With tax thresholds frozen until 2031, millions more Britons are paying higher rates
The UK’s significant stealth tax raid is accelerating – and couples are squarely in the crosshairs. There are now 39.1m income taxpayers, an increase of 6.1m since tax thresholds were frozen in 2021/22, according to HMRC data.
The number of basic rate taxpayers has surged to 30.4m (up 3m), higher rate taxpayers to 7.08m (up 2.65m) and additional rate taxpayers to 1.23m (up 710,000). Over 8.7m taxpayers are above state pension age – a growth of 29% since the freeze. And more than a fifth of taxpayers now pay higher or additional rates.
With thresholds fixed until April 2031, the squeeze is set to worsen. However, couples who are willing to plan meticulously can protect thousands of pounds from the taxman.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says: “The frozen income tax thresholds have taken a horrible toll, so that more than a fifth of taxpayers now pay higher or additional rates. Between us, we’re paying billions more in tax than we did this time last year, and it’s only going to get worse, because those tax thresholds have been frozen until April 2031.
“It means the idea of generating a tax-free income has become even more attractive. Fortunately, there are a number of allowances and rules which mean you can take steps to protect yourself from a horrible tax bill.”
13 strategies for couples to fight back
1. Double personal allowances – £25,140 tax free.
Each Brits can earn up to £12,570 before they are liable for income tax. For couples, this equates to £25,140 tax free.
Be wary of the £100,000 trap: the allowance is reduced by £1 for every £2 earned above this threshold, resulting in an effective 60% tax rate between £100,000 and £125,140. Pension contributions can help lower taxable income.
2. Earn £7,500 tax free from a lodger.
Under the rent-a-room scheme, the first £7,500 earned from renting out a furnished room is tax free. The limit has remained unchanged since April 2016 – so higher rents could push landlords into needing to complete a tax return.
3. Make £1,000 from a side hustle – tax free.
The trading allowance permits you to earn £1,000 from hobbies or online selling without incurring tax. Selling personal belongings isn’t typically taxable unless a single item sells for more than £6,000.
4. Another £1,000 from property.
A separate £1,000 property allowance applies to certain rental income (excluding rent-a-room).
Savings: How couples can double up
5. Personal Savings Allowance.
Basic rate taxpayers can earn £1,000 interest tax free; higher rate taxpayers get £500. Additional rate taxpayers receive nothing.
A pair of basic rate taxpayers could protect £2,000 in interest between them.
6. Starting rate for savings – up to £5,000 extra.
If your non-savings income is below the personal allowance, you can earn up to £5,000 in savings interest tax-free – this is in addition to the personal savings allowance. In theory, a person could earn £12,570 in wages and £6,000 in savings interest without paying any tax. However, the allowance decreases by £1 for every £1 earned above the personal allowance.
7. Utilise your ISA allowances.
Each adult has the opportunity to invest £20,000 a year into an ISA, with any interest or returns being completely tax-free. For couples, this means they can protect £40,000 annually – a potent long-term safeguard.
8. Premium Bond prizes.
Regardless of whether it’s £25 or £1m, all winnings are tax-free.
Investments: The real benefits of ISAs
9. Tax-free income from stocks and shares ISAs.
Any dividend income, bond income and capital gains within an ISA are exempt from tax. Outside of an ISA, only the first £500 of dividends is tax-free.
The dividend allowance has decreased from £5,000 (2016) to £500 (2024). Dividend tax rates increased in April 2022 to 8.75% (basic), 33.75% (higher) and 39.35% (additional).
From April 2027, the basic rate will be 10.75% and the higher rate 35.75%. For couples seeking income, ISAs are becoming increasingly essential.
10. Lifetime ISA income at 60+.
Withdrawals from a Lifetime ISA from the age of 60 are tax-free. Couples who both have LISAs can each generate tax-free retirement income.
11. Dividend allowance outside ISAs.
The first £500 of dividends earned outside an ISA is tax-free – but no more.
Tax planning: The real power for couples
12. Share assets to double allowances.
Married couples and civil partners have the ability to transfer assets between them.
This allows for doubling up on:
- Personal allowances.
- ISA allowances.
- Dividend allowances.
- Savings allowances.
If one partner is a higher-rate taxpayer and the other a basic rate, shifting income-producing assets can significantly reduce the household’s tax bill.
13. Purchased life annuities.
When bought with non-pension funds, part of the income is treated as a return of capital – and is tax free. The interest component is taxable, but may fall within allowances.
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