People are being warned they could end up paying more tax in 2023 once the new financial year begins on April 6. Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said frozen thresholds and cuts to tax breaks are among the pressures people should be aware of this year.
The personal finance analyst explained for most people, the “lion's share” of the rise will come from the freeze in income tax thresholds which could see some people paying more tax on their salary.
Ms Coles said: "The personal allowance - how much you can earn before paying tax - has been frozen at £12,570, and the higher rate threshold - the point at which you start paying 40 per cent - has stuck at £50,270 since April 2021. As incomes rise, employers are under pressure to raise salaries, so their staff can afford to live.”
She continued: “Salaries rising automatically increases the amount of tax we pay, but the frozen thresholds also mean that the more wages rise, the more people will cross the frozen thresholds to pay a higher rate of tax. The additional rate threshold hasn't moved from £150,000 since it was introduced in 2010, which already meant more people moving into the tax bracket through wage inflation.
"However, from April it will fall to £125,140. It means anyone earning between the old threshold and the new one will lose an average of £621 a year."
She continued: "Those on higher wages tend to have more wiggle room in their budgets, but rising prices have created headaches for top earners. Those with big mortgages will feel particular pain from higher mortgage rates too, so this additional tax blow is an unwelcome extra burden."
Ms Coles said that people could also end up paying more tax on profits and dividends. She warned: "Business owners who pay themselves with dividends out of profits will take a hit at a time where they're facing threats to their businesses from all angles - from runaway energy bills to rising prices and wage bills."
But it’s not all doom and gloom. Ms Coles also highlighted several ways in which people may be able to make their finances more tax-efficient, such as by making the most of tax-free Isa savings accounts, paying into pensions and making the most of the marriage allowance.
Explaining how the marriage allowance works, Ms Coles said: "If one spouse is a non-tax payer, and the other is a basic rate taxpayer, the marriage allowance lets the non-taxpayer give £1,260 of their personal allowance to their spouse in the current tax year."
Workers can also explore salary sacrifice options. Ms Coles said: "In some cases, the UK Government will let you give up a portion of your salary, and spend it on certain things free of tax. This includes pensions, childcare vouchers, bike-to-work schemes, and technology schemes. This won't boost your take-home pay, but will cut your tax bill."
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