Low earners are due to pay up to £401 more tax this year due to frozen thresholds, analysts have said.
This comes despite National Insurance (NI) cuts announced in the Chancellor’s Autumn Budget, which reduced the rate from 12 percent to 10 percent this weekend, giving low earners a tax break of £209.
Calculations by investing platform interactive investor found average earners (£32,000pa+) are due to pay £124 more tax next year, despite the £486 saving made from NI cuts.
However, there are ways people can keep more of their money for themselves.
As the cost-of-living crisis continues, Britons strapped for cash will be looking for any ways they can cut back or make some money.
As prices rise, wages also rise – however this can be cancelled out due to frozen tax thresholds.
Britons pay income tax on earnings at different levels. There is no tax to pay on earnings up to £12,570. But extra over this is charged at 20 percent – earnings between £12,571 and £50,270.
Earnings over that are taxed at a higher 40 percent rate or an additional 45 percent rate.
Despite rising inflation, the Government has announced these thresholds will be frozen until 2028. This means more people are being dragged into higher tax brackets even though they aren’t any better off. This is known as “fiscal drag”.
Douglas McWilliams, co-chairman of the Growth Commission, told Express.co.uk that the Chancellor would dampen growth and erode average earnings by a third over the coming years due to his decision to extend the freeze in his Autumn Statement on tax thresholds as millions of taxpayers end up being dragged into paying higher levels of tax.
“The effect of the freeze is to erode the real value of the allowances and bands in relation to average earnings by 34.7 percent from 2021-22 to 2027-28 on the Growth Commission’s forecasts for average earnings,” he said.
“We estimate that the rise in income tax receipts would be from 9.6 percent of GDP to 13.4 percent of GDP. The negative impact on GDP from this is to cut GDP (in the long term) by 1.3 percent.”
Mr McWilliams warned that the Chancellor had failed to do enough to soften the blow to people’s wallets from the now notorious hike in stealth taxes.
He said: “Although the cut in National Insurance announced in the Autumn Statement is welcome and undoes about half the damage from the frozen allowances and bands, it does not stop the trend of rising taxation damaging the economy.”
How to avoid fiscal drag
Alice Guy, head of pensions and savings at Interactive Investor explained that the fiscal drag is “a ruthless and silently effective tax policy and leads to us all feeling a lot poorer over time”.
High and middle earners will benefit slightly more from the NI cut than low earners, but everyone will still pay a lot more tax overall.
Putting more money in one’s pension is one way to reduce the tax burden if someone can afford it.
Ms Guy said: “Some employers will allow you to pay into a workplace pension through salary sacrifice, which allows employers to reduce employees’ salary and pay the equivalent amount as pension contributions. Basic-rate taxpayers get 20 percent pension tax relief, which turns an £80 contribution into £100.”
According to Interactive Investor, someone earning £30,000 a year could save £150 in NI each year by using salary sacrifice to pay into their pension.
She continued: “Using salary sacrifice to make pension contributions is a win-win for both employees and employers. It allows you to save on National Insurance as well as income tax, potentially saving up to 10 percent extra tax on pension contributions.
“And employers can save 13.8 percent employers’ National Insurance because the pension payment under a salary sacrifice arrangement isn’t officially counted as part of the employees’ pay.”
