THREE major tax rates are not changing today but it could still leave you £1,000s worse off.
The new tax year has begun and three major tax rates will remain at their previous level throughout the period.
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The tax year runs from April 6 to April 5 – not from January to December like a calendar year.
Thresholds for the basic and higher rate of income tax remain frozen, and hundreds of thousands of families could soon be forced into paying more tax.
This is because households could see their salaries rise to keep up with inflation, which stood at 10% in March, over the next few financial years.
Inflationary fuelled salary increases will also see more families worse off due to the frozen child benefit cap.
Rising interest rates which, on paper, rewards savers will also punish thousands more by pushing their interest earnings over the personal savings allowance.
This means more people could be forced into paying taxes on their savings.
Freezing thresholds is a form of stealth tax – and helps governments generate higher tax revenue in a way that isn’t as obvious as a threshold change.
We’ve listed all the 10 new rules which kick in today and how they’ll affect your finances over the next 12 months.
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Here’s everything you need to know about the three frozen tax thresholds and how they could leave hundreds of thousands of households worse off.
Income tax threshold – FROZEN
The only major change to tax bands is for people in the additional rate tax bracket.
The threshold for the 45% tax band has fallen from £150,000 to £125,140.
The additional rate change is expected to pull a quarter of a million more people into the top rate of taxation.
Meanwhile, the basic rate (20%) and the higher rate (40%) thresholds remain the same – but this is a stealth tax.
It means that over time more people will be pushed over the thresholds to pay more tax.
Estimates suggest that by 2027/28 a total of 1,130,000 people will be pushed into paying a higher tax rate, according to figures published by HMRC.
The increase of people pushed into paying higher tax rate in the year 2027/28 is a result of “fiscal drag”.
Fiscal drag happens when the income level at which taxes can be collected doesn’t increase at the same rate as inflation or income growth.
This can cause a larger amount of a person’s income to be subject to taxes and can also mean more people to fall into higher tax brackets ultimately meaning they pay more in tax.
Child benefit cap – FROZEN
In the Spring Budget, Chancellor Jeremy Hunt did not increase the earnings threshold where the benefit reduces or stops altogether.
It means that thousands more mums and dads will lose out on the cash – worth up to £1,133 a year for the first child and then £751 a year for each subsequent one.
Figures from the Institute for Fiscal Studies (IFS) suggest roughly 200,000 families will go over the £50,000 threshold in the 2023-24 tax year.
You have to pay the high income child benefit charge if you or your partner has an individual income over £50,000.
For every £100 above the threshold, parents see 1% knocked off their child benefit payments.
They lose it completely when one parent’s salary hits £60,000 a year.
That means hundreds of thousands of families will be dragged into paying back some of their child benefit.
This is another stealth tax – a form a tax collected in a way that isn’t obvious.
Even though the government doesn’t change the headline rate, you end up paying more money.
Personal savings allowance – FROZEN
During his Autumn Statement, the Chancellor froze the personal allowance and higher rate tax thresholds until April 2028.
People have had to pay tax on savings since 2016 when the personal savings allowance or PSA was first introduced.
It means that each year you get a £1,000 savings allowance, which is the amount you can earn in interest before you pay any tax.
For higher-rate taxpayers, the allowance is £500 a year instead.
But because interest rates are rising, banks are offering a higher rate of returns on savings accounts.
The Bank of England’s base rate last increased from 4% to 4.25% on March 23 in a bid to keep a lid on soaring inflation.
The Bank has hiked rates for eleven consecutive months since December 2021 when it was at a historic low of 0.1% and it could continue to do so to help bring down inflation which currently stands at 10.4%.
On the one hand, this is good news for savers because they’re getting more back, but it means that they’ll be more likely to have to pay more tax because they’ll breach the personal savings allowance.
