fifth of under 40s in the UK will be pulled into paying higher or additional rate tax by the 2027/28 tax year as a result of the government’s frozen income tax thresholds.
The analysis shows that 3.6 million under 40s will be brought into the higher rate of income tax due to the threshold freezes in the tax years 2022-23 to 2027-28, and a further half a million will be brought into the additional rate.
The ONS estimates there are 19.2 million people aged 18-39 in the UK, meaning the equivalent of just over one fifth of all people in the UK under the age of 40 are expected to be hit by the fiscal drag effect of frozen tax thresholds. Given the number of under 40s paying income tax is likely to be lower, the real figure could be even higher.
Under 40s pulled into higher (H) or additional (A) rate income tax brackets by threshold freezes in millions:
| 2022-23 | 2023-24 | 2024-25 | 2025-26 | 2026-27 | 2027-28 | |||||||
| Age | H | A | H | A | H | A | H | A | H | A | H | A |
| Under 40 | 0.1 | .. | 0.4 | 0.1 | 0.7 | 0.1 | 0.7 | 0.1 | 0.8 | 0.1 | 0.9 | 0.1 |
| Totals | 0.1 | 0.5 | 0.8 | 0.8 | 0.9 | 1.0 | ||||||
| 4.1 million | ||||||||||||
Taxpayer counts are in millions and rounded to one decimal place.
‘..’ denotes figures that are not zero but are less than 50,000.
The government’s tax take has soared dramatically in recent years following the implementation of the frozen tax thresholds, as well as the reduction in the threshold for the additional rate of income tax. Given the new Labour government has unveiled a £20 billion black hole in public sector finances, it seems likely it will look to its first Budget in the autumn as an opportunity to raid the pockets of taxpayers to help plug it. For those already being pulled into higher income tax brackets as a result of the already frozen income tax thresholds, it could amount to a significant impact on their finances.
The Labour government now finds itself between a rock and a hard place as while it has pledged not to increase the rate of income tax, it is in effect maintaining the Conservative strategy of increasing income tax by stealth by leaving rates untouched, but it simply cannot afford to thaw them.
Not only have income tax thresholds been frozen, but many other tax allowances and thresholds have been limited in recent years too, such as the reduced capital gains tax and dividend allowances. As such, it is becoming increasingly important to make use of those available to you to make sure no more of your hard-earned money ends up going to the taxman than is necessary.
Rachael Griffin, tax and financial planning expert at Quilter, says:
“Frozen income tax thresholds, which show no signs of thawing under the new Labour government, were initially introduced in the 2021-22 tax year until 2025-26 and were expected to create a total of just one million more higher rate taxpayers in this time. Now, however, thanks to the extension of the frozen thresholds to the 2027-28 tax year, coupled with higher wages which increased in an attempt to keep up with high inflation, those aged under 40 are expected to more than quadruple the initial target alone.
“These frozen thresholds have given a significant boost to government coffers, but with public finances in their current state Labour will no doubt be quietly grateful.
“Those navigating the shift into a higher tax bracket will require a strategic approach to financial planning to help mitigate their tax liability, especially considering the considerable changes there have been to the tax landscape over the past few years.
“Pension contributions are particularly advantageous for higher rate taxpayers. At present, you can receive up to 40% tax relief on your contributions, making pensions an efficient way to save for retirement while also helping to reduce your overall tax liability and can also help ensure you are eligible for certain benefits such as child benefit if you are on the cusp of the earnings threshold where you lose some or all of it. The majority of people can pay up to £60,000 into their pension each year, which can help you reduce your taxable income considerably. What’s more, you can carry forward unused pension annual allowance for up to three tax years.
“Similarly, the marriage allowance can be beneficial for those couples who are married or in a civil partnership where one partner has unused personal allowance as they can transfer up to 10% of this to their spouse to help shield more of your household income from tax. However, your partner also has to be a basic rate taxpayer, and given more people are getting dragged into higher rates of income tax it is important to check if you are eligible.
“Salary sacrifice is another useful tool that can help save you money on purchases such as protection policies, and in some cases, it can also help reduce your overall tax burden. Employees can lower their overall income tax liability by giving up a portion of their earnings in return for a non-cash benefit from their employer, reducing the amount of money you take home, and subsequently the amount of tax and national insurance you pay on it.
“As always, maximising your ISA allowance for investments is another excellent way of mitigating any tax liability on your investments. With a generous annual limit of £20,000 for the 2024/25 tax year, ISAs allow you to save or invest without worrying about income tax, capital gains tax, or dividend tax on the returns. Maximising your ISA contributions can significantly mitigate the tax impact of moving into a higher bracket.
“Moving into a higher tax bracket in the UK presents both challenges and opportunities. By understanding the implications on allowances, capital gains, savings, and investments, and by strategically planning your finances, you can manage your tax liabilities effectively while continuing to grow your wealth.
“It’s important to note that while there are strategies to potentially bring your taxable income below the higher rate threshold, such as maximising pension contributions, this may not always be feasible or sufficient for everyone. Factors such as your overall financial situation, long-term goals, and the amount by which your income exceeds the threshold will influence the effectiveness of these strategies. Seeking professional financial advice can help you make the most of your allowances and mitigate your tax position.”
