| Data indicates that by 2031 an additional 4.8 million people could be paying higher rate tax | Moving into a higher tax band can have implications beyond Income Tax, affecting other allowances and benefits | A tax review can identify opportunities to improve tax efficiency and ensure your arrangements are effective |
A pay rise should be a welcome milestone. However, with Income Tax thresholds remaining frozen, increasing numbers of people are finding themselves drawn into higher rate tax bands without necessarily feeling significantly better off.
Data from the Office for Budget Responsibility (OBR) indicates that by 2031, an additional 4.8 million people could be paying higher rate tax compared with when the threshold freeze began in 2022. If your income has increased recently, it may be worth reviewing whether your financial planning remains as tax efficient as possible.
One of the most effective ways to manage a higher tax burden is through pension funding. Contributions made via salary sacrifice are deducted before tax, helping to reduce taxable income while boosting long-term retirement savings. With planned changes to salary sacrifice arrangements expected from April 2029, you may wish to review use of this benefit.
Higher rate taxpayers are entitled to additional pension tax relief, but it is not always applied automatically. In some cases, extra relief may need to be claimed through Self-Assessment or directly from HMRC.
Moving into a higher tax band can have implications beyond Income Tax alone. The Personal Savings Allowance falls from £1,000 to £500 for higher rate taxpayers, meaning more interest could become taxable outside ISA arrangements.
It may also affect eligibility for Marriage Allowance and increase exposure to the High Income Child Benefit Charge, potentially reducing valuable family benefits.
Tax rules are becoming increasingly complex, and small changes in income can have wider consequences than many people realise. A review of your position can help identify opportunities to improve tax efficiency and ensure your financial arrangements continue to work as effectively as possible.
It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored advice and is for guidance only. Some rules may vary in different parts of the UK.