Younger age group to face increased tax rates

Headline: Under-40s Face Increased Income Tax Burden, According to New Research

The Conservative government's decision to freeze income tax bands, announced in 2021, is set to significantly impact the tax status of millions of young workers. According to a recent study by Quilter, by 2028, a fifth of under-40s will become higher or additional rate income taxpayers.

The freeze on income tax bands has led to an increase in higher-rate taxpayers, as earnings that previously fell within lower tax brackets are now taxed at higher rates. For instance, if annual earnings exceed £125,140, one becomes an additional rate taxpayer, with income over that level taxed at 45%.

The basic income tax rate for earnings between the Personal Allowance and £50,270 is 20%. The Personal Allowance for most people is £12,570, meaning they can earn up to that amount each year tax-free. Earners over £100,000 gradually lose their Personal Allowance, with additional rate taxpayers getting no tax-free earnings allowance.

The higher rate tax band for earnings above £50,270 is taxed at 40%. However, higher-rate taxpayers can benefit from tax relief on their pension contributions. Increasing pension contributions can help reduce taxable income for higher-rate taxpayers, as they receive 40% tax relief on their pension contributions.

Salary sacrifice is another method that can help reduce taxable income. This involves giving up part of earnings to receive non-cash benefits such as health insurance, a bike, a company car, or increased pension contributions.

Inflation and wage growth are expected to drag millions more people into increased income tax bands. The extension of the frozen thresholds to the 2027-28 tax year is expected to more than quadruple the initial target of one million more higher rate taxpayers.

The Labour government has not pledged to increase income tax. The marriage allowance is another option for couples where one doesn't earn enough to exceed the Personal Allowance. This allows them to give up to 10% of their unused allowance to their partner to reduce their income tax bill.

The frozen income tax thresholds were initially introduced in the 2021-22 tax year until 2025-26. Critics argue that this allows the Conservative government to increase income tax stealthily.

As the tax year 2027-28 approaches, under-40s are encouraged to review their financial situations and consider strategies to minimise their tax liabilities.