One in three of those earning more than £50,000 don’t know their current tax bracket, according to a new analysis from Barclays Wealth.
But this information will be important starting April 6, when the new fiscal year begins and the tax changes announced in last year’s fall statement take effect.
The majority of Britons will be negatively impacted by the frozen base rate and higher tax brackets, while hundreds of thousands will be affected by the reduction in the top-up tax threshold.
We explain the different tax brackets and what changes next month.
According to Barclays Wealth, many people don’t take advantage of the tax deductions available to them each tax year
What are the income tax changes from April 6?
The November Fall Statement brought with it a number of changes that affect taxpayers.
This included extending the freeze on income tax thresholds for basic and higher income tax until April 2028, and lowering the supplementary rate threshold from £150,000 to £125,140 from 6 April 2023.
According to the government, there are currently 629,000 people paying the top-up income tax rate – a figure that is likely to rise dramatically if the threshold falls.
The Barclays Wealth survey found that two in five of those who would fall within the 45 percent bracket from April 6 were unaware that the threshold was being lowered.
The UK survey of more than 3,000 individuals earning more than £50,000 revealed differences of opinion when it comes to tax planning.
Despite two-thirds of those surveyed saying they are confident in their understanding of income tax, one-third of those earning between £100,000 and £125,140 did not know what the personal allowance was tapering off.
| Band | Taxable income | Tax rate |
|---|---|---|
| Personal consent | Up to £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | £125,140+ | 45% |
What is the personal tax allowance and when do you lose it?
The personal allowance is £12,570, which is the amount of income most people can earn without having to pay tax on it. However, for those earning more than £100,000, that allowance begins to taper off.
The personal allowance is reduced by £1 for every £2 that a person’s adjusted net income exceeds £100,000. This means their allowance is zero if their income is £125,140 or more.
The Fall Statement in November brought a number of tax changes, including the extension of the base tax and higher income tax freeze until April 2028
This means that the top UK income tax rate is essentially 60 per cent, for those earning between £100,000 and £125,140.
For example, someone earning £118,000 would potentially pay £38,232 in tax per year, because they lost £9,000 of their personal allowance.
They pay £10,800 more in tax than someone who earns £100,000, based on the fact that for every £2 earned over £100,000, £1 of the personal allowance is lost.
More than a quarter of those earning more than £100,000 are also unaware that HMRC requires them to complete a tax return, according to Barclays.
If they do not usually file a tax return, they must register by 5 October after the end of the first tax year in which they have earned more than £100,000.
How can I reduce the tax due?
One way to reduce your taxable income is to take advantage of the benefits available each tax year – but Barclays found that three-quarters of Britons were unaware of the benefits of using their full personal benefits, Isa- allowances or pension contributions at work.
ISAS allow you to save or invest up to £20,000 per tax year in cash or stocks and shares, while protecting interest, dividends and capital gains from taxation.
> Read our essential guide to Isas
This will become even more important in the coming tax year, as the capital gains and dividend tax changes also take effect from April 6.
Those who invest outside of an ISA may have to pay capital gains tax on the profit they make when they sell their investments.
Everyone has a capital gains tax deduction, meaning they only have to pay tax on any gains above the allowance limit.
This is currently £12,300, but it will drop to £6,000 for the 2023/2024 tax year, so those considering selling investments should consider doing so before the fee is reduced.
Anyone can also currently receive up to £2,000 a year in dividends without paying tax.
But this dividend tax allowance drops to £1,000 from April 6, meaning those with investments that pay dividends that aren’t in an Isa pack could be worth moving to an Isa pack.
Unaware: One in three of those earning more than £50,000 don’t know their current tax bracket, according to Barclays Wealth
Saving for a company pension or self-invested personal pension is another tax-efficient method of setting aside money for the future, as anyone can get tax relief on money deposited into a pension.
Basic rate taxpayers receive a 20 per cent tax credit, so for every 80 pence they pay on a pension, the government tops it up to £1.
Higher rate taxpayers with an additional rate can claim additional tax relief through their tax returns, with higher rate taxpayers receiving a 40 percent tax credit and higher rate taxpayers 45 percent.
It is therefore worthwhile to pay as much as possible into pension within the annual supplement.
Clare Francis, director of savings and investments at Barclays Wealth, said: ‘Millions of people will see their tax bills rise from next month, putting even more pressure on households at a time when money is already tight for many.
“While tax may seem complicated, there are a few simple steps you can take to ensure you’re taking advantage of the benefits available to each of us each year, which will help you pay less tax.
‘Things like using your Isa allowance and increasing your pension premium can all help and in the long term make a big difference in the tax you pay.’
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