MORE than four million low-income households are facing a stealth tax rise next year.
A total of 4.2million Brits will be pushed into paying income tax in 2024-25, according to the Centre for Economics and Business Research.
GettyMore than four million households are facing a stealth tax rise in the next year[/caption]
This is because the personal allowance threshold – the amount you can earn before paying tax – has been frozen until 2027/28.
The freeze is essentially a pay cut for millions of households, once you take into account rising costs and wages.
You pay no tax if you earn less than the personal allowance, which is currently set at £12,570.
You start paying tax on any earnings over this amount at a rate of 20%.
Tax thresholds usually rises regularly so that people can earn more and pocket the cash, rather than it going to the taxman.
But the frozen thresholds, stubbornly high inflation and rising wages, mean more people are pushed into paying tax, or paying more.
This is what is known as “fiscal drag” and a so-called stealth tax – although taxes are not higher, more people are dragged in to paying it.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “It’s the last thing people need at a time of runaway inflation, and things are only going to get worse.
“We’re still only very near the start of the income tax threshold freeze – which is set to last until 2028.
“It means things are set to get even worse over the next few years.
“We’re going to see a steady stream of taxpayers crossing thresholds and paying eye-watering levels of tax.”
Meanwhile, 2.5million people will be pushed in to paying the higher rate of income tax at 40%.
At the moment, the highest rate of tax is applied to anyone with an income between £50,271 to £125,140.
How to avoid paying too much tax
There are ways for keeping your tax under control.
You might want to consider a salary sacrifice scheme.
This is where the government will let you give up a portion of your salary and spend it on certain things free of tax – in some cases, national insurance for example.
It could include pensions, childcare vouchers and bike-to-work schemes.
You don’t pay tax on the portion of your wages that goes towards paying for these schemes, lowering the amount of income tax you pay overall.
Each salary sacrifice scheme is different and the benefits will vary depend on your salary and you should speak to your company’s HR department to find out more.
Contributing to your pension could be another way of bringing you back below the higher rate tax threshold.
When you pay into your pension, some of the money that would have been paid as tax goes towards your pot – and this reduces the amount of tax you pay.
Make sure to look into marriage allowance if you’re married.
Marriage allowance is available to couples who are married or in a civil partnership, where one person earns less than the personal allowance threshold of £12,750.
You can transfer £1,260 of your personal allowance to your partner, reducing their tax bill.
You cannot claim marriage allowance if you’re living together but you’re not married or in a civil partnership.
You can backdate your claim to include any tax year since April 5, 2019, that you were eligible for marriage allowance.
Your partner’s tax bill will be reduced depending on the personal allowance rate for the years you’re backdating.
To work out how much you will get you can use the government’s marriage allowance calculator.
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