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Chancellor Jeremy Hunt extended the freeze on the UK income tax allowance threshold meaning it now will remain in place until 2027/28. The Government appears to have made this decision to balance the books and recoup £55billion amid the cost of living crisis.
Families and high earners face eye-watering tax rates leaving some with just a few pounds from a £1,000 pay increase, new analysis from AJ Bell shows.
The complicated mesh of thresholds and allowances means some workers getting a £1,000 pay rise will lose almost all of it through tapered benefits or cliff-edge allowances, while those who have student loans will be hit with extra deductions on top.
In the most extreme cases some people will be left with just a few pounds from a £1,000 pay increase.
Experts have suggested people will need to divert money into their pensions to avoid a tax penalty bigger than the pay increase.
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Some of the worst affected are higher earning graduates.
A graduate with a student loan receiving a pay increase next year pushing them into the additional rate tax bracket, which will be lowered to £125,140, could be left with just £6.50 in take home pay after a £1,000 pay increase – a 99 percent tax rate.
This also takes into account losing the Personal Savings Allowance – the tax break on savings interest.
Parents seeing Child Benefit tapered because they earn over £50,000, or losing Tax-Free Childcare completely once their earnings exceed £100,000, will be hit by sky-high effective marginal tax rates.
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The “most popular option” is using salary sacrifice to put money in their pension, meaning that putting a small amount extra in a pension could bring someone back under the limits.
It means that people need to be able to afford to put the money in their pension, but once they’ve taken into account the high marginal tax rates, it could cost them very little.
Ms Suter added: “The UK’s tax system is crying out for an overhaul and simplification, so that workers can understand exactly what they’ll be taking home and where a pay rise will actually mean they end up substantially better off.
“Sadly, the recent scrapping of the Office for Tax Simplification seems to signal that this isn’t a top priority for the current Government.”
A Government spokesperson said: “Tax simplification is a priority for this government, which is why instead of a separate arms-length body to oversee it, we will embed it into our institutions so it is at the core of all tax policy making.
“We’re committed to protecting those on low incomes which is why have steadily increased the tax-free personal allowance since 2010 to make it one of the most generous in the world, where 30 percent of people have been taken out of paying income tax altogether, and over 80 percent of taxpayers pay the basic rate – something only made possible by responsible management of the public finances.”
