Younger adults face increased tax rates
In the UK, the tax year 2023 sees a continuation of the income tax rates first announced by the Conservative government in 2021. Here's a breakdown of the rates and allowances:
- Basic rate taxpayers, those earning up to £50,270, will continue to pay 20% tax on their income.
- Higher-rate taxpayers, earning between £50,271 and £125,140, will pay 40% tax on their income.
- The additional rate of 45% applies to those earning over £125,140.
- There is a personal allowance of £12,570, meaning the first £12,570 of income is tax-free for everyone.
For those contributing to their pensions, the good news is that basic-rate taxpayers receive 20% tax relief on their contributions, and higher-rate taxpayers can claim 40% tax relief.
Research by Quilter predicts that by 2028, 3.6 million workers under 40 will fall into the higher income tax band, and an additional half a million will become additional rate taxpayers. This increase is largely due to the freeze on income tax bands, a move that was initially expected to create one million more higher rate taxpayers between 2021-2026.
However, there are ways to mitigate the impact of increased tax. Using the marriage allowance can reduce a household's income tax bill by up to £252 a year. Salary sacrifice, where employees give up part of their earnings for non-cash benefits like health insurance, a bike, a company car, or increased pension contributions, can also make a big difference to long-term wealth over a lifetime of working.
Alice Guy, head of pensions and savings at interactive investor, considers salary sacrifice as a great way to reduce tax burden with no extra cost. Increasing pension contributions can also help reduce taxable income.
It's important to note that the Labour government has not pledged to increase income tax. However, by freezing all the tax thresholds for seven years, the Conservative government found a stealthy way to increase income tax. The frozen tax bands will result in millions more people being dragged into increased income tax bands due to inflation and wage growth.
By 2028, a fifth of under-40s will become higher or additional rate income taxpayers. Employees can pay up to £60,000 into their pension each year, and understanding these changes can help individuals plan their finances more effectively.
