The “vast majority” of pensioners will miss out on the government’s plans for an income tax exemption from next year, new research suggests.

In the 2025 Budget, chancellor Rachel Reeves announced pensioners whose sole income is the basic or new state pension would not need to pay the “small amounts” of tax via simple assessment if the state pension exceeds the tax-free personal allowance from 2027/28.

It was positioned as easing the “administrative burden” but the government has since clarified pensioners in this situation won’t have to pay income tax at all from 2027/28, if their pension exceeds the personal allowance from that point

It came as the chancellor announced the allowance would be frozen at £12,570 until at least April 2031. The threshold last increased in April 2021.

This proposed waiver is intended to stop pensioners solely reliant on the state pension (with no other taxable income or pension ‘increments’) having to pay tax on the payment.

Only around 5.5 million pensioners – or just one in 18 – will be eligible for the concessions, former pensions minister Sir Steve Webb, a partner at pensions consultancy LCP, said.

The full new state pension of £12,548 sits just £22 below the tax threshold and the government expects the rate from next April to rise above the threshold for the first time, given high inflation, wage growth and the triple lock.

The old state pension, by comparison, is much lower than the threshold and even with expected rises looks set to remain so, meaning people solely on the old state pension would not have to pay income tax anyway.

How will the government proposals affect different groups of pensioners?

Webb has called the disparity of treatment between groups of pensioners under the proposed scheme “bizarre”, as LCP’s research flags how few people will actually benefit from the move.

The firm’s new report, ‘The tax treatment of state pensioners’ highlights that anyone who reached pension age before 2016 – when the flat-rate, single tier system replaced the two-tier system of basic plus additional state pension (SERPS or S2P) – will not benefit.

LCP said based on current data for 2025/26, none of the 8.1 million pensioners in the old state pension system will qualify for the exemption. This is either because they are only receiving the old state pension, which at £9,614 a year currently falls below the income tax threshold anyway or – in the case of 6.5 million of them – because they also receive additional state pension (either under SERPS or state second pension) and therefore are receiving a pension “increment” on top of the basic payment.

Similarly, most of the five million people on the new state pension (anyone hitting retirement age after 2016) may also miss out.

The firm calculated that 290,000 are not based in the UK; one million receive pension ‘increments’ or protected payments; 1.1 million have a new state pension rate that will remain below the income tax threshold in the next three years; and 1.8 million have other taxable income, such as private pensions or investment income so they are not solely dependent on the state.

Using the Office for Budget Responsibility (OBR) outlook, LCP calculated the estimated tax levels due over the remaining tax years (under this Parliament), assuming the state pension will rise by 3.7% in April 2027 and then by at least 2.5% in April 2028 and 2029.

Webb said the outlook presents some potential “cliff edges”, pushing people with even £1 of other income into a very different tax position than those without.

He said: “Someone who qualifies for this tax break in 2027/28 does not have to pay tax but someone who just misses out because of £1 of other income… will have to pay income tax not just on the £1 but also on the income tax on their state pension – a further £88. Over time this cliff edge will increase, to £153 in 2028/29 to £220 in 2029/30.”

The table below shows how much income tax would be payable without the proposed concession, for someone solely dependent on the new state pension.

Source: LCP, calculations based on the OBR’s March 2026 Economic and Fiscal Outlook for April 2027/28, then assumes a minimum increase of 2.5%.

Webb gives the example of someone with a small pension pot under auto-enrolment who cashes it out at retirement, therefore taking some taxable income and no longer being classed as solely dependent on the state.

Speaking to MoneyWeek, he said the government’s reference to the old basic state pension might be perceived as an even-handed benefit, whereas it was more of a red herring.

He said: “Freezing tax thresholds for a year or two is manageable. Freezing them for nearly a decade creates more unintended consequences by making a structural shift to the tax system in a ‘back-door’ fashion that isn’t fully thought through.

“Instead, we need a fundamental ‘root-and-branch’ review of the system – why we have tax thresholds in the first place, whether we should have the same rates for pensioners as for working people and so on.”

What are some alternative ideas to the new tax concession for pensioners soley getting the state pension?

He said he appreciates this is being presented as a short-term fix to the end of the current Parliament and is suggesting two potentially ‘cleaner’ solutions.

One option, albeit more expensive than the current proposal, is a broad-brush increase in the tax allowance for all pensioners.

Webb added: “But this would come at a considerable cost because it would also benefit the eight-million-plus pensioners already paying tax. This would not be a targeted solution to the problem.”

He also suggested writing off all small tax bills for pensioners, which would be a cheaper, more targeted option focused on the group of most concern. It would also not discriminate between those on the old and new tax systems.

“But it would still be only a temporary fix and would still leave any future government with a headache as to how to tackle the growing cost of such a measure.”

Webb added that the government already has a line at which it writes off small tax bills but it’s just less well-documented.

“I'm pretty sure HMRC doesn’t send out self assessment demand letters for amounts of £4. It’s taxpayers’ money and why shouldn’t that be paid? We know they clearly have a line already, all I'm saying is just make it bigger.”

LCP also warns the policy presents potential problems for the next government as any write-offs get more expensive over time.

Webb said: “By 2029/30 it looks as though the pensioners who do benefit will have over £200 per year in income tax written off. If the policy continues into the next Parliament it will get more and more expensive with every passing year, but will be hard to switch off – a bit like the triple lock.”

A HM Treasury spokesperson said: “Pensioners whose only income is the basic or new state pension, without any increments, will not have to pay income tax over this Parliament. “

It was better news on tax receipts than we are used to. After several months of the borrowing figures rising higher and higher, and with the gilts market turning more and more nervous, January's data suddenly looked a lot better than had been expected.

The first month of the year is always a bumper four weeks for HMRC, as self-assessed tax falls due, as so does capital gains tax (CGT). Even so, January 2026 was better than usual.

The government racked up a surplus of slightly over £30 billion last month, more than double the £15 billion in January 2025.

That doesn’t mean Britain is suddenly in the black. We will still end the year borrowing more than £100 billion to keep the country afloat.

Still, it does mean that chancellor Rachel Reeves has a little more money to play with and the gilts market will be reassured. The IMF won’t be flying into Heathrow any time soon.

And yet it is indicative of the way this government thinks that influential figures such as pensions minister Torsten Bell believe that simply squeezing more and more tax revenue out of a stagnant economy is a measure of success.

Tax receipts are not growing because the economy is growing, because earnings and profits are surging, or because retail sales are growing. It is simply that the state is taking more and more of the pie, leaving less for everyone else.

That becomes painfully clear as soon as you start to drill down into the figures. The biggest increase was in receipts from CGT, with £17 billion collected from the sale of assets, a 69% year-on-year increase, and £1.1 billion more than the Office for Budget Responsibility forecast.

Employers’ national insurance contributed a lot more than last year, as did the self-employed through self-assessment, and frozen thresholds mean the yield from income tax has been heading up. Add them all up, and it is not hard to see why revenues are increasing.

Labour backbenchers will no doubt be thinking of ways they can spend the money. Train drivers and junior doctors could be awarded another pay rise. Welfare benefits can be made more generous. The government can give away more free stuff. Ed Miliband can buy some state-of-the-art windmills.

When it comes to spending money, Labour politicians need little encouragement. It is the one thing they are good at and it will be harder for Reeves to tell them the cash is not available.

There are two big problems, however. To start with, the huge rise in CGT receipts is unlikely to be sustained. With all the speculation about an increase in the rate in the last Budget, investors rushed to sell assets, landlords to get rid of their properties, and entrepreneurs to offload their companies. But you can only sell assets once and the total is certain to fall sharply next year.

It is hardly encouraging for growth that investors are ditching British shares and companies at a record rate, even if it does generate a bit more tax revenue.

The state is taking too much in tax receipts

More importantly, it shows the state is taking too much tax.

The huge tax rises Reeves has imposed are crushing the life out of the economy. The big rise in employers’ NI might raise cash, but it has also destroyed jobs, sending unemployment above 5%, and vacancies to record lows.

Frozen income tax thresholds are destroying incentives, with marginal rates of 60% or more, once student loans and tapered reliefs are taken into account.

It’s hardly surprising if people choose to work less and turn down promotions rather than pay that much.

Likewise, the self-employed are stumping up more tax for now. But there are already worrying signs that many of them are working less or taking early retirement instead of paying punitive rates of tax – the number of people working for themselves has already fallen from a peak of more than five million at the start of the decade to 4.3 million now.

The tax haul tells us the chancellor has pushed taxes too high and she should use the Spring Statement to hand some of the cash back.

A £30 billion round of tax cuts paid for with the January surplus would give the economy a massive boost – and repair some of the damage of the past 18 months.

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High net worth and experienced investors looking for tax breaks and keen to do more than just add to their ISA or pension will want to have a keen eye on weeks leading up to the end of the 2025/26 tax year.

Certain government-backed initiatives – namely Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS), and venture capital trusts (VCTs) – have use-it-or-lose-it allowances interested investors will need to act fast to take advantage of, well in advance of the official end of the current tax year on 5 April.

EIS, SEIS and VCTs are designed to encourage investment in early stage companies using the carrot of income tax savings. These are also much riskier products, suitable only for high net worth individuals who can afford to lose out if the companies fold (as young companies are more likely to do) and experienced investors who understand those risks.

With that in mind, for interested investors the deadline for submitting applications to invest in EIS, SEIS and VCTs is much sooner than 5 April. Also changes to the tax incentives for VCTs from April mean that investors need to act now to benefit.

Susannah Streeter, chief investment strategist at Wealth Club said: "High net worth investors with multiple sources of income, or complex tax arrangements, often find that planning for the end of tax year deadlines is a headache – and this year it risks becoming a migraine.

“There were yet more tweaks to taxes at the 2025 Budget, making affairs even more complicated at a time when tax rates remain at the highest levels in peacetime. So, investors wanting to reduce their tax bills should act now rather than leaving everything to the last minute.”

End of tax year checklist for experienced investors

Up to six weeks before end of tax year

VCT investors will find that, while the deadlines to invest span the last two weeks of the tax year – with some VCTs using the earliest deadline to invest on 23 March and with the last to close its books at noon on 2 April – the real deadlines will be earlier.

This is down to offer capacity, meaning the maximum amount of money a specific VCT is looking to raise from investors during a new share offer. The most popular VCT offers are likely to be fully subscribed before their deadlines are met and are already nearing capacity, according to Streeter. For example:

• Albion VCTs (87% full)
• Northern VCTs (94% full)
• Molten Ventures VCT (93% full)

“With VCT income tax relief due to drop to 20% from 2026/27, investors whose shares are allotted in the current tax year can still benefit from 30% income tax relief. This means there is a real incentive to do a VCT now rather than waiting till the next tax year,” said Streeter.

You can invest up to £200,000 per tax year into a VCT.

Five weeks before end of tax year

Investors seeking to invest in SEIS funds have only have until 27 February to invest in funds deploying capital in the 2025/26 tax year, including, for example:

• Fuel Ventures SEIS Fund (27 Feb)
• SFC Angel Fund SEIS (27 Feb)

“That said, investors whose funds are deployed in 2026/27 may still use the ‘carry back’ option to apply their SEIS income tax relief to 2025/26,” Streeter pointed out.

Carry back allows investors to treat shares acquired in the current tax year as if they were bought in the previous tax year. This enables you to claim income tax relief against the previous year’s tax bill.

When you invest via SEIS you receive up to 50% income tax relief. You can invest up to £200,000 into SEIS each tax year.

Two weeks before end of tax year

“Investors in EIS funds will find some have already closed for the 2025/26 tax year, but there are a few remaining open with the latest deadline on 27 March,” said Streeter. These include:

• Fuel Ventures Follow-on EIS Fund (27 Mar)
• Guinness EIS (6 Mar)
• Haatch EIS Fund (6 Mar)

Like SEIS investors, EIS investors whose funds are deployed in 2026/27 may still use the ‘carry back’ option to apply their EIS income tax relief to 2025/26.

When you invest in EIS you receive income tax relief of up to 30%. You can invest up to £1 million a year or £2 million if the company is “knowledge intensive”.

One week before end of tax year

Investors in Knowledge Intensive EIS funds will find that the deadlines range from 30 March up to 3 April at noon. These funds, from managers including Parkwalk and Molten Ventures, provide investors with a single EIS certificate dated in 2025/26 once they have deployed 90% of their capital.

Deadlines in the last week

ISAs

If the higher risk EIS, SEIS and VCTs are not for you, you can still put up to £20,000 in ISAs this tax year right up until a minute before midnight and all income, interest or capital gains are tax-free. “You can also add up to £9,000 into a Junior ISA up to 11.30pm with providers by debit card, but if completing a bank transfer this needs to be done by 11.59pm on 4th April,” said Streeter.

Pensions

The annual allowance for adding money in your self-invested personal pension (SIPP) is £60,000 although that amount is restricted to as little as £10,000 for high earners. Investors can add up to this amount, or the up to their annual income each year, whichever is the lower. “Some providers will take payments by debit cards into pensions up to 30 minutes before midnight on 5 April but bank transfers may be limited to before 12pm (noon) on that day,” Streeter said.

Frozen tax thresholds have increased the number of Brits paying income tax at the same time as squeezing the tax-free allowances that let people make an income without paying a penny to HMRC. But the tax system can still be made to work to your advantage, if you know how to play it.

An estimated 39.1 million people now pay income tax, according to HMRC data. This is an increase of 6.1 million from when income tax thresholds were frozen in the 2021/22 tax year, almost four years ago – an effect known as fiscal drag.

Basic rate taxpayers account for the vast majority, an estimated 30.4 million people, which is a rise of around 3 million since the freeze.

Higher rate taxpayers are up by 2.65 million to 7.08 million, and additional rate taxpayers make up 1.23 million of the total, an increase of 710,000.

Thanks to the state pension triple lock – which has seen the state pension increase every year since 2011 by inflation, average earnings or 2.5%, whichever is higher – 8.7m taxpayers are over state pension age, up 29% since the freeze.

Income tax thresholds will remain frozen until April 2031. Originally set to end in 2028, the freeze was extended by the government in the 2025 Autumn Budget to raise funds. Good news for the Treasury, not so good for personal incomes.

Yet there are still a few ways to legally generate an income free of tax, if you are willing to be flexible about where that income comes from.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “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.”

How to generate tax-free income every year

1. Keep up to £12,570

The personal allowance – the first £12,570 of taxable income per person per year – is tax-free. If you earn less than this, you won’t pay a penny of income tax.

The personal allowance is reduced by £1 for every £2 of taxable income above £100,000, which is why earnings between £100,000 and £125,140 are taxed at an effective 60% tax rate.

That’s one reason why people who make more than £100,000 may consider making additional pension contributions to cut their taxable income and so keep more of their personal allowance.

2. Rent a room to a lodger and keep up to £7,500

If you rent a furnished room in your home to a lodger, the first £7,500 of rent each year is tax-free under the rent-a-room scheme. This limit hasn’t risen for a decade, however, and if you go over it you’ll need to file a self-assessment tax return.

3. Rent out land or property for up to £1,000

This could be from a property business, but it doesn’t count for renting out a room in your own property that falls under the rent-a-room scheme.

4. Side hustle earnings are tax-free up to £1,000

If you make a modest income from a side hustle or hobby, such as selling items you have made on Ebay, Etsy or Vinted, you can keep what you make without paying income tax up to £1,000. This is known as the ‘trading allowance’. Cash from getting rid of your old belongings isn’t likely to be taxable unless any individual item is worth more than £6,000. You can check if your additional income is taxable using HMRC’s tool.

5. Make your savings work hard and keep up to £1,000

Stick your cash in some of the best regular savings accounts or accounts with the best savings rates for lump sums and don’t worry about paying tax on the interest up to £1,000 if you’re a basic rate taxpayer and up to £500 for higher rate taxpayers. Additional rate taxpayers don’t have a personal savings allowance.

6. Low earners get an extra savings boost

If you don’t earn much but have a healthy amount in savings you could be entitled to an extra tax-free income. Earn less than the personal allowance of £12,570 from wages and pensions, and you get the starting rate for savings. This means the first £5,000 of interest on your savings is tax-free. You also get the full £1,000 personal savings allowance on top of that.

So in total you can make up to £12,570 from wages, and £6,000 in savings interest without paying any tax. However, for every £1 of non-savings income over your personal allowance, you lose £1 of your starting savings allowance, so if you earn £17,570 you lose the entire allowance altogether.

7. Premium Bond prizes are tax-free

Whether it’s £25 or £1 million, Premium Bond prizes are tax-free.

8. Keep all the interest on savings in a cash ISA

Savers can put up to £20,000 into a cash ISA in the current tax year and interest is completely tax-free. The allowance remains the same in the coming tax year, before dropping to £12,000 for people under the age of 65. And all withdrawals are tax-free. Be sure to shop around to get the best cash ISA for you.

9. Income from stocks and shares ISAs yours to keep

All income your investments make inside a stocks and shares ISA – bond income or dividend income, for example – is free of any tax. You can also withdraw all the money without paying tax on it. When you reach the life stage where you want to draw an income from your assets, having ISAs in the mix alongside taxed income, like pensions, can really keep your tax bill down.

10. Income withdrawn from a Lifetime ISA at age 60 or over is tax-free

Any money withdrawn from a Lifetime ISA (LISA) is tax-free – as long as you stick to the rules. The LISA is dual purpose; it can be used to build a deposit to buy a first home (in which case the cash will go straight into that at the point of purchase) or save for retirement, with access from age 60. With the retirement option, all withdrawals are tax-free, giving you another tax-friendly income stream. But take the money out under any other circumstances and you’ll pay a penalty.

11. Enjoy your £500 dividend allowance

If you have investments outside an ISA, the first £500 of dividend income is free of tax in the current tax year. This allowance has dropped dramatically since being introduced in 2016 and dividend tax rates have increased during that time too, making ISAs even more valuable for those using dividends to boost their income.

12. Make use of double couple allowances

There are financial benefits to being married. You can share assets between you and double the amount of money you can make before the taxman takes a slice. For example, you can share income-producing assets with your spouse, so you can both take advantage of your personal allowance, dividend allowance and ISA allowance. Or in the case of capital gains tax, if you sell an asset that you hold jointly, you can effectively double the potential tax-free gain you make on it.

13. Purchased life annuities can generate a tax-free income too

These are designed to provide a guaranteed income for life or over a fixed term, in exchange for a lump sum that’s not from a pension. Part of the income paid is deemed to be a return of your original investment and therefore is tax-free. The interest element of the income is taxable, but no tax will have to be paid if it falls within the personal allowance or personal savings allowance.

Businesses could face paying between 5% and 10% more for an accountant as a result of a surge in demand due to the government’s Making Tax Digital (MTD) rules, which will begin being rolled out from this April, according to a survey.

More than 860,000 sole traders and landlords – those earning more than £50,000 from self-employment and property – need to start using digital income tax reporting from 6 April and are being urged to act now with less than two months left to prepare.

Of these, around 212,500 UK businesses currently operate without an accountant for filing their self-assessment tax return, according to HMRC figures.

These ‘unrepresented’ businesses risk being hit with sharply higher costs as Making Tax Digital rolls out, analysis by tax software company TaxCalc suggested.

A capacity crunch could leave businesses that are seeking to hire an accountant at the last-minute paying 5%-10% higher fees in the lead up to April, according to the findings of TaxCalc’s latest survey of 215 accountancy professionals.

Estimates suggested these unrepresented businesses could collectively face tens of millions in additional annual accountancy fees if they engage late – driven not by the Making Tax Digital rules themselves, but by a rush of demand across the accountancy industry.

“Scaled across the UK’s 212,500 unrepresented businesses, this could equate to tens of millions in additional accountancy costs annually.”

How much could Making Tax Digital cost me?

Nearly half (47%) of accountants say they plan to increase prices for MTD clients, according to the TaxCalc survey.

For a typical small business currently paying around £1,500 per year in accountancy fees, a relatively modest 10% increase would add around £150 annually.

“However, for unrepresented businesses that currently pay nothing for accountancy support, engaging an accountant late to meet MTD deadlines could mean jumping from £0 to a much higher-priced service based on our survey findings,” said Andy North, chief customer officer at TaxCalc, “as firms pass on the extra time, capacity and onboarding costs associated with last-minute MTD preparation”.

“Scaled across the UK’s 212,500 unrepresented businesses, this could equate to tens of millions in additional accountancy costs annually.”

Some parts of the accountancy sector are already reporting being stretched. The TaxCalc survey found almost half (48%) of accountancy professionals say they have more clients than they can manage, while ‘too much work’ is cited as the number one cause of stress by 36% of firms.

“Businesses that leave MTD preparation until the last minute may struggle to find an accountant willing or available to take them on and, as a result, are far more likely to face higher fees, particularly when firms are asked to onboard them at short notice,” said North.

What are the penalties for Making Tax Digital?

Penalties for failing to meet the requirements of Making Tax Digital are paused during the first year, but any missed quarterly submission deadlines from April 2027 onwards will result in businesses accruing penalty points.

Once the penalty threshold is reached, a £200 fine is issued, with a further £200 charge for each subsequent missed deadline until sustained compliance is achieved.

More demand for accountants from April 2027

Making Tax Digital is being rolled out in stages. Looking ahead, when the Making Tax Digital business income threshold falls from £50,000 to £30,000 in April 2027, the current proportion of unrepresented businesses (25%) is likely to rise, as more landlords, smaller businesses and sole traders enter the mix.

North said: “This is expected to trigger a much larger wave of last-minute demand for accountancy services throughout 2026 and into 2027, placing sustained pressure on firms and driving costs even higher for businesses that delay engagement.”

Top tips for businesses ahead of Making Tax Digital

1. Treat April as the start – not the deadline

While Making Tax Digital officially begins in April, the first deadline for submissions isn’t until the end of June. But it makes sense for businesses to start keeping digital records from day one. Doing so helps avoid a last-minute rush, reduces stress, and makes that first quarter far easier to manage.

And although HMRC fines won’t be issued until April 2027, disorganised records in the lead-up significantly increase the risk of avoidable penalties.

2. Build habits, not spreadsheets

“MTD is really about behaviour change – updating records little and often, weekly or monthly, is far easier than trying to catch up once a quarter,” said North. “Businesses that build good habits early will find MTD far less disruptive.”

3. Penalties and fines will add up faster than businesses realise

While fines shouldn’t be issued until April 2027, building the habit of meeting all quarterly deadlines now is crucial. Missing four updates would take you straight to a fine once penalties are switched on.

4. Don’t assume quarterly figures can be ‘fudged’

While there’s no requirement for quarterly figures to be perfectly accurate, they are expected to be a reasonable reflection of what’s happening in the business.

“Deliberately filing zeros or clearly wrong numbers just to meet a deadline goes against the spirit of Making Tax Digital, which is designed to encourage regular, up-to-date record-keeping,” said North.

Quarterly updates are later compared with the final tax return, so obvious discrepancies can raise questions and lead to additional scrutiny. It effectively raises a flag to HMRC that you're probably not maintaining digital records, and could well trigger an investigation.

In practice, filing something broadly accurate will be far safer than submitting figures that don’t reflect reality.

5. Expect your accountancy firm pricing to change

Quarterly reporting means more work, whether you manage it yourself or use an accountant. Businesses should expect accountancy fees to change and budget accordingly, rather than being surprised later in the year.

6. Remember this is only the first wave

North said: “The current £50,000 income threshold is relatively high. From next year, Making Tax Digital will extend to businesses earning £30,000 or more, likely including more landlords with one property, or sole traders. Even if you’re not affected now, it’s worth preparing early.”

7. You can still file yourself – with compliant software

Some businesses entering Making Tax Digital have never used an accountant and may want to continue filing themselves. That’s fine – but you will still need MTD-compatible software to submit your data digitally.

Taxpayers in the London borough of Wandsworth paid more income tax than those in Leeds and Birmingham combined in 2022/23, according to new HMRC figures that lay bare the stark differences in tax take across the UK.

Residents of Wandsworth paid £4.26 billion in income tax that year. This was more than both Leeds and Birmingham, which together paid £4.23 billion.

Taxpayers in the London borough of Hackney, who paid £1.54 billion in income tax in 2022/23, contributed more income tax than the whole of Scotland’s second city Glasgow, where residents paid £1.35 billion.

Overall, London and the South East contributed 45% of the UK’s total income tax bill of £240.7 billion in 2022/23, according to analysis of HMRC figures by accountancy firm UHY Hacker Young.

The capital on its own accounted for a quarter of all income tax paid (26.5%).

According to UHY Hacker Young’s research, all top 20 areas in the UK for the highest tax per capita are in London or the South East, in part due to frozen tax thresholds and fiscal drag.

Neela Chuahan, partner at UHY Hacker Young, said: “London and the South East now account for almost half of the UK’s entire income tax take. Obviously, that reflects the sheer concentration of high earners in the South East but it also reflects years of tax policy geared towards shifting more of the tax burden onto higher earners.”

Source: UHY Hacker Young based on HMRC data

A decade of income tax rises

Over the past ten years since April 2016, London’s income tax contributions have jumped 80.7% from £35.3 billion to £63.8 billion. This compares with a 48.4% increase for the rest of the UK, the analysis showed.

Because London and the South East are home to a disproportionate number of high earners paying tax at the 45% rate, the areas consistently contribute a larger share of income tax than other parts of the country.

Increasing numbers of taxpayers in the capital and the South East have seen their tax bills rise as the threshold for the 45% additional rate tax was lowered from £150,000 to £125,140 in April 2023.

Around 232,000 would pay the additional rate of tax who would not have done so had this threshold been maintained at £150,000, according to government estimates at the time.

For those with income between £125,140 and £150,000, the average cash loss was £621 in 2023 to 2024. For those with income above £150,000 the average cash loss was £1,256.

At the same time, personal allowances and higher-rate thresholds have been frozen since April 2021, dragging more and more people into higher tax bands as incomes increase, a process known as fiscal drag.

Chauhan added: “Freezing allowances and lowering the additional-rate threshold has pulled ever more taxpayers into higher bands, driving a sharp rise in revenues from London in particular – up more than 80% over the past decade.”

“While this underlines how dependent the Exchequer has become on London and the South East, it also raises concerns about the long-term competitiveness of the UK tax system and the risk that persistently higher tax burdens could push some high earners to relocate abroad or reduce their economic activity,” she said.

Source: UHY Hacker Young based on HMRC data

Ahead of the self-assessment tax return deadline, taxpayers are being urged to double check their paperwork after more than two million Brits overpaid an estimated £8.9 billion in income tax in 2024/25.

The self-assessment tax return deadline is 31 January each year. That is also the date taxpayers who pay their tax via self-assessment have to make their first payment.

However, HMRC also operates a ‘payment on account’ system when it comes to filing self-assessment returns. Payments on account are payments towards your next tax bill (including Class 4 National Insurance if you’re self-employed).

They help spread the cost of your tax by making payments in two instalments. Each payment is half of the tax you owed last year. The payments are due by midnight on 31 January and 31 July.

But the payment on account system used for self-assessment returns causes millions of people to overpay, according to accountants UHY Hacker Young.

This is because it requires advance instalments based on your previous year’s tax bill – any dip in current earnings leads to a significant overpayment of tax, as this tax was based on last year’s earnings.

For example, if your 2024/25 tax bill was £4,000, you'd pay £4,000 (for 2024/25) plus £2,000 (first payment on account for 2025/26) by 31 Jan 2026. Then £2,000 (second payment on account for 2025/26) by 31 July 2026. And then your next year's bill. This January’s tax return deadline is for the 2024/25 tax year.

Neela Chauhan, partner at UHY Hacker Young, said: “Self-assessment is supposed to ensure people pay the right amount of tax, but for millions it means they are being overtaxed by billions of pounds.”

Am I overpaying tax?

Around 2.6 million people are estimated to have overpaid income tax through the self-assessment system, according to data provided by HMRC to UHY Hacker Young under the Freedom of Information Act. Many are likely unaware they are owed money, the accountancy firm said.

Overpayments made through self-assessment forms are not automatically corrected by HMRC. Taxpayers must identify the error themselves and formally request a refund.

Another reason for income tax overpayments can simply be mistakes made by people filling out the forms, UHY Hacker Young said. Mistakes could be as simple as filling in the wrong salary or not claiming all valid business deductions, like travel or supplies, meaning you pay tax on profits that aren't yours.

UHY Hacker Young is urging people to ensure they take extra care when filling out self-assessment forms and seek professional advice if they are unsure how to do it correctly.

Chauhan said: "Self-assessment taxpayers must check whether they have paid the correct amount. Refunds are not automatic and HMRC will not proactively tell you that you’ve paid too much."

How to claim a tax refund

You may be able to claim a tax refund (rebate) if you’ve paid too much tax. However, you may not get a refund if you have tax due in the next 45 days (for example for a payment on account). Instead, the money will be deducted from the tax you owe.

If you submitted your self-assessment return online, sign in to your online account and check if you completed the section: ‘if you have paid too much tax’. Check the same section if you sent a paper return.

If you completed the section, you’ll usually get a refund automatically. If not, you’ll need to claim a refund through your online account. If you don’t have one, either set up an online account or contact HMRC.

If you’re due a refund, HMRC’s official guidance is you’ll usually get it within two weeks of when you sent your return online or the date on your tax calculation letter (SA302), if you sent a paper return.

However HMRC backlogs mean reclaiming overpaid tax can be slow and frustrating. In some cases taxpayers can wait as long as 18 to 24 months to receive their money, said UHY Hacker Young.

The firm urges anyone completing a self-assessment return to review income assumptions carefully and act quickly, where overpayments are identified.

“If you don’t check your return carefully and follow up, you may never see that money again,” said Chauhan. “Any overpaid tax is essentially a low interest loan to HMRC so should be chased up as quickly as possible.”

Remember, however, HMRC does not send details of tax refunds by email. You can report suspicious emails to them.

Taxpayers have won more than 62% of appeals against automated fines from HMRC according to the latest data. Experts have said taxpayers who do not fight automatic penalties are potentially forking out hundreds of pounds unnecessarily.

HMRC’s most recent performance data showed the taxman won just 37.8% of the appeals people lodged against the automatic penalties they received for the late filing of returns and payment of tax.

There were 32,258 appeals against automated penalties from the taxman lodged in the six months between 31 March and 30 September 2025. Of these the taxpayer won 20,076 appeals.

With the self-assessment tax return filing deadline looming less than 10 days away on 31 January, HMRC is ramping up pressure on taxpayers to pay now.

Its latest communication to taxpayers signed up for self-assessment warned: “Do you still need to pay your self-assessment tax bill? If so, you must make a payment by 31‌‌‌ January‌‌‌ 2026 – or you may risk having to pay a penalty.”

We look at how to file a self-assessment tax return in a separate article.

However, accountancy firm UHY Hacker Young said: “The fact taxpayers win so many cases means that it's worth people appealing any automated fines they receive unless they feel they are in the wrong. If they do not, they are unnecessarily giving extra money to the taxman.”

Why does HMRC issue fines?

HMRC issues an automatic fine of £100 whenever someone files a self-assessment tax return late. Additional penalties are charged the longer the delay goes on.

Furthermore, penalties for the late payment of tax start at 5% of the unpaid amounts and are issued at 30 days late, then at six and 12 months. HMRC also charges interest on late payments.

The taxman also issues automatic fines when either VAT and company tax returns are not filed or not paid on time. HMRC may also issue a penalty if you send an inaccurate return or fail to keep adequate records.

Neela Chuahan, partner at UHY Hacker Young, said it is important for people to challenge the automated fines levied by HMRC to ensure that any penalties issued are fair and accurate.

HMRC’s systems can trigger penalties automatically, even when people have valid reasons for missing deadlines.

Chuahan said: “When you appeal you have the opportunity to provide evidence and argue your case. Given HMRC’s success rate, you are more likely than not to win an appeal against the taxman and overturn an automatic penalty.”.

HMRC will waive an automated penalty if someone has what it believes to be a “reasonable excuse”.

These include suffering a computer failure while preparing an online return, issues with the HMRC website, postal delays, having a life-threatening illness or bereavement, and your tax adviser or accountant failing to send in your return on time.

Last summer, the Tax Policy Associates think tank released data, obtained under a Freedom of Information Request, which showed that 600,000 people over the last five years were hit with late filing penalties, even though they owed no taxes to HMRC.

How to appeal an HMRC fine

If you disagree with a penalty, you’ll need to explain why to HMRC. For example, if you have a reasonable excuse or you think the penalty is wrong. This can include you were unaware of or misunderstood your legal obligation.

You usually have 30 days from the date your penalty was issued to contact HMRC or make an appeal. If you miss the deadline, you’ll need to give a reason.

There are different ways to challenge the penalty, depending on whether it’s direct or indirect tax.

Self-assessment is a direct tax. There is specific, detailed guidance on how you can appeal a self-assessment penalty. However the official guidance is that you should consider paying the penalty even if you appeal. If you do not, and your appeal is rejected, you’ll have to pay interest on the penalty from the date it was due to the date you paid it.

For any other type of direct tax penalty (for example income tax or capital gains tax), follow the instructions on the penalty letter or use the appeal form that came with it.

If you do not have an appeal form, send a signed letter to the HMRC office related to your return. Explain why your return or payment was late, including dates. Also include in your letter:

• your name
• your reference number – for example your Unique Taxpayer Reference (UTR)

If you could not file or pay because of computer problems, you should include the following:

• the date you tried to file or pay online
• details of any system error message

MoneyWeek has approached HMRC for comment.

What happened at the Autumn Budget?

Taxes are up – a lot: another £26 billion a year by 2029, drawing millions more into higher tax bands. That’s almost as big as the £32 billion raised in last autumn’s Budget, with its job-destroying increase on employers’ national insurance contributions. Spending is going up, as a political choice, as is borrowing. Thanks to the higher taxes, fiscal headroom will double to £22 billion – this is the amount by which government can increase spending or cut taxes without breaking its own fiscal rules, in this case, to have national debt falling as a percentage of GDP within five years.

Most of the spending increases will happen up front, while the tough fiscal consolidation (threshold freezes, other tax rises and spending restraint) is pencilled in for the future. Reeves’s choices mean that tax as a fraction of national income is now expected to be a full percentage point of GDP higher than forecast in March, at 38%. That’s an all-time high and five percentage points higher than in 2019.

Did the Budget contain any good news?

Increasing fiscal headroom is a “sensible move for which the chancellor deserves credit”, say economists at the Institute for Fiscal Studies. “By providing greater insulation against economic turbulence, the additional buffer will reduce the risk of playing out this year on repeat in 2026.” Even so, that £22 billion is judged by the Office for Budget Responsibility (the government’s own fiscal watchdog) to be small compared with the uncertainties in the economic outlook. Moreover, it is only 75% of what her predecessors, on average, thought prudent.

There were some other good things, says William Hague in The Times: an increase on limits for investing through venture capital trusts and the enterprise investment scheme, an expansion of the number of companies eligible for share-option schemes for employees; promoting innovation in government procurement; increasing the annual budgets for UK Research and Innovation through to 2030, and mooted improvements in the regulation of the nuclear industry.

Will the Budget boost growth?

Not according to the OBR, no. The watchdog, for all its sparring with the Labour government, actually rode to Reeves’s rescue with a surprisingly upbeat forecast of higher tax revenues driven by higher wages and employment. Yet in their economists’ judgement, none of the policy measures announced in the Budget had a “sufficiently material impact” to justify changing its growth forecast.

The OBR upgraded its GDP growth prediction for the current year to 1.5%, but cut its expectation for the remainder of its five-year forecast. The watchdog now thinks growth will be 1.5% in 2029, below its previous prediction in March of 1.8%. Its overall forecast, averaging 1.5% for the next few years, is better than the 1.2% average since 2008, but far too weak to be transformative.

Does it mean the Budget will harm growth?

The OBR could be wrong, of course. Economic forecasts are famously a mug’s game and the OBR’s are no exception. And Reeves’s speech included some high-flown rhetoric about growth and business. But the prosaic reality is of a directionless and floundering government that is raising taxes to prioritise welfare spending – and appease Labour’s disillusioned backbenchers – at the expense of enterprise, supply-side reform and growth.

What’s more, notwithstanding the relatively sanguine reaction in financial markets (including gilts), the Budget as a whole lacks credibility, according to the Institute for Fiscal Studies. “The additional spending and borrowing in the short term is readily believable. The future restraint, just before the next election? One could be forgiven for treating that with a healthy dose of scepticism.”

What are the damaging measures?

The extra three-year freeze to personal tax thresholds, paired with a surcharge on high-value properties and increases to income-tax rates on property, savings and dividends, all “risk undermining a significant portion of the tax base by pushing more affluent and mobile taxpayers abroad”, says the Financial Times. The ill-judged plan to raise £4.7 billion by curbing pension salary-sacrifice reliefs will penalise savers, raise employers’ costs and damage work, investment and confidence. A steep rise in minimum wages next April will layer on further costs for businesses and weaken hiring incentives.

And the Budget leaves the UK on an ever-upward trajectory of government debt. According to the OBR, its measures means that UK debt will rise to 95% of GDP this year and end the decade at 96% of GDP, which “is two percentage points higher than projected in March and twice the debt level of the average advanced economy”.

Any reasons to be cheerful?

The most “depressing” thing, says Martin Wolf in the Financial Times, is the lack of any meaningful pro-growth agenda. It is bizarre, and ominous, that even a “government with a huge majority dares to do so little to transform economic prospects”. The optimistic view, says David Smith in The Sunday Times, is that if the chancellor (as she hopes) has finally delivered the stability promised, then this will bring benefits. “Financial markets will no longer be constantly on edge and businesses will have the confidence to invest (though the OBR revised down its business investment forecasts).” Consumers could regain the confidence to spend, helped by lower interest rates.

But that’s a lot of ifs. Labour’s “soak the rich” approach is not the way to drive growth, says Ambrose Evans-Pritchard in The Telegraph. It deserves credit for “ending the long and lamentable failure of the British state to invest in infrastructure” – pushing up public investment to 2.6% of GDP from the long run average of 1.6% – and it’s possible a productivity boost from AI will lift the UK’s growth rate and public finances in the coming years. But will Labour still be around to reap the rewards? You wouldn’t bet on it.

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Pensioners whose sole income comes from the state pension will be exempt from paying income tax on it until the end of this parliament, chancellor Rachel Reeves has said.

The full new state pension is expected to rise to at least £12,862 from April 2027, under the triple lock mechanism.

It will increase from £11,973 a year now to £12,547 from April 2026, due to wages rising at 4.8%, then by a minimum of 2.5% the following April, taking it to at least £12,862.

Someone in this position, purely on the state pension, would then breach the personal allowance threshold, which is frozen at £12,570 until 2031. Ordinarily, they would face a tax bill of around £58.

However, the chancellor has now confirmed that HMRC will not collect tax for people in this situation in 2027/28 and the following two financial years.

This would typically be collected by simple assessment, but the government said in the 2025 Autumn Budget that people whose sole income is the basic or new state pension without any increments would not need to pay “small amounts of tax” via this mechanism. More detail will be set out next year.

In an interview on ITV’s The Martin Lewis Money Show Live on Thursday, 27 November, Reeves said the government was looking at a “simple workaround” to stop state pensioners paying small amounts of tax to HMRC.

She said: “If you just have a state pension, and you don’t have any other pension, we are not going to make you fill in a tax return.”

Pressed on whether this meant these same state pensioners will have to pay any tax, the chancellor said: “In this parliament, they won’t have to pay the tax.”

MoneyWeek asked the Treasury to comment.

Concerns have been raised for those whose only income is the state pension, as they are dragged into paying income tax because of frozen thresholds and rising payments due to the triple lock.

The phenomenon, known as fiscal drag, is pulling millions of taxpayers into paying more tax on their income due to rising wages.

Helen Morrissey, head of retirement analysis at financial services firm Hargreaves Lansdown, said pensioners would be “breathing a sigh of relief” over the chancellor’s announcement.

However, Steve Webb, former pensions minister and now partner at consulting firm LCP, raised questions over whether those on the basic state pension receiving additional amounts, people with private pensions and pre-retiree workers will be exempt from income tax if their incomes tip marginally over the personal allowance threshold.

He said: “There is no costing for this policy in the Budget documents which suggests that it is still very much an idea rather than a firm plan.

“But it will be incredibly difficult for the Treasury to come up with something that is workable and fair.”

How pensioners can shield themselves from income tax

In 2024/25, an estimated 8.3 million people of state pension age paid tax, up from 7.83 million in 2023/24, according to HMRC.

If you’re one of the millions of pensioners already paying tax on your income, there are steps you can take to reduce your tax liability.

Firstly, you should maximise your tax-free lump sum, which is 25% of your pension pot or up to £268,275 in total, said Morrissey.

Secondly, if you are going to withdraw from your pot through drawdown, try to take out an amount that won’t push you over into a higher tax bracket.

For example, if you are on a full new state pension (£11,973 a year currently) and are drawing down just once in a year, you wouldn’t want to take out more than roughly £40,000 otherwise you’d be tipped into the higher rate tax bracket, based on having no income.

It’s also important to make the most of your ISA allowances, where any interest earned is tax-free. You can currently add up to £20,000 per tax year across any number of ISAs.

You can also defer your state pension, which would reduce your overall income that tax year. When you do come to take your state pension after deferring, the amount you get also increases. If you reach state pension age on or after 6 April 2016, it will rise by just under 5.8% for every 52 weeks delayed, provided you defer for at least nine weeks.

But, Morrisey warned: “You need to be aware that when you do come to take your state pension the higher amount could also have an impact on how much tax you pay.”

The government’s extended freeze on income tax thresholds could leave you £1,300 worse-off, according to new analysis.

In the 2025 Autumn Budget, chancellor Rachel Reeves confirmed the freeze on income tax thresholds will be extended by three years from 2028 to 2031. The chancellor, whose government pledged not to raise income tax rates in their 2024 election manifesto, said she knew it would affect working people and wouldn’t “pretend otherwise”.

The extension will mean taxpayers paying up to as much as £1,292 in extra tax over the three years compared to the freeze ending in 2028, based on calculations by investment platform AJ Bell.

Laura Suter, director of personal finance at AJ Bell, said: “The chancellor has doubled down on what was once the Conservatives’ brainchild: the income tax freeze is now firmly the ‘Reeves Freeze’, extended for another three years until 2031.

“The result is that every taxpayer in the country will see their wages quietly eroded by higher tax bills.”

How the freeze will chip away at your earnings

The freeze on income tax thresholds until 2031 will hit those with bigger pockets more.

Someone with a yearly income of £15,000 today faces an extra tax bill of £259 over the three years between 2028 and 2031, with the personal allowance frozen at £12,570.

Someone on £45,000 a year will take a hit of £683 over the same three years, while someone with an annual income of £47,000 now will have to fork out an extra £1,292.

Someone on £47,000 is likely to become a higher rate taxpayer between now and 2028 due to rising wages, according to AJ Bell, meaning they’ll be dragged into paying 40% tax on a portion of their income. In England, Wales and Northern Ireland, you pay the higher rate of income tax on taxable income between £50,271 and £125,140. The 45% additional rate applies on income over £125,140.

Over 8.3 million people have now paid higher or additional rate tax since 2021, when income tax thresholds were first frozen, with more set to be dragged into this net between 2028 and 2031.

The extension announced in the Budget will rake in £12 billion in extra revenue, according to the Office for Budget Responsibility (OBR).

If there had been no freeze since 2021, the OBR estimates the personal allowance would have been £17,470 by 2031, and the higher rate threshold £70,370 – more than £20,000 higher.

Suter added: “Nothing can make up for the lost years where income tax bands have seen no inflationary uplift.

“The cumulative cost is staggering: the OBR estimates it will cost taxpayers £56 billion a year by 2029-30, around £1,330 per taxpayer on average.”

Source: AJ Bell

How to protect yourself from frozen income tax thresholds

There are steps you can take to mitigate the effects of frozen thresholds eroding your hard-earned cash.

James Norton, head of retirement and investment at Vanguard Europe, suggested optimising your ISA and pension allowances, like the annual allowance, which shelter your investments from income, dividend and capital gains tax.

“For those in retirement, consider the best way to draw your income. Most people will be best served by taking money out of cash savings and general investment accounts first. This means you can leave money to grow tax free for longer within ISAs and pensions,” said Norton.

Andrew Prosser, head of investments at investment platform InvestEngine, said increasing pension contributions can reduce your tax bill and means you’ll benefit from pension tax relief.

“For higher-rate taxpayers, a £20,000 contribution can effectively cost just £12,000 once government and personal tax relief are applied, making careful planning more important than ever.”

Millions of savers in the UK are being dragged into paying tax on their savings interest because the personal savings allowance (PSA) has been frozen for a decade, according to new research.

By the end of the 2025/26 tax year, taxpayers will have paid over £28 billion in tax on their savings interest since the PSA was launched, with basic rate taxpayers alone paying £4.7 billion, analysis of HMRC data and forecasts by Yorkshire Building Society found, outlining the impact of a policy that has been unchanged since it was introduced in 2016.

Despite jumps in interest rates and frozen tax thresholds pushing more people into higher tax bands, the PSA remains frozen at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, while additional rate taxpayers still have no allowance at all. During the same period, the Bank of England base rate has climbed from 0.50% to 3.75%, instantly pushing ordinary savers over their allowances even on fairly modest sums.

The landscape for savers has materially changed over the past decade. When the personal savings allowance was introduced on 6 April 2016, the majority of easy access accounts paid 1% or less. Now most pay 3% or less. This means while in 2016 basic-rate-tax payers would have been able to put away as much as £100,000 in a typical savings account, in 2026, with interest rates hovering around 3%, savers would only be able to save around £33,000 without breaching their allowance. For those earning over £50,271 and paying higher-rate tax, that amount would fall to around £16,000.

At the same time people need bigger savings nest-eggs to be able to reach ordinary milestones. The median average house deposit has jumped from £25,000 in 2016 to £36,500 in 2024/5 – an increase of 46%, according to the English Housing Survey Headline Report.

Tina Hughes, director of savings at Yorkshire Building Society, said: “Ordinary people are being penalised by a system that simply hasn’t kept pace with reality. These aren’t wealthy investors — they’re people putting money aside for a house deposit, families saving for their children, or those planning a well-earned holiday.

“When the PSA was introduced, almost no one breached it. Today, millions do — not because they’re rich, but because the allowance is frozen and thresholds haven’t moved. People doing the right thing are facing rising tax bills and fewer ways to protect their savings. It’s time for a modern, fair framework that gives savers clarity and confidence.”

Millions at risk of 'unnecessary' tax bill

Basic rate taxpayers (who earn between £12,571 and £50,270) in the UK hold £516 billion in non-ISA savings accounts that have large enough balances to breach the personal savings allowance, separate data from Paragon Bank showed in November 2025.

The personal savings allowance shields some taxpayers from having to pay income tax on savings interest – basic rate taxpayers can earn up to £1,000 a year in savings interest, while the allowance is £500 for higher rate taxpayers.

However, 5.2 million UK savings accounts owned by basic rate taxpayers were on track to earn more than the £1,000 allowance in interest in 2025, the data shows, leaving them with a 20% tax bill on the savings interest above the threshold.

The problem becomes even worse for higher rate taxpayers.

Higher rate taxpayers (people who earn between £50,271 and £125,140) have their personal savings allowance cut by half, leaving them with just £500 of tax-free savings interest outside an ISA.

Nine million UK non-ISA savings accounts owned by higher rate taxpayers, worth over £632.7 billion, were expected to earn more than £500 in interest in 2025, Paragon’s research shows, meaning these savers should prepare for an extra tax bill.

Additional rate taxpayers, who pay the highest rate of income tax, don’t get a personal savings allowance at all, meaning any interest they earn outside an ISA is subject to tax.

Brits who earn above the personal savings allowance in interest have increasingly helped bolster the government’s coffers. HMRC expected to generate £6 billion in income tax on savings interest in 2025, up from £2 billion in the 2022/23 tax year.

Additional rate taxpayers are expected to contribute the most (£4.2 billion), followed by higher rate taxpayers (£1.3 billion), and basic rate taxpayers (£500 million).

Andrew Wright, head of savings at Paragon Bank, said: “Savers should act now to protect their hard-earned money by moving funds into a tax-free wrapper such as a cash ISA.”

Using an ISA to shield your savings

The easiest way for UK savers to shield their savings interest from the taxman is by using an ISA.

You can put up to £20,000 into ISAs each tax year. There are different types of ISA – including cash ISAs and stocks and shares ISAs. The appeal of an ISA is that any interest or investment income earned within the ISA is shielded from the taxman.

For example, let’s assume you are a basic rate taxpayer who has built up an ISA holding of £100,000 by saving the maximum amount in a cash ISA for five years.

If you placed the entire amount into the best cash ISA on the market right now, from Plum, you could expect to earn 4.66% interest over the next 12 months.

At the end of the 12 months, assuming the interest rate did not change, this £100,000 would grow by £4,660. Because this money was held in an ISA, you would not be charged any tax on that.

However, if this £100,000 was held and grown in a non-ISA savings account, the £4,660 earned would breach the £1,000 personal savings allowance, meaning £3,660 of your interest earned would be taxable. You would therefore pay the government £732 in tax.

Adult cash ISA balances surged in 2025 as savers moved to protect tax‑free returns ahead of the Autumn Budget, with Paragon Bank analysis showing cash ISA balances increasing by over £50 billion as non‑ISA balances fell.

Between the end of January and end of December 2025 savers took a big shift towards tax-efficient savings ahead of the anticipated reduction in the cash ISA allowance announced in the Autumn Budget, CACI data for the period found.

Over the period, the average adult cash ISA account balance increased from £15,919 to £17,225. Meanwhile the average non-ISA account balance fell marginally from £11,919 to £11,909. The data suggests savers were seeking to maximise tax-free interest before potential ISA threshold changes in the 2025 Budget.

Total adult cash ISA balances rose by £57 billion during the period, with much of the growth driven by strong demand for fixed-term products. Overall, adult cash ISA balances in accounts totalled £436 billion across 25 million accounts at December 2025.

Fixed-term ISAs accounted for £35.8 billion of the overall increase, rising to £237.7 billion as customers locked in rates ahead of an expected reduction in interest rates. Instant access ISA balances also grew, albeit at a steadier pace, increasing by £22.4 billion to £192.9 billion.

In contrast, non-ISA balances fell by £1.8 billion over the same period to £845.6 billion across 71 million accounts. This was mainly driven by fixed-term non-ISA balances falling as savers reallocated money into tax-efficient wrappers.

Andrew Wright, head of savings at Paragon Bank, said: “2025 marked a clear shift in saver behaviour, with many people taking proactive steps to protect their returns by making greater use of tax-efficient savings. Anticipation of changes announced in the Autumn Budget encouraged savers to review where their money was held and to maximise the benefits of cash ISAs while allowances remained unchanged.

“What’s particularly notable is the strength of demand for fixed-term ISA products. Savers were not only responding to potential tax changes but also looking to lock in competitive rates amid expectations that interest rates would begin to fall. This combination of tax planning and rate certainty made fixed-term ISAs especially attractive.”

If you've used up your annual allowance, we look at other ways to shield your savings from tax in a separate guide.

Hundreds of thousands of Brits are set to be dragged into an effective 60% tax trap over the next four years, according to new figures.

Almost 2.3 million taxpayers will earn over £100,000 by 2028/29, based on Freedom of Information (FOI) data obtained from the HMRC by wealth and asset management firm Rathbones, leaving them exposed to the tax trap.

The top rate of income tax in England, Wales and Northern Ireland is 45%. However, the tax-free personal allowance gradually reduces once you earn over £100,000. You lose it completely if you earn £125,140 or more.

This means, if you earn between £100,000 and £125,140, you effectively pay an income tax rate of 60%.

HMRC estimates 1.8 million taxpayers earned above the £100,000 threshold in 2024/25, but this is expected to rise by 493,000 to 2.29 million by 2028/29.

Not only does breaching £100,000 in earnings lead to an effective 60% rate of tax on income between £100,000 and £125,140, it means families can lose out on vital childcare support worth tens of thousands of pounds.

Stephanie Ebner, a financial planning lead at Rathbones, said the £100k tax trap had increasingly become a “stealth tax on the middle class”.

“The £100,000 tax trap is one of the most baffling quirks in our tax system,” she added.

“Originally designed to target the very highest earners, after 15 years of inflation and frozen thresholds, it now ensnares thousands of professionals who were never meant to be caught.”

For parents with two children under five, earning just £1 over £100,000 can mean losing childcare support worth almost £20,000, Rathbones warns.

All entitlement to tax-free childcare and free childcare hours is lost once parents earn more than £100,000 a year.

Stephanie said: “These costs must be covered from post-tax income, so it’s no surprise many are concerned.

“Hard-working families would need a substantial pay rise just to offset the impact of this tax trap.”

Source: HMRC via Freedom of Information request November 2025. Figures for the 2023-24 to 2028-29 tax years are estimates.

What is the £100k tax trap?

The £100k tax trap, also known as the 60% tax trap, is where taxpayers earning between £100,000 and £125,140 pay an effective income tax rate of 60%.

This is because your personal allowance, worth £12,570, is tapered off until eventually you have none left. This means being hit with extra tax on top of the 40% marginal rate.

The allowance tapers down at a rate of £1 for every £2 worth of income earned above £100,000.

For example, if your income rose to £110,000 from £100,000 you would pay 40% income tax on the additional £10,000 over £100,000. This works out at £4,000 in tax.

You would also lose £5,000 of your personal allowance (50% of £10,000) which is taxed at 40%. This equates to £2,000 in tax.

It means you pay £6,000 (60%) tax on the £10,000 earned over £100,000.

You pay the 45% additional rate of income tax on anything earned over £125,140.

Fiscal drag pulls more taxpayers into the 60% tax trap

The £100,000 threshold for losing the personal allowance has been frozen since its introduction in April 2010. Income tax thresholds have also stayed the same since April 2021 and remain frozen until April 2028.

But with taxpayers seeing their incomes increase due to rising wages and inflation, more and more people are being pulled into higher tax thresholds – a phenomenon known as fiscal drag.

The number of people losing some or all of their personal allowance due to fiscal drag is projected to rise by 88% between 2021/22 and 2028/29, from 1.22 million to 2.29 million, according to HMRC estimates.

Can you avoid the 60% tax trap?

Put simply, yes. You could give up a portion of your salary, if you’re still working, and add it into a workplace pension, thereby reducing your annual pay.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “Check if your employer operates a salary sacrifice scheme, where you give up a portion of your salary, and spend it on certain things free of tax – including pensions. You can use this to bring your salary down below the £100,000 threshold.

“If your employer doesn’t run a salary sacrifice scheme, or the Budget brings in changes that make it harder to take advantage, you can still pay into a self-invested personal pension (SIPP) and receive tax relief at your highest marginal rate.”

Coles highlighted how someone on £101,000 paying £1,000 into a pension would benefit from £400 tax relief and an extra £200 boost as their personal allowance wouldn’t start being tapered down, meaning a £1,000 contribution would only actually cost them £400.

She added: “Plus, if a parent can bring their income back under £100,000, they may keep their eligibility to tax-free childcare too.

“If you’re making income from savings interest, you can use a cash ISA to protect as much as possible from tax.”

That said, there have been speculations the chancellor Rachel Reeves could introduce a £2,000 cap on the amount of earnings that can be exchanged through salary sacrifice in the Autumn Budget, signalling bad news for those trying to avoid the £100k tax trap.

The government is said to have ditched plans to hike income tax rates in the Autumn Budget in a major U-turn.

Chancellor Rachel Reeves and prime minister Keir Starmer have “ripped up” earlier proposals to raise the basic and higher income tax rates, the Financial Times reports.

The chancellor had earlier signalled she would break a key Labour manifesto pledge by raising rates to drum up much-needed cash.

Hiking the basic rate could have raised around £15-20 billion.

However, she now appears to have dropped the plans as she looks for other ways to fill a fiscal hole estimated to be up to £30 billion.

One reported option could be to cut the thresholds at which people pay different rates of income tax while leaving the headline basic and higher rates of the tax unchanged, dragging more people into paying tax.

The chancellor could also extend the freeze on income tax thresholds, due to end in 2028. This would draw more people into paying tax through what’s known as fiscal drag.

Recent analysis from wealth management firm Quilter suggests someone currently earning £44,000 would see their tax bill increase by £843 over the next four years, if thresholds were frozen until 2030.

Kallum Pickering, chief economist at investing banking firm Peel Hunt, said ditching income tax rises was one thing, but choosing to not lower income tax thresholds would leave the chancellor with limited alternatives.

“Her remaining option would likely be to opt for a haphazard patchwork of smaller anti-growth tax increases. That would be a bad outcome,” he said.

“It would add to uncertainty, further damage the government’s already tarnished credibility, and complicate any Bank of England judgement to potentially offset tax rises with rate cuts.”

MoneyWeek has contacted HM Treasury asking for comment.

Income tax U-turn sends gilt yields rising

Gilt yields surged this morning following the news income tax rises were off the table at the Autumn Budget. Yields move inversely to gilt prices.

Yields on 10-year gilts, also known as bonds, moved towards 4.54% while the pound fell to a two-year low against the euro.

Nigel Green, chief executive officer of global financial advisory deVere Group, said: “Gilts are sliding, borrowing costs are climbing, and sterling is weakening because markets fear the government is improvising.

“There’s nothing investors hate more than indecision disguised as strategy.”

Green suggested the reaction was bond traders “telling the Treasury that they will not tolerate mixed signals” and were “pricing risk in real time”.

He added the sell-off this morning saw Reeves potentially making the same mistake as former prime minister Liz Truss in 2022, whose “mini-Budget” spooked financial markets and led to gilt yields soaring.

“Bond markets cannot be managed with wishful thinking. They respond to discipline, coherence and clarity. When those elements disappear, yields surge.

“The pattern we are seeing today aligns with the behaviour that preceded the Truss meltdown, and that should concern every saver and investor.”

The M&S boss, Stuart Machin, has already called it. Presenting his company’s results last week, he warned that his affluent, but hardly mega-rich, customers were already worrying about the tax rises chancellor Rachel Reeves has made clear will have to be imposed in the Budget later this month and are already cutting back on spending.

We don’t know how much the rise will be yet. But it seems clear that Reeves is going to break her manifesto pledge and raise income tax in the Budget late this month. In a very odd address from Downing Street last week, she prepared the ground for that by blaming the mess she inherited for the deteriorating state of the public finances. Leaks from the Treasury suggest the decision has already been made. Reeves will be the first chancellor since Denis Healey in the 1970s to put up the basic rate, and that will hit all the UK’s 34 million employees.

We can all debate whether that is politically viable, or whether the choice to raise income tax is better than the alternatives (my view is that, while it would be preferable to control spending, if the government can’t do that, then raising income tax will do less damage to the economy than lots more levies on business and “the rich”). But there is a far more significant question. What impact will a rise of, say, 2% in the basic rate of income tax have on the wider economy?

Unfortunately, it is not going to be good. First, and most obviously, it will hit demand. People will have less take-home pay every month, and that will inevitably mean they will have to cut back on their spending. Demand is already very weak, and while retail sales managed a 0.5% rise this month, footfall on the high street has been falling for six months. After a tax rise, it will fall even further. Even worse, everyone will expect taxes to rise in the next Budget as well, and the one after that. Consumers will have to save more and spend less to protect themselves from rising taxes, and that means that demand will keep on falling and the economy will start to shrink.

Income tax is a tax on working

Next, it will damage incentives to work. Britain already has a huge problem with the number of people who have simply given up on work. There are currently more than nine million people of working age who don’t have any form of employment. Of those, a few are students, and some have taken early retirement, but 7.4 million are on disability benefits. There are another 1.7 million people who are unemployed, taking the total close to 11 million. The welfare bill is already more than $300 billion a year, putting a huge strain on the public finances. One of the government’s major challenges will be getting many of those people back to work.

And yet, if people face higher marginal rates of tax as soon as they take a job, that will inevitably be more difficult. Indeed, plenty more people might decide sickness benefits are a better option. Higher up the income scale, if the top rates rise to 42% and 47%, as they almost certainly will, we should expect more people to opt for early retirement, or to scale back on their hours if they are self-employed. After all, income tax is a tax on working, and the more we tax it, the less we can expect.

Finally, it will damage investment as companies anticipate weaker sales. If overall demand is falling, and looks like it will remain subdued as taxes carry on rising, and if labour is scarce as more and more people decide to leave the labour market, then there is very little incentive to open up new shops, cafes, warehouses or factories. It does not hit business as directly as a rise in corporation tax, or as last year’s increase in the rate of national insurance that businesses are charged on everyone they employ. But that does not mean there is no impact. It makes the UK an even less attractive place to invest than it already is.

The only real fix for the UK’s economic stagnation is to reduce the size of the state and make what remains more efficient. Raising income tax might keep the bond markets happy. But it won’t do anything for longer-term stability, nor will it restore confidence. The economy is already flat – a tax rise will push it into recession.

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The number of people paying the highest rate of income tax in the UK hit more than one million last year as frozen thresholds dragged hundreds of thousands more into the additional rate band.

Roughly 720,000 people paid the 45% rate on income between £125,140 and £211,562 in 2024/25, according to a freedom of information (FOI) request submitted to HM Revenue and Customs (HMRC) by advisory firm Bowmore Financial Planning.

A further 385,000 paid the 45% rate on income above £211,562, according to the FOI.

Had the top income tax rate moved in line with inflation since 2013, when it was lowered from 50% to 45%, it would now stand at £211,562, Bowmore said.

It means the 720,000 additional rate taxpayers in 2024/25 wouldn’t have had to pay the 45% rate if the threshold had risen along with the cost of living.

John Clamp, fellow of the Personal Finance Society and chartered financial planner at Bowmore Financial Planning, said: “Both the 45% and 40% rate of income tax are capturing more and more taxpayers.

“A lot of people who consider themselves as having very little disposable income are now finding that they are having to pay the very highest rate of income tax.”

Income tax thresholds are currently frozen until April 2028, with rumours swirling the chancellor could announce an extension to the freeze in this month’s Budget.

The move is known as a “stealth” tax as it increases tax revenue for the government without rates actually increasing. As inflation rises, more people are drawn into paying tax – known as fiscal drag.

Even if the freeze isn’t extended beyond 2028, more people will likely have to pay more tax on their income over the next three years, based on inflation continuing to rise.

Clamp said: “The Government is content to let inflation do its work and add more and more people to the highest tax rate.

“Many people are working harder but taking home less, simply because inflation has drawn them into higher tax bands.”

Clamp added frozen thresholds could explain why productivity was stagnating in the UK, with workers dissuaded from working longer hours and boosting their pay.

UK wages continue to grow slowly, while GDP grew by just 0.3% between June and August. Meanwhile, the Office for National Statistics (ONS) says productivity has remained stubbornly low since 2009.

“It’s perhaps unsurprising productivity is stagnating,” Clamp said.

“If extra work barely boosts take-home pay because of frozen tax bands, people are less inclined to work longer hours or push themselves – and that ultimately drags on the economy.”

A Treasury spokesperson said: “The UK’s income tax system is highly progressive with an internationally high personal allowance.

“These figures relate to the previous government’s 2022 Autumn Statement.

“This government inherited the previous government’s policy of frozen tax thresholds and lowered Additional Rate Threshold.”

How to cut your tax bill

There are ways to avoid paying more tax if frozen thresholds are eating away at your hard-earned cash.

Clamp said those still working can reduce their income tax bill through salary sacrifice.

This sees you contribute more to your pension out of your salary, thereby reducing the amount of taxable income and therefore cutting the income tax and National Insurance contributions you pay.

That said, the government could look at abolishing or reforming salary sacrifice in the upcoming Budget.

Meanwhile, if you’ve got cash stashed away in a traditional savings account, you should also make the most of your annual ISA allowance.

You can currently add a total of £20,000 a year into multiple ISAs with any interest on savings or returns being non-taxable.

Any savings held outside ISAs are subject to the personal savings allowance. Basic rate taxpayers can earn £1,000 per year before being taxed and higher rate taxpayers £500. Those over the additional rate threshold don’t get any allowance.

The self-employed look set to be left worse off after the Budget if chancellor Rachel Reeves goes ahead with plans to increase income tax and reduce employees’ National Insurance by the same amount – because they will suffer from the hike and won’t benefit from the cut.

Ideas in a Resolution Foundation report, which suggested taking 2p off National Insurance and adding it to income tax, are currently under consideration in the Treasury ahead of the Budget, according to several papers.

The move could raise £6 billion, the think tank said, without affecting people receiving income from employment under state pension age – and therefore technically avoiding hitting ‘working people’, in line with Labour’s manifesto pledge.

However, it would hit self-employed people, who pay income tax, but not standard employee National Insurance.

A self-employed person earning £20,000 annually would be £149 worse off a year, those earning £30,000 would take home £349 less and a self-employed person earning £50,000 would be £749 down, according to calculations for MoneyWeek by Hargreaves Lansdown.

Self-employed people do pay National Insurance, but a different class at a different rate. They pay 6% on profits over £12,570 up to £50,270 and 2% on profits over £50,270. By only cutting National Insurance for employed people – while hiking income tax for everyone – the tax system would put more of a burden on the self-employed.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “Speculation is mounting over tax changes in the Budget that would hit self-employed people.

“Given they’re already wrestling with insecurity, lumpy incomes, lack of a safety net from their employer, and less help with life’s milestones – like retirement saving – rumours about potential Budget blows will be one more thing to worry about.”

Other types of income that could be hit by the move include pension income, earned income from people over the state pension age, savings interest outside cash ISAs, and income for landlords.

Someone on a total pension income of £35,000, for example, currently pays £4,486 in income tax at 20%. A rise to 22% would mean they pay £449 extra a year, Hargreaves Lansdown calculated.

Dividend tax increase?

Changes to dividend taxation could also feature in the Budget tax rises – another blow for self-employed people who own their own business and take some of their income in dividends.

The higher and additional rates of dividend tax aren’t very different to the tax on wages – at 33.75% and 39.35% respectively – but given the basic rate of dividend tax is 8.75%, the Resolution Foundation has argued for a rise.

“This would be a headache for self-employed people, and would also hit investors with portfolios outside ISAs and pensions who make more than the annual allowance of £500 a year,” said Coles.

Self-employed people are already struggling versus their employed counterparts, with lower average incomes and less money to spare, according to research by Hargreaves Lansdown.

Households headed by a self-employed person have an average of £89 left over at the end of the month, compared to employed households with £244, it found.

Their income can be lumpier too, with good months and bad months, making it harder to save. Self-employed people save an average of 2.3% of their income, compared to employees who save 5.6%.

How can self-employed people beat tax rises?

1. Bring forward dividend payments

If you pay yourself at least in part through dividends, it could be a good idea to consider the timing of your dividend payments, potentially taking them now rather than later when the rules may change.

2. Pay into a pension

One way to cut your income tax bill is by making payments into a pension or Sipp, which will offer income tax relief at your highest marginal rate. This could be even more rewarding if the tax rate rises.

We look at how to set up a pension for the self-employed in a separate article.

3. Use ISAs

A cash ISA will protect you from tax on your savings interest. For broader tax savings, if you have investments outside an ISA or pension, and you have the allowance available, you could move them into an ISA through the Bed & ISA process or into a Sipp through Bed & SIPP.

It also makes sense for any new investments to be made within pensions and ISAs to protect them from dividend tax and capital gains tax in future.

4. Consider a Lifetime ISA

There is another option that could be of real use to groups such as the self-employed – the Lifetime ISA (LISA). The 25% government bonus on contributions up to £4,000 acts like basic rate tax relief on a pension. Though higher-rate taxpayers are better off with a pension due to the higher tax relief on offer. There’s also tax-free income when you come to draw down from this pot after the age of 60.

You can also access the money early if needed, though this is subject to a 25% exit penalty. This, unfortunately, has the effect of taking a chunk of your hard-earned savings, along with the bonus that you’ve built up.

Hargreaves Lansdown is calling on the government to enable people to open and contribute to a LISA up until the age of 55. At the moment, the age limit to opening a LISA is 40. The platform’s research suggested this could help 1.2 million self-employed households build a better retirement.

The chancellor has finally admitted that “further measures on tax” will be announced in the Budget on 26 November. “Those with the broadest shoulders” – the ever-growing number of higher- and top-rate taxpayers – are likely to bear the brunt of it. Meanwhile, pensions, traditionally a bastion of tax efficiency, have begun to look less appealing, thanks to limits on what you can contribute, restrictions on tax-free cash and the prospect of death taxes of up to 67% following changes in the last Budget.

Against this backdrop, venture-capital trusts (VCTs) look startlingly attractive. When you support young British companies by investing in VCTs, you could receive up to 30% income-tax relief – a tax break of up to £60,000 if using the full £200,000 VCT allowance. In addition, any dividends VCTs pay are tax-free. This could be particularly valuable now the dividend tax-free allowance is at a historic low of £500.

And despite the economic woes of the past few years, VCTs have continued to deliver a regular stream of dividend payments. Over the last five years active generalist VCTs have on average paid dividends totalling 32% of the starting net asset value (NAV), rising to 68% over ten years. No wonder, then, that experienced investors keep on turning to VCTs.

Venture capital trusts to consider

The long-established British Smaller Companies VCTs have been a favourite among investors for years. This year, British Smaller Companies VCT (LSE: BSV) and British Smaller Companies VCT 2 (LSE: BSC) raised £9.5 million in the first 24 hours of the offer opening. The two VCTs target business-services companies. The portfolio includes some impressive outfits such as Unbiased, a platform that reviews financial advisers and is expanding rapidly in the US. Another investment is digital special-effects studio Outpost VFX, which has worked on projects such as Captain America: Brave New World and The Lord of the Rings: The Rings of Power. Over the five years to September 2025, the VCTs have paid cumulative dividends equivalent to 40.9% (BSV) and 43.0% (BSC) of the starting NAV of each VCT.

Consider also the three Northern VCTs: Northern Venture Trust (LSE: NVT); Northern 2 VCT (LSE: NTV); and Northern 3 VCT (LSE: NTN). They target more established firms with growth potential. Manager Mercia’s sweet spot is regional businesses (more than half of the portfolio is outside London and the South East) in the healthcare and technology sectors. This is an area where Mercia is achieving success after success. The latest example is The Beauty Tech Group, which allows people to apply beauty techniques such as laser therapy at home. It floated last month at a £300 million valuation. The VCTs target annual dividends of 4.5% to 5% of NAV. Over the five years to September 2025, the VCTs have paid cumulative dividends worth between 29% and 35% of starting NAVs.

The Triple Point Venture VCT (LSE: TPV), meanwhile, brings something different to the table. It’s a newer VCT and it targets earlier-stage companies. That is when competition, and consequently valuations, tend to be lower and the potential returns higher.

And this approach is starting to bear fruit: the VCT already bagged a high-profile exit when credit-checking platform Credit Kudos was acquired by Apple just two years after Triple Point invested. The VCTs target an annual dividend of 5% of NAV. Over the five years to September 2025, the VCT has paid cumulative dividends equivalent to 15.6% of the starting NAV.

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Few people outside the Treasury understand how a Budget really comes together, or how the fiscal chess game inside Whitehall determines what happens to your tax bill, pension allowances, and savings returns.

One man familiar with the horse trading that goes on ahead of a Budget inside 1 Horse Guards Road, London – home of the UK Treasury – is David Gauke, a former chief secretary to the Treasury (2016-17), the second highest position in the department after the chancellor.

Now chair of Negotient, which advises on partnerships between the government and the private sector, Gauke, speaking exclusively to MoneyWeek, said while speculation about potential policy changes – such as will taxes rise – is playing out loudly in public, the story of this Budget will be in what happens behind closed doors.

“Budgets aren’t invented in a week,” Gauke said, “they are the culmination of complex negotiations between departments, the Treasury, No10, and sectors that matter to the economy: from energy to finance to housing”.

A common mistake many organisations make is to approach the run-up to a Budget as simply a lobbying exercise: a one-way pitch for a particular tax cut or subsidy, said Gauke.

“The Treasury rarely responds well to that. What works is negotiation, a two-way process where both sides understand each other’s constraints and build something sustainable, together,” he added.

MoneyWeek asked the former Treasury insider what Britain could expect from chancellor Rachel Reeves’ second Budget, due on 26 November. He revealed a complex picture of competing priorities and unpalatable decisions.

What could be in the Autumn Budget?

Officials and ministers are – as we speak – weighing how to fill what the Office for Budget Responsibility calls a “fiscal black hole” without stifling investment. The trade-off between fiscal rules and political promises dominates every conversation. Departments want more; the Treasury wants restraint.

With an estimated shortfall ranging from £27 billion (according to analysts at KPMG) and £50 billion (says independent think tank the National Institute of Economic and Social Research), it’s not going to be an easy gap to plug.

“When the fiscal headroom is thin, the question becomes not what the chancellor wants to do, but what she can responsibly afford to do,” Gauke explained.

Each year, this process includes quiet discussions with industry groups and sector bodies whose proposals can shape how policy lands. “These talks rarely make headlines,” Gauke said, “but they decide whether a tax or spending measure works in practice or ends up being reversed.”

The chancellor is clearly going to need to raise a lot of additional revenue. But she also needs to be able to sell the measures to the country as a whole and her political party. This means Reeves will “need to show the richest are making a big contribution”, said Gauke.

Before any decision the key factors Reeves will consider, according to Gauke, are:

• How much revenue will be raised?
• What will the political reaction be?
• Can this be presented as fair, especially to Labour voters?
• Does this disincentivise enterprise and investment?

How might this pan out for workers, pension savers and homeowners? Potentially, said Gauke, something like this.

1. Income tax

"If the chancellor is going to need a very large sum of money, it is very hard to do that without using the big tax levers, the most likely of which will be income tax,” said Gauke.

That would do less economic harm than a series of smaller tax increases, he said, but will be a clear breach of a manifesto commitment not to raise income tax, National Insurance or VAT. Reeves also “needs to show the wealthy will pay a greater share”, Gauke said.

Putting a penny on the basic rate of income tax would cost more than £1 a day in extra tax for higher earners, according to analysis by investment platform AJ Bell. It could also raise almost £7 billion next year for the Treasury, according to HMRC estimates.

2. Property tax

Various property tax changes have been mooted, including replacing stamp duty with a national tax on the sale of homes worth more than £500,000 and introducing a form of mansion tax with a capital gains tax charge on homes that sell for more than £1.5 million.

Further reports in the Daily Telegraph have suggested the chancellor could introduce a regular 1% charge on homes worth above £2 million.

“A property tax must be tempting, in that our current council tax system fails to distinguish between a quite expensive property and a very expensive property,” said Gauke, adding the allure for is stronger as a property tax “is also simple to explain”.

3. Inheritance tax

Changes to inheritance tax are “also possible”, said Gauke, but the ongoing row about agricultural property relief and business property relief shows increasing inheritance tax revenue comes at a high political cost.

“Tightening the ability to make gifts outside the IHT regime, for example, will raise little by way of revenue but will provoke vocal opposition, including from those unlikely ever to be affected,” said Gauke.

“The Treasury might, however, think they need a row here to demonstrate that they are trying to raise revenue from those with greater assets.”

4. Pensions

Various Budget pension policy changes have been suggested, from reducing tax relief to cutting the amount of tax-free cash. In another life, Gauke was also work and pensions secretary (2017-2018), so he knows the struggles of pension reform.

Reducing the pension tax-free amount radically could be criticised as retrospective, he said – people invested in their pensions on the assumption they would get 25% tax free. But if the change is set for some future date, it will not raise substantial revenue for many years, Gauke pointed out.

Either way, constant speculation about changes to the pension tax-free amount “is damaging for our system and Reeves needs to end the uncertainty one way or another”, he said.

5. ISAs

Reeves is heavily tipped to cut the cash ISA allowance, down from its current level of £20,000 to somewhere between £10,000 and £4,000, to get Brits investing in UK companies instead.

“I expect they will go ahead with some reforms here,” said Gauke. “But I think it will get some pushback given this will reduce the tax-efficient options for people who will already have paid tax once on this money.”

Where could Reeves slip up?

Some of the measures Reeves will announce in her Budget will be more about a political message than the revenue raised, Gauke said. But he added “there are a couple of issues where she needs to be careful”.

1. Too much double (or triple) taxation

“Many of the options that appear to be under consideration may well involve the same people being hit multiple times, and that might mean very vocal opposition,” Gauke said.

2. Too hostile to the wealthy

Our tax system already relies heavily on the richest. If the government gives the impression of being hostile to the wealthy, there is a risk more of them will move elsewhere, or that people won't come to the UK in the first place, said Gauke. “When the government is hoping to get the economy growing, that is a bad message to send out."

Budget negotiations behind-closed-doors

Reeves has little room for giveaways – so how the Treasury negotiates with key sectors will determine the real-world effects on your personal finance balance sheet.

“Expect renewed talks with utilities as the government considers longer-term energy-price reform,” said Gauke. “A poorly structured deal could see bills spike again, feeding inflation and higher interest rates – bad news for mortgage rates and bond portfolios”.

Likewise if ministers revive home buyer incentives, the negotiation with lenders and developers will dictate whether that supports supply or merely pushes up house prices. “A well-designed deal could stabilise property values; a hasty one could reignite volatility,” said Gauke.

Examples of successful Budget compromises

Some of the most successful policies of recent years have been born of negotiation, not confrontation. A case in point was the single-use plastics tax, introduced after extensive talks between the Treasury, manufacturers, and environmental groups such as Greenpeace.

“That policy worked because environmental campaigners, business, and government found common ground,” Gauke explained. “Rather than imposing a blanket ban, the Treasury designed a tax that rewarded recycled content and supported investment in cleaner production.”

One of the clearest examples of Budget-era negotiation shaping personal finances came during the 2022 energy crisis. As wholesale gas prices surged, the Treasury, Ofgem, and energy suppliers negotiated the Energy Price Guarantee – a deal designed to shield households from soaring bills.

“It was the right instinct,” Gauke said. “But the negotiation focused on short-term relief rather than long-term resilience. A more creative, risk-sharing approach between government and suppliers could have produced greater stability and less inflationary pressure.

“And that matters, because inflation feeds directly into mortgage rates and the real value of savings.”

He also pointed to the Help to Buy scheme, which emerged from Treasury discussions with lenders and developers to boost market confidence after the financial crisis. “That showed what Treasury negotiation can achieve when the aim is to unlock credit and stimulate investment,” Gauke said.

It also, he added, illustrated the importance of balance, ensuring measures to support growth work alongside policies to increase supply. “Getting that right is exactly what the government faces again now,” he added.

“Whether it’s energy transition, housing, or pensions, the government will have to negotiate intelligently with the private sector,” Gauke said. “That’s how you deliver value for taxpayers while creating opportunities for investors.”

Nearly 80,000 pensioners were caught in a quirk of the earnings system and hit with an effective tax rate of 60% last year, according to new data – more than double the figure just three years ago.

While the official top rate of tax in the UK is 45%, in practice this can jump to 60% for some high earners due to the way the tax system is set up. Older workers at the height of their earning potential are increasingly being caught in the 60% tax trap due to frozen tax thresholds.

A total of 77,000 Brits at state pension age – currently 66 years – and above were dragged into what is known as the 60% tax trap in 2024/25, affecting those with incomes of between £100,000 and £125,140.

This is more than double the number of pensioners falling into this income tax bracket three years before, up from just 34,000 in 2021/22, according to a Freedom of Information Request to HMRC by investment platform Interactive Investor.

The number of pensioners paying 60% income tax has increased by double digits every year since 2022.

It rose by 13% (from the previous year) in the tax year ending April 2025, having surged by 55% in the tax year ending April 2024,. It increased by 16% in tax year ending April 2023 and 12% in tax year ending April 2022.

Craig Rickman, pensions expert at Interactive Investor, said: “More people now work well into their late 60s, including high earners at the peak of their careers. They often enjoy their work, and the continued sense of purpose, so want to carry on consulting or running a business until well into their golden years.

“However, there’s a risk that ultra-high tax rates could mean losing older talent. As taxes take an even bigger bite from the cherry, many older high earners will weigh up whether they’re better off stepping back and earning less, rather than risk facing such a heavy tax burden.”

What is the 60% tax trap?

The 60% tax trap, also known as the £100k tax trap, describes the situation where individuals earning over £100,000 effectively pay 60% tax on a portion of their income.

This is because the £12,570 tax-free personal allowance is gradually withdrawn once income exceeds £100,000. For every £2 earned over £100,000, individuals lose £1 of their personal allowance. On this basis the tax-free personal allowance disappears totally once income hits £125,140. The consequence is a real-life tax rate of 60%.

For example, a higher earner receives a pay rise from £100,000 to £110,000. They pay 40% income tax on £10,000 but also lose £5,000 of their personal allowance, which is also taxed at 40% – a further £2,000. In total, they pay £6,000 income tax on the £10,000 earned above £100,000. A 60% tax rate.

Individuals earning over £125,140 also pay 60% tax on their earnings between £100,000 to £125,140, but their higher earnings, over £125,140, will be taxed at a lower rate of 45% as they have already lost the whole personal allowance.

The effect of fiscal drag

The threshold for losing the personal allowance has stubbornly stuck at £100,000 for more than 15 years, since it was introduced in April 2010. Fiscal drag – where income tax thresholds have remained static rather than keeping up with wage inflation – has meant more people are being caught out by the 60% tax trap. Income tax thresholds have been frozen since April 2021 and are set to remain frozen until April 2028.

With the full new state pension set to increase £573 a year to £12,547 from April 2026, under the triple lock mechanism, thousands of pensioners who are still working will see 60% of this rise swallowed up in tax.

Rickman said: “This data reveals the punishing impact of the 60% tax trap on older workers, as frozen tax thresholds pull more pensioners’ incomes into six-figure territory.

“If the tax-trap threshold had kept pace with inflation, workers would now be able to earn £155,000 before being hit with 60% income tax. With the deep freeze on income tax bands set to endure until 2028/29, and fears the government could extend it even further, thousands more people above state pension age will be hit with punitive rates of tax on some of their income.”

Source: Data based on a Freedom of Information request to HMRC, obtained by Interactive Investor.

How to beat the 60% tax trap

Paying into pensions is the one surefire way to beat the 60% trap. This is because pension contributions can reduce what’s called your adjusted net income – the measure HMRC uses to judge how much tax you owe.

Rickman said: “Paying into a pension to bring your income below £100,000 can attract 40% income tax relief and enable you to keep your personal tax-free allowance.

“Just don’t forget to include the pension contribution on your tax return if it goes into a private pension, like a self-invested personal pension (Sipp) – also known as a pension pot for life – as you only receive the 20% basic-rate relief upfront.”

Over-55s who have already made a flexible and taxable withdrawal from their pension – i.e. have taken more than just their tax-free cash – need to watch out for the money purchase annual allowance (MPAA), however.

“The MPAA lowers the maximum amount you can put into pensions every year and get upfront tax relief from £60,000 to just £10,000,” Rickman pointed out.

“It also means you can no longer use carry forward relief that enables you to tap into unused annual pension allowances from the previous three tax years.”

A tax rise that would hit employees, pensioners, landlords and savers could be coming in the Budget after prime minister Keir Starmer seemed hesitant to rule out an income tax hike.

Putting just a penny on the basic rate of income tax in the Autumn Budget would cost more than £1 a day for higher earners, according to analysis by investment platform AJ Bell – equating to up to £377 a year in extra tax, with anyone earning £50,270 or more facing the maximum hit.

It could also raise almost £7 billion next year for the Treasury, according to HMRC estimates.

Laura Suter, director of personal finance at AJ Bell, said: “If the government wanted to change income tax, the most straightforward option would be to add 1p to the basic rate of tax, increasing it from 20% to 21%.”

Asked at Prime Minister’s Questions yesterday if the government would stick to its election manifesto pledge not to raise National Insurance, VAT or income tax, Starmer refused to rule the idea out. He said the government’s plans would be laid out at the Autumn Budget on 26 November.

Starmer’s reluctance to repeat the pledge – which in the summer he had confirmed would remain in place – has given rise to speculation an income tax rise could be on its way.

Will income tax rise in the Budget?

The government is faced with the issue of having a fiscal hole to fill and needing to raise money to do so. With an estimated shortfall ranging from £50 billion (according to independent think tank the National Institute of Economic and Social Research) and £27 billion according to analysts at KPMG, it’s not going to be an easy gap to plug.

“While tinkering with other taxes may raise small amounts here and there, an increase to income tax raises a big chunk of money in one move – approximately £7 billion by the government’s own estimates,” said Suter.

While Starmer’s seeming reluctance to stand by his party’s pledge not to raise tax on ‘working people’ has given rise to the latest rumours about hikes, reports elsewhere have suggested the government is seeking to use a new definition of working people to get around the pledge.

According to Sky News, the broadcaster has obtained an internal description of ‘working people’ used by the Treasury, in which officials have reportedly been tasked with protecting the income of the lower two-thirds of working people.

While this means people earning more than around £46,000 could potentially be targeted for tax rises in the Budget, this is likely to rule out increases to the basic rate of income tax and National Insurance, since people earning less than that would pay more tax.

The Treasury declined to comment on the speculation. But a Treasury spokesperson told MoneyWeek: “The chancellor has been clear that in the Budget she will strike the right balance between making sure we have enough money to fund our public services and ensuring we can bring growth and investment to businesses.”

How much would a 1p rise in income tax cost?

Adding 1p to the basic rate of income tax would cost someone on an average income of £35,000 another £224 a year. Taxpayers with an income of £50,270 would incur the maximum £377 increase.

Source: AJ Bell. Annual income tax bill based on income taxpayers with the standard personal allowance. Rounded to the nearest £1. Those with earnings over £100,000 would be hit by the additional cost of the loss of personal allowance.

While hiking the basic rate of income tax would hit every income taxpayer in the UK, a more nuclear option would be to add one percentage point onto all income tax rates, also taking the higher rate up to 41% and the additional rate to 46%.

“While it’s possible income tax rates could be hiked across the board, higher and additional rate taxpayers already account for a disproportionate share of the income tax take,” pointed out Suter. “An increase to the basic rate is easier to position as a shared burden since it affects almost all workers, as well as pensioners and some savers.”

Increasing the basic rate to 21% would raise £6.9 billion in the next tax year and £23.4 billion over the next three years, based on HMRC figures. In comparison, hiking the higher rate to 41% would raise £1.6 billion next year and increasing the additional rate to 46% would raise a relatively paltry £145 million in extra tax revenue.

Is there an alternative to raising income tax?

One option put forward by the Resolution Foundation, a think tank, is raising income tax but offsetting the impact on employees with an equivalent cut to National Insurance.

“That would raise overall tax rates for pensioners, landlords, savers and perhaps those with dividend income too, while offsetting the impact on workers,” said Suter.

Given the manifesto pledge focused on workers – a definition the government is struggling itself trying to pin-down – the chancellor may be able to argue this policy raises taxes without breaking the spirit of the pre-election promise.

Professional advisers to the ultra high net worth – from accountants to wealth managers – are seeing a shift in how their clients want to manage their affairs. More enquiries are coming in for family investment companies (FICs) as a way to pass on wealth while potentially paying less tax on it.

One of the consequences of the Autumn 2024 Budget announcements on inheritance tax (IHT) is that many families are now considering passing assets on to the next generation sooner than they might have otherwise planned, according to accountancy firm RSM. This is where family investment companies come in.

Chris Etherington, partner at RSM, said: “Historically, trusts have been the preferred solution. However, trusts have become more challenging due to potential upfront tax charges that can result in a 20% IHT liability, particularly on larger gifts into a trust.”

No such upfront charge is due on gifts of shares via a family investment company, another way to avoid inheritance tax. “As a result, the use of trusts has steadily declined since 2006 [when then chancellor Gordon Brown brought in the 20% upfront IHT liability for trusts], while in our experience, the use of an alternative vehicle, the family investment company (FIC), has increased,” said Etherington.

Ben Handley, private clients tax partner at accountancy firm BDO, agreed: “Changes to capital gains tax business asset disposal relief and the forthcoming changes to IHT business and agricultural reliefs have forced business owners to reconsider their family wealth succession plans,” he said.

“In some situations, converting an existing trading company into a FIC may be attractive for business owners as part of their overall wealth succession plan.”

What is a family investment company?

A family investment company – or FIC – is essentially a private company set up to hold, invest and distribute family wealth.

The typical structure involves parents as both directors and shareholders, retaining voting control through one share class. Meanwhile children or grandchildren hold different share classes with limited or no voting rights but entitlement to dividends and capital growth.

The experience at wealth manager Six Degrees is that family investment companies tend to become suitable for investment portfolios of around £5 million or more, due to the costs and administration it takes to set them up and run them.

“However under certain circumstances it may be suitable for lower amounts,” said Katherine Waller, co-founder of the firm.

Assets held within a FIC are subject to corporate tax rates – meaning corporation tax of up to 25% and dividend tax rates of 8.75% at the basic rate, the higher rate of 33.75% and additional rate of 39.35% – which may be better versus the assets being subject to personal tax rates.

FICs are sometimes confused with trusts, but they are completely different structures: while ownership of trust assets lies with the trustees, companies are typically owned and controlled by shareholders.

“Settling assets into a trust typically entails giving away assets, and control, while holding assets in a company enables asset owners to retain control and ownership,” said Waller.

Why would you set up a family investment company?

There are a number of reasons to set up a family investment company.

1. Inheritance tax

From an inheritance tax perspective, family investment companies are efficient, as it can remove value from the parents' estates, which might otherwise be subject to 40% IHT, although this liability is transferred to another family member.

Like a transfer into a trust, gifts of shares via a family investment company count as a potentially exempt transfer (PET) for inheritance tax. This means the value of the gift would fall out of the donor’s estate for IHT purposes, provided they survived the giving of it by at least seven years.

James Floyd, managing director at pension firm Alltrust Services, said: “The appeal is understandable. FICs enable parents to freeze the value of assets in their estate for inheritance tax purposes whilst retaining control, and the transferred value begins its seven-year IHT rule immediately.”

2. Asset protection

Shares held by beneficiaries are separated from their personal financial circumstances, offering protection from creditors or divorcing spouses.

3. Better for entrepreneurs

Six Degrees works with a lot of entrepreneurs, who are often more comfortable with a company structure than with a trust.

“A company feels tangible. You can run board meetings, review investments, and involve the next generation in decision-making. It’s a great way to involve the different family members with the wealth, and share ownership responsibly,” said Waller.

4. Retaining control

Wealthy parents who see the value of gifting assets to manage their inheritance tax liability but are concerned about giving large sums to their children and want to retain control are a key demographic for FICs.

5. Tax efficiency

Holding investments in companies can also be tax-efficient, since companies generally do not pay corporation tax on dividends received from shares held.

Giving different share classes to children also lets parents easily distribute dividends to them, taxed at the children’s own marginal rate, which is often low (basic rate) or zero (within the personal allowance). This could be useful when funding university fees for example. “If they are not earning an income themselves this approach can be incredibly tax efficient”, said Six Degrees’ Waller.

6. Flexibility

FICs also offer wealthy families flexibility when it comes to moving their money around. They enable assets to be ‘lent in’, using redeemable preference shares, meaning the original capital may be repaid without triggering any tax.

What are the pros and cons of family investment companies?

Pros

“The biggest advantage is control,” said Waller. “Parents can keep voting rights while shifting value to their children gradually, and the company pays corporation tax on income and gains, which can be lower than personal tax rates. It’s also flexible – you can decide how profits are reinvested, distributed, or lent.”

Cons

The flip side is complexity. You need proper governance, accounting, and a clear plan for how to get money out efficiently. It’s not a set-and-forget structure. “So it’s important to go in with eyes open and see it as part of a bigger family strategy, aligned with the wealth’s purpose, rather than simply a tax play,” Waller said.

How much does it cost to set up a family investment company?

Tax advisers charge between £15,000 and £25,000 to set up a family investment company, in Six Degrees’ experience.

Ongoing compliance – annual accounts, CT600 returns, confirmation statements at Companies House – is likely to add £2,000 to £5,000 annually, according to pension firm Alltrust Services.

“In addition to the monetary cost it’s an investment of time to get the structure right at the start,” said Six Degrees’ Waller. “Setting one up is actually the easy bit – you can incorporate a company in a day. The hard work is in designing it properly. Who gets voting shares, who gets growth shares, how decisions are made. That’s where the value lies.”

Double taxation?

Family investment companies seemingly have much to recommend them. But some experts say they also suffer a “brutal taxation” that undermines their economic attractiveness for many families.

“The structure suffers from double taxation: corporation tax at 25% on profits, followed by income tax on dividends at 8.75% for basic rate taxpayers, 33.75% for higher rate, and 39.35% for additional rate. This creates significant tax drag on investment returns,” said Floyd from pension firm Alltrust Services.

However David Denton, tax expert at wealth firm Quilter Cheviot, said because of the way FICs are established and invested, this can change the narrative around double taxation in several ways.

“For example, not all profits held within a company – trading or investment – are taxable. This is because most dividends aren’t taxable when equities are owned by another company. An investment policy with a bias to high dividend paying shares can substantially reduce the internal effective rate of tax,” he said.

At the same time, FICs may be partly or fully funded by way of a loan. If structured correctly, loan repayments to the founders are not subject to tax.

As mentioned, if grandchildren are share class owners, then otherwise taxable dividends may fall within their tax-free personal and dividend allowances.

Finally, said Denton, “on final wind-up of a company, it is possible capital gains tax is due at a maximum of 24% rather than dividend taxation at a maximum of 39.35%”.

Family pension trusts – an alternative to family investment companies

A potential alternative to a family investment company that achieves the same control and succession planning aims – but with potentially better tax treatment – is the family pension trust.

Established through a small self-administered scheme (Ssas) or a Sipp, “the taxation advantages to a FIC are substantial and immediate,” said Floyd.

Pension investments grow completely tax-free, he pointed out, eliminating the 25% corporation tax FICs face. Money can be drawn tax-efficiently using pension income rules, avoiding the dividend tax that can make FICs expensive.

“In addition, contributions attract tax relief up to 45%, providing an immediate boost that FICs cannot match,” Floyd said.

Pensions currently remain outside the estate for IHT purposes, though changes are coming in April 2027, when any unused pensions will be subject to inheritance tax.

“For business owners looking to hold trading assets or property not qualifying for pension investment, FICs may represent the most suitable structure,” Floyd said.

“For families whose primary objectives are long-term wealth preservation, succession planning, and tax-efficient transfer to the next generation, the family pension trust delivers substantially better outcomes. The tax savings alone, avoiding both 25% corporation tax and dividend tax whilst gaining contribution relief, transform the economic equation.”

The major downside, of course, is that pensions do not allow for capital access before age 55, soon rising to 57. There are also limits to how much can be contributed to a pension.

The number of women making up the ranks of the UK’s highest earners jumped last year to nearly 300,000 – the trick is to build this into pension saving and investing where they still lag behind men.

High-earning women in the UK – those making more than £125,000 a year and paying the top rate of income tax – rose in number to a record high of 284,000 in the year to March 31 2025.

This is up 12% from 254,000 the year before, according to exclusive data obtained from HMRC for the Bowmore Wealth Group.

Women now make up 26% of top-rate taxpayers, up from 25% last year and 24% in the year before that.

The top or ‘additional’ rate of income tax is 45%, applied to individuals earning more than £125,140 a year.

The fresh-high of women who are top earners pointed to more women reaching senior positions in professions such as law and financial services. Record numbers of women now sit on FTSE 350 company boards, for example – with 43% of board roles now taken by women.

Gill Millen, managing director at Bowmore Financial Planning, said: “It’s encouraging to see a record number of higher-earning women. Growing female representation in senior roles is showing up clearly in higher incomes.”

If you're a high earner – or about to become one – you may fall into the 60% tax trap. But what is it and how can you avoid it?

Female millionaires lagging behind

Women are not joining the ranks of millionaires as quickly, however.

While the number of male million-pound plus earners rose by 9% in the last year to 2,500, the number of women remained flat at 400, meaning women now make up just 14% of this group – down from 15% the previous year.

Millen said: “Unfortunately, the progress made with more women getting into the top tax bracket doesn’t seem to be reflected at the very top end with those earning a million pounds or more per year.”

“That suggests issues still exist when it comes to women accessing the highest-paid leadership roles and the distribution of shares in those businesses.”

“Change is happening though and with more women reaching the highest tax bracket, the need for smart, well-informed investing becomes increasingly important. This will enable them to retire comfortably later in life and pass on wealth to their family.”

How much women need to pay into their pension

Women on average need to be higher earners to even come close to bridging the common gap in their pensions and investments, according to new research.

Women aged 45 already face a £52,000 pension wealth gap – with average pension savings of £48,000 compared to £100,000 for men, according to government statistics.

They would need to earn £74,000 per year from age 45 onwards to achieve the same pension wealth as men by retirement, analysis from Interactive Investor, an investment platform found – double the average salary of £35,000.

This analysis assumes both groups contribute 8% of their earnings (3% employer contributions and 5% employee contributions) – known as the 8% pension rule – until age 68 with 5% investment growth.

Because women are on average starting from a much lower base in terms of pension savings, they must contribute £495 per month (8% of £74,000) from age 45 to achieve retirement pension wealth of £450,000 by age 68. In contrast, men need to contribute £233 (8% of £35,000) to achieve the same.

The lower women’s earnings, the bigger the pension gap. Women who earn the average £35,000 salary face a £160,000 shortfall by retirement – with an expected pension pot worth £290,000, compared to £450,000 for a man, even when both earn £35,000 from age 45 and reach age 45 with an average-sized pension.

There are multiple factors at play which are well documented; women are more likely to have time out of the workplace or work part-time during their thirties and forties to care for family – and this translates to smaller pension values and more financial stress in later life.

Camilla Esmund, interactive investor, said: “Our thirties and forties can be a significant time for us in terms of our earnings, but it can also be a time of competing financial priorities. As it stands, average pension differences begin to snowball once women hit their thirties and become more pronounced when they hit midlife.”

Three ways to close the pension gap – depending on your stage of life

While the data doesn’t make for encouraging reading, not all is lost. By taking some simple steps as soon as possible, women can take control of their financial futures and narrow the gender pensions gap.

Option 1 - Starting early (ages 22-45) - increasing contributions in your 20s and 30s is a great way to enter your forties with no gender pension gap. To reach age 45 with no pension gap at all, the average woman would need to contribute an extra £85 per month between ages 22 to 45.

Option 2 - Catch up later (ages 45-68) - if you’re already 45 with a £52,000 pension wealth gap, you’ll need to contribute an extra £262 per month to close the full £160,000 gap by retirement age.

Option 3 - Steady contributions throughout (ages 22-68) – contributing an extra £57 per month across your entire working life bridges the £160,000 gap by retirement.

How to boost your pension

There are a number of ways to boost your pension savings.

1. Top up your personal contributions if you can, making the most of tax relief

“The minimum amounts under auto enrolment often aren’t enough for a comfortable retirement, especially if you hope to take time out of the workplace to focus on bringing up your family. This is something to think about, and to plan for early, if you can,” said Esmund

Pension contributions receive tax relief at your marginal rate, meaning every £50 payment effectively costs £40 for a basic-rate taxpayer, £30 if you’re in the 40% tax bracket, and £25 if you’re in the 45% tax bracket.

2. Maximise your employer’s contributions

Some workplaces will contribute more to your pension if you increase your own contributions, and this could make a huge impact over time. For example, if you contribute £50 more per month to your pension for ten years from age 25, this could swell to £42,000 by retirement, assuming 5% investment growth.

3. Check your maternity pension contributions

“Employers are supposed to pay into your pension based on your pay before maternity leave, but recent analysis by Sky showed that some firms are reducing their contributions in an accidental error,” said Esmund.

4. Mind your fees

“Another easy win is to check how much you’re paying in pension fees. This isn’t always easy to see, but you could be paying more than necessary, which can eat away at your savings over time,” Esmund said.

When Beauty Tech Group made its debut on the stock exchange earlier this month, it was a welcome boost for the UK market, which has struggled to attract new issues in recent times. The £300 million listing was also a big win for venture-capital trusts (VCTs) – three VCTs run by Mercia Fund Management were among the first investors to recognise Beauty Tech’s potential, taking stakes in the company in 2018 when it had annual sales of less than £1 million and was still losing money. Beauty Tech follows in the footsteps of other VCT success stories, including Zoopla, Gousto and Virgin Wines.

VCTs were launched 30 years ago this year by the then chancellor Ken Clarke with a mandate to encourage investment in early-stage British businesses. Clarke’s view was that investors needed encouragement to risk their money in these small and immature companies, where the danger of failure is a very real one. He therefore legislated for the launch of VCTs – collective funds that build portfolios of such companies, but offer a series of generous tax reliefs to compensate for the additional risk, providing some downside protection in the event of losses. Successive chancellors have fiddled with the reliefs along the way, but the basic premise has been maintained. Today, investors who buy new VCT shares get 30% upfront income tax relief – so a £10,000 investment, say, costs only £7,000 – and enjoy tax-free dividends with no capital-gains tax to pay on profits. In addition, you can put up to £200,000 a year into VCT shares – far more than you’re allowed to invest in other tax-efficient wrappers, such as private pensions and individual savings accounts (ISAs).

The critical phrase is “new VCT shares”. While shares in VCTs are listed on the stock market, providing useful liquidity for investors who need to sell, it’s only subscriptions for new shares that attract the 30% income-tax break; investors must also hold on to the shares for at least five years, or face demands to repay the relief. In practice, this means that VCT managers offer new shares each tax year – either by launching new funds, or through additional fund-raisings for existing vehicles. This tax year about 20 VCTs have launched new share issues, or signalled that fund-raisings are imminent – and Alex Davies, the founder of investment platform Wealth Club, thinks this is just the beginning. “With the launch of the big name VCTs, such as Northern and British Smaller Companies, VCT season has only just begun,” Davies says. “So far, demand looks robust, with these VCTs respectively raising £12 million and £18 million in their first days of opening. With signs of life in the initial public offering (IPO) markets, which should be good for VCT exits, and further tax rises likely in the Budget, this year should see another year of healthy demand for VCTs.”

The Budget reference is a significant one. In recent years, VCTs have captured investors’ attention in an environment where other tax-advantageous savings schemes have been squeezed. Reduced private-pension contribution allowances for wealthier savers, for example, appear to have boosted the sector. The move to make unused pension assets subject to inheritance tax is also piquing interest in VCTs; although they offer no inheritance-tax benefits of their own, the funds are subject to fewer withdrawal restrictions than pension products and are hence useful for financial planning. Demand has boomed accordingly. “Despite a difficult economic background, the 2024/2025 tax year was the third-best year for VCT fundraising,” says Annabel Brodie-Smith, communications director of the Association of Investment Companies. “In the current environment, dominated by daily headlines about the need to raise taxes, it’s not surprising that VCTs remain a favoured investment for those who want to back growing UK companies while reducing their tax bill.”

Are VCTs right for you?

Last year’s VCT fund-raisings totalled £845 million, some way behind the £1.13 billion and £1.08 billion achieved by the sector in 2021-2022 and 2022-2023 respectively. Nonetheless, Chris Lewis, chair of the VCT Association, says the scale of the figure reflects widespread support for the sector. “More than ever, we see entrepreneurs, investors and policymakers aligned on the need to support the high-growth, high-potential firms backed by VCTs.” Clearly, this year’s VCT managers spy an opportunity given speculation about more tax rises to come in next month’s Budget. Several are even offering discounted fees to early birds. But while it’s true that the most popular VCTs tend to sell out relatively quickly – funds limit the amount they raise so that managers aren’t left scrambling to find enough attractive small businesses in which to invest – advisers urge investors to be cautious. VCTs aren’t suitable for everyone. They’re generally a better fit for those who have already made good use of private pension and ISA reliefs – and you’ll need to be comfortable with risk and volatility.

Even if you’re relaxed about risk, a question mark remains. The average fund has delivered a 53% total share-price return over the past decade. While the effective value of that return is boosted by the upfront tax relief, it’s worth putting it into context. The average investment trust investing in UK-listed companies rose 112% over the same period; the average investment trust with exposure to global shares delivered 280%. Choosing the right vehicle is critical. Over those 10 years, shareholders in the best-performing VCT enjoyed total share-price returns of 168%; those in the worst performer lost almost 80% of their money.

Many VCT managers are focused on income rather than capital gains. The average VCT yields 6.9%, with managers often structuring their funds so the proceeds from successful exits from portfolio companies can be used to pay dividends. That 6.9%, remember, is tax-free, making the yield look even more attractive given current low interest rates. Still, Ben Yearsley, director of adviser Fairview Investing, worries VCTs may have become victims of their own success. “Too much money has been raised in the past few years and it is chasing too few high-quality companies,” he warns. “I think investors will need to get used to returns in the region of 5% each year and not the 7%-8% seen previously. Is this enough for the risk? You’ll need to make your own mind up, but without the tax breaks, the answer would definitely be no.”

Yearsley also points out that the challenges – and risks – involved with managing VCTs have grown due to recent tweaks in the rules. Most significantly, the funds are usually now banned from investing in any business that has been trading for more than seven years – limiting them to less-mature enterprises at an earlier stage of growth. That’s in addition to restrictions such as investee companies having to be worth less than £15 million and with fewer than 250 employees. VCTs must also invest 80% of funds raised in qualifying assets within three years.

“I’m still not convinced that VCT managers have transitioned totally successfully to the new, more restrictive rules that mean only younger high-growth companies can receive investment,” Yearsley adds. Brodie-Smith is more optimistic. “In a challenging landscape, VCTs are helping to get ambitious businesses off the ground, and many of these will go on to fuel growth in the UK economy,” she argues.

VCT options

It’s also worth pointing out that VCTs come in several different shapes and sizes, with different risk profiles in each case. The largest section of the market is accounted for by generalist VCTs that invest in privately owned qualifying companies in a wide range of sectors, providing some diversification benefits. There are also specialist VCTs, which focus on one sector of the market – technology or healthcare, for example – and are therefore more exposed to the fortunes of a narrow band of businesses. In the third category, Aim VCTs invest in shares issues by companies listed on the junior market. Although Aim constituents are listed companies, rather than privately owned businesses, some still qualify as VCT investments because of their size and age. These Aim VCTs have performed less well, on average, than other VCTs, delivering only 20% over the past 10 years – but with much less variability.

These variations on the theme at least present investors with plenty of options – and the potential to build a portfolio of VCTs over time. It’s a good idea to begin with a base of generalist VCTs, only adding exposure to more specialist vehicles later on. The key is to do plenty of homework first – or to consult an independent financial adviser with expertise in this area. As Budget speculation continues and some VCTs start to fill up, it may be tempting to rush into a decision for fear of losing out at the hands of the chancellor or other investors. But don’t part with your money unless you can build an investment case for doing so that makes sense in the context of your existing portfolio, your financial goals and your attitude to risk. Tax incentives alone aren’t a good enough reason, in isolation, to embrace VCTs.

Three VCTs to consider now

For investors ready to take the plunge into the VCT market, choosing the right vehicle from the 20 or so funds raising money is vital. We asked Alex Davies of Wealth Club to pick his favoured funds for 2025-2026. Here are his three top picks.

Northern VCTs: “These long-standing VCTs [manager Mercia is raising money for Northern Venture Trust, Northern 2 VCT and Northern 3 VCT] target more established companies with growth potential. Mercia’s sweet spot is regional businesses – more than half the portfolio is outside London and the southeast – in the healthcare and technology sectors. This is an area where Mercia is getting success after success. The latest example is beauty technology firm Beauty Tech Group, which floated at the start of October at a £300 million valuation.”

British Smaller Companies VCTs: “The British Smaller Companies VCTs [British Smaller Companies VCT and British Smaller Companies VCT 2] target business-services companies – a pretty large pond to fish in. The current catch includes some cracking companies, such as financial adviser review platform Unbiased, which is expanding rapidly in the US, and digital special-effects studio Outpost VFX, which has worked on Captain America and Rings of Power.”

Triple Point Venture VCT: “Triple Point aims to invest earlier in a company’s life than many VCTs. At this stage there’s less competition, resulting in lower valuations and potentially higher returns. It is also higher risk, but the VCT mitigates that by making lots of smaller bets before doubling down on the winners. We think this VCT offers investors a distinctive, well thought out approach – with a manager who is starting to develop an appealing record.”

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It has always been tough to get your first job. But this year, it is proving tougher than ever. According to jobs website Indeed, graduates are facing the worst labour market since 2018. In September, consultancy giant PWC, traditionally a major recruiter, said it was hiring 200 fewer university leavers this year. In the UK, it doesn’t help that the economy has stagnated. But even in the booming US, a similar story is unfolding. According to the research firm Cengage, just 30% of this year’s graduates have found a job in their field. There are different local factors in each economy, but right across the developed world, it is clear that something else is going on: entry-level graduate jobs are disappearing.

It is not hard to work out why that is. AI is accelerating at such a rapid pace that it is now replacing much of the work that was traditionally done by new graduates. Higher up the career ladder, where the major decisions are made, and genuine expertise and insight are usually required, most jobs are still reasonably safe, at least for now. The smart bots still can’t do that kind of work. But drafting documents at a law firm, or checking spreadsheets at an accounting firm, which used to be left to the trainees, can now be performed perfectly adequately by one of the highly developed AI systems. In effect, the bots have taken out the first rung of the career ladder, leaving many graduates struggling to find their way into employment.

That is going to pose a genuine challenge for policy makers. If graduates can’t find a first job, their skills will start to erode, the debts they have taken on to pay for their degrees will never be repaid and they will never have a chance to build a rewarding career, or to contribute to the wider economy. It will be a disaster.

So what should be done? Plenty of people will argue for controls or regulations. They will say that AI systems should not be allowed to replace the work done by humans, or that companies have to stick to the same number of recruits as they were taking on five years ago. There might even be calls to ban AI completely. Such neo-Luddism won’t work. We don’t want to slow the development of AI, given the spectacular gains in productivity across the whole economy it could generate. Then again, we don’t want Gen Z to remain jobless, or for just one generation that just happened to have the misfortune to be born at the wrong time to suffer the entire brunt of the transition from one technology to another.

How to counter the AI jobs bloodbath

There is only one real fix for that: we should radically deregulate the jobs market for the under-30s. In the UK, the Labour government has chosen the worst possible time to give workers full employment rights from day one. It will take a bad situation for new graduates and make it a whole lot worse. It is hard to see why a company would take on someone leaving university this summer when AI might soon be able to do their job, and they will be stuck with them for years, or face a huge compensation payout if they decide to get rid of them. The government should carve out an exemption from that for anyone under the age of 30. It should also go further. Portugal recently offered the under-35s a 100% tax exemption for the first year of employment and 75% in the second year. The UK could easily copy that scheme and so could many other countries. Or else it could slash the national insurance charges for “first rung” graduate jobs, reversing the big increase that was imposed in the last Budget.

One point is surely clear – Gen Z is facing an AI jobs bloodbath. The entry-level work on which careers were built is being replaced by super-smart computer programs that are cheaper to run and easier to control. The only way to counter that is to create lots of new jobs to replace the ones that are being replaced by machines – and only a radical round of deregulation is going to achieve that.

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Pension savers concerned about inheritance tax (IHT) are on the look out for new ways to plan for retirement. The Enterprise Investment Scheme (EIS) is one attractive option, and EIS-focused investment managers are launching new products and services as demand increases.

The EIS, which has been running for more than 30 years, has often been regarded as a niche investment suitable only for the most sophisticated and wealthy investors. That is understandable – the scheme aims to help small and very early-stage businesses raise cash to fund growth, but such enterprises often fail, putting investors’ money at risk.

However, while the EIS was originally conceived as a scheme through which investors would put money into individual firms, several specialist managers now offer funds through which you can spread your money across a portfolio of qualifying businesses, helping to reduce the jeopardy. And the generous tax reliefs on offer provide a substantial cushion when individual investments do disappoint.

Change in the Enterprise Investment Scheme small print

One of those reliefs is particularly eye-catching in today’s environment. Under the current rules, investments in EIS-qualifying companies don’t count towards the value of your estate for IHT purposes once you’ve held them for two years or more. In April 2026, the small print will change slightly, limiting full IHT relief to the first £1 million of qualifying EIS assets, but only 50% of the value of your remaining EIS assets will be subject to IHT, reducing the tax rate on these assets from 40% to 20%.

For anyone worried about the changing rules on pension assets, this makes the EIS look interesting. Remember, from April 2027, any money remaining in your private pension plans at the time of your death will, for the first time, fall within the IHT net. For some families, that could lead to a sizeable tax bill – and boosts the attraction of alternative vehicles that are more IHT-efficient.

An EIS comes with other tax perks, too. You get up to 30% up-front tax relief on your investment – a little less than the 40% or 45% available to higher- and additional-rate taxpayers on pension contributions, but the annual investment limit on the EIS is very generous, at £1 million. There’s also no capital-gains tax (CGT) to pay on any profits you make, and you can offset losses against your income tax bill.

All in all, the EIS packs a powerful punch from a tax-efficiency perspective, especially in the context of the changing rules on private pensions. There’s potentially more tax relief available when you first save – at least in cash terms – and less liability to IHT at the other end. All of which comes with a hugely important caveat. The underlying assets in an EIS are much riskier than the investments that most savers hold in their pension funds. Investing through a professionally-run fund can help mitigate some of this risk – particularly compared with picking single qualifying companies yourself – but you’re still exposed to a volatile and illiquid set of assets.

The EIS is therefore best-suited to savers who have already amassed substantial pots of cash in conventional vehicles, including private pensions and individual savings accounts (ISAs). These are also likely to be the savers most at risk of leaving their heirs with an IHT liability.

It’s also sensible to take independent advice on EIS investments. Professionals expect demand for the EIS to rise fast in the months and years ahead. Roughly 20 firms are currently raising money for EIS ventures, with platforms such as Wealth Club offering access to the scheme.

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What are wealth taxes?

Taxes that make you pay a levy based on your assets – typically your net wealth – rather than your income from work. Such taxes used to be far more common globally than they are now. Sweden charged an annual levy on net assets for the best part of a century, with a top marginal rate that peaked at 4% in 1984; it was abolished in 2007. France had a wealth tax (riddled with loopholes) that was scrapped in 2017. As late as 1990, 12 OECD nations (advanced economies) still had wealth taxes, though they raised a paltry 1.5% of all tax revenues, on average. Today, only three countries still levy a tax on net wealth, namely Switzerland, Norway and Spain. Several European countries – France, Italy, Belgium and the Netherlands – do still levy wealth taxes on selected assets, but not on an individual’s overall wealth.

What are typical rates?

In Switzerland, which first introduced a net wealth tax in 1840, the level varies by canton between about 0.3% and 1% of a taxpayer’s net worth above a threshold typically in the low six figures. In Norway, where the tax dates back to 1892, the government currently charges 1% on individuals’ wealth exceeding a threshold of NKr1.76 million (£130,500). So if you lived in Norway and you had £250,000 in investments and £500,000 equity in your house, you’d pay an extra £6,190 a year in taxes. Above NKr20.7 million, the rate ticks up fractionally to 1.1%.

Why did wealth taxes fall out of favour?

In part, because wealth taxes are hard to introduce and administer, and are inevitably accompanied by a thriving cottage industry to help the truly wealthy avoid them. The only time a UK government was elected promising to introduce one was Labour in 1974. But over the course of his five years as chancellor, wrote a rueful Denis Healey in his memoirs: “I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.” The value of some assets is fairly easy to record, but for others – property equity, say – valuations are expensive, subjective and wide open to legal challenges. HMRC does not currently have an overview of the wealth of every citizen, and no way of doing so without a big investment of time and resources, and political will. All that makes wealth taxes a giant headache.

Why else are wealth taxes unpopular?

Bluntly, because wealth taxes don’t work. Calls for wealth taxes are readily understandable: governments everywhere – not least in the UK – are facing vast fiscal challenges in an era of low-growth and ageing populations. Meanwhile, in recent decades, the very wealthy have got much wealthier. In 2010, the combined wealth of the top 100 people on The Sunday Times Rich List was £172 billion. Last year, it was £594 billion. At the same time, the rich have remained as canny as ever about mitigating their tax liabilities (ie, paying as little as possible). The problem, though – even for fans of big government who think it’s fine for the state to tuck into individuals’ private assets – is that wealth taxes end up raising less than hoped and do so much collateral damage to the economy that they are self-defeating in fiscal terms. If that was true in Healey’s day, it’s even more so now.

Why’s that?

Because wealth, and the wealthy, are far more mobile. Dan Neidle, the Labour-supporting tax lawyer turned campaigner, recently published a 16,000-word essay “explaining why a wealth tax is a really stupid idea”, says Robert Colville in The Times. Executive summary: if you tax something, you get less of it, and wealth is no different. Neidle examines a model backed by campaigners and some Labour backbenchers, which posits that a 2% wealth tax on those with assets of more than £10 million would raise at least £24 billion a year. But he calculates that, under this system, 80% of the revenue would come from just 5,000 people and 15% from just 10. “So the entire thing could be scuppered if a dozen people got on a private jet.” Neidle favours, instead, a wholesale reform that scraps several existing taxes – including stamp duty, council tax and business rates – with a land value tax.

What are other arguments against wealth taxes?

Not only do wealth taxes not work, but they also distort the economy. Since debt is tax-deductible, wealth taxes tend to encourage the rich to avoid the tax by borrowing to invest in exempted asset classes (farmland or woodland, say), thus shrinking the tax base and distorting incentives. Alternatively, they might simply leave the country for a lower-tax jurisdiction, as did thousands of wealthy French citizens who set up in Belgium, or the thousands of the richest Norwegians who live abroad. Opponents argue that a wealth tax would only work if it were adopted globally – in practice, that means never. Another argument against wealth taxes is that rather than diminish billionaires’ political power, they would increase it by encouraging them to spend their money on nefarious political causes.

But we will get them anyway?

It’s unlikely, given that Rachel Reeves has ruled it out. But she may well be looking at more stealthy ways of taxing assets. Indeed, this summer has seen almost constant Treasury kite-flying in the press, with tales of various different property and inheritance taxes the government is said to be mulling over. There’s certainly significant wealth there, and it would be possible to tax it, says Neil Unmack on Breakingviews. Some £7 trillion of value is stored in British housing, making the full capital gains tax exemption for primary residences look tempting to target. Inheritance tax exemptions mean the average taxed estate pays 13%, not the 40% headline figure. The risk is that any such raids would add “affluent middle-class voters to the ranks of Reeves-haters". "Yet targeting them would make it politically easier for her to cut welfare spending. Especially if she does so with a degree of stealth.”

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Nicola Sturgeon has a book out?

Yes. But given the publishers reportedly shelled out a £300,000 advance for a memoir titled Frankly, there are disappointingly few revelations in Nicola Sturgeon’s memoir. And whether you thrill to the words of Scotland’s former first minister or find them risible will be a matter of taste and ideology, for she is a divisive figure. Supporters laud her as straightforward and honest; opponents criticise her as arrogant, condescending and implacably hostile to all those whose views she doesn’t share. Former SNP MP Joanna Cherry, for example, a barrister who fiercely opposed Sturgeon’s gender reforms, is brutal when it comes to documenting her ex-leader’s failings on domestic policy – including health, education, poverty and transport – and, of course, the failure to secure independence. “She repeatedly promised a second referendum she knew she could not deliver, issuing a never-ending list of dates and targets which she missed,” says Cherry in the Scottish Daily Mail. “She marched her troops up and down the hill until many of them deserted in disgust.”

Is that fair?

In part, yes. Sturgeon won eight successive elections as SNP leader, but left her party in a chaotic mess – watching it sink to defeat in 2024 (losing all but nine of their Westminster seats). Yet if all political careers end in failure, 99% of politicians would surely envy Sturgeon’s. She served as first minister for more than eight years, from November 2014 to March 2023, and took the SNP to new electoral heights. In May 2015, the party won 50% of the Scottish vote in the UK general election (its vote share surging by 30 percentage points) and won 56 of the 59 seats. At Holyrood, the SNP was never in danger of losing power under Sturgeon, and even now – after Labour’s win in the 2024 UK election – the SNP is ahead in opinion polls for the 2026 Holyrood election. Under Sturgeon, party membership surged, the SNP entrenched itself as the dominant party of government in Scotland, and support for independence held steady at around the 45%-50% mark – briefly touching 53% in 2020. That’s no small achievement and something no other leader has done.

What did Nicola Sturgeon achieve in office?

Under Sturgeon, the SNP government moved to the left, using newly devolved powers to make income tax more progressive (and higher than in England) and social security more generous, even as GDP grew broadly in line with the rest of the UK. But while Scotland’s debt balloons and spending on public services such as health and education is around 25% higher per capita than in England, “outcomes are not 25% better”, says Alex Massie in The Times. Sometimes they are significantly worse. “Drugs kill more people, per capita, in Scotland than anywhere else in Europe,” and while the causes are complex, the scale of the problem doubled on Sturgeon’s watch. The latest figures on the public finance, too, “paint a pretty bleak picture”, says Lucy Dunn in The Spectator. Scotland has a £26.5 billion gap in the public finances – a black hole that amounts to 11.7% of GDP and which widens to more than £30 billion if North Sea oil revenues are excluded.

What about education?

It’s a similar story. Shortly after becoming first minister, Sturgeon vowed to “close the attainment gap completely” between children from well-off and poor backgrounds, and asked to be judged on this measure. But a decade later, that gap has widened – and is still growing year by year, while Scotland has fallen decisively behind England and other comparable nations on key metrics. Even admirers of Sturgeon have always wrestled with “the space between rhetoric and reality in the SNP government”, says Libby Brooks in The Guardian. Sturgeon says the introduction of the Scottish child payment, the expansion of free childcare and support for youngsters in care are among her proudest achievements. In practice, though, there’s been a significant implementation gap – extended childcare ended up as a postcode lottery, with extra hours offered at work-unfriendly times. But it is of a piece with contemporary politics that “good intentions are expected to substitute for good outcomes”, says Massie. “In that respect, Sturgeon was an archetype of a particular type of political success. And no one ever lost money betting against the Scottish left’s capacity for moral preening. Sturgeon was, and remains, a master of this craft.”

What about Covid?

The pandemic is seen by some as Sturgeon’s finest hour. In practice, though, Sturgeon’s policies differed from England’s mainly in details of timing and tone. Overall, Scotland’s record on deaths and economic damage are similar – and worse than many European peers. The public inquiry into the pandemic blotted her reputation, with the revelation that many crucial WhatsApp messages were deleted. Sturgeon blames the pandemic for the poor performance of the Scottish health system, but it was under serious strain even before 2020. Under the SNP (in power since 2007) Scotland has lower – and falling – life expectancy, and higher deaths from drug misuse, than England and other European peers.

Not much of a legacy, then?

The SNP has already backed away from much of her policy legacy, says Iain Macwhirter in The Spectator. The gender nonsense has been abandoned.

Sturgeon’s coalition with the Scottish Greens is long gone. And the Scottish government has ditched the ambitious emissions reduction targets she established. Only this week, it scrapped her plans to replace a million gas boilers by 2030. For the SNP to have a chance of securing its goal of independence, it must first understand that Sturgeon’s “policies, especially on gender and the environment, led to a breach with many mainstream Scottish voters”. Yes, 46% percent of voters still back independence. But the prospect of it actually happening is as far away as ever.

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Britain’s chancellor Rachel Reeves is facing at least as much risk from her parliamentary colleagues as she is from gilt markets. Upon delivering the Spring Statement in March, she introduced welfare reforms to ensure the Office for Budget Responsibility (OBR) would confirm she had met her fiscal rules.

But tightening the criteria for disability benefits was a step too far for many Labour MPs, who rebelled once the welfare reforms came to a vote. The government only managed to pass the bill by gutting its substantive fiscal savings, leaving Reeves with an extra £5 billion to find. She broke down in tears, gilt markets wobbled, and a huge fiscal black hole looms.

Tax hikes cannot fill the gap without endangering growth and breaking a manifesto pledge. The fiscal and political constraints are now so great that the chancellor, a keen chess player, must recognise she is in zugzwang: there are no good moves left.

One year on from a historic landslide, it seems almost impossible to contemplate that the government is unable to command a majority in parliament. And yet the welfare rebellion demonstrates the party is unable to accept the fiscal reality.

Debt interest payments total £100 billion a year, almost twice the amount spent on defence and not far off the education budget. This was her inheritance. Such is the debt albatross slung around the neck of the low-growth UK economy.

The chancellor’s first decisions have compounded the problem. Her attempts to boost growth, such as increasing public investment and relaxing planning regulations, only pay off in the long term, whereas the increase in the minimum wage and employers’ national insurance had an immediate effect on business hiring and confidence.

Is there a third way for Rachel Reeves?

But this is mere tinkering when the solution at its heart is a question of political philosophy. Would tax cuts and a small state boost growth, or must the government deliver tax and spend? Liz Truss famously tried part of the former and lost her job – but with government borrowing and the UK tax burden already at record highs, the latter strategy would be an even bigger gamble.

Reeves has tried to plough a third way, promising not to raise the big three taxes of income tax, national insurance and VAT while spending only to invest. The compromise has not worked. Rather than expanding growth, the chancellor has been forced into ever tighter corners.

The fiscal constraint has led to manoeuvres that have confounded even her own electorate. It’s unlikely Labour voters wanted to reduce benefits for the old, the disabled and children with special needs. This is a government with a majority but without a mandate for the actions that the chancellor decided to take.

The lack of a mandate is exactly what caused so many problems for Liz Truss: if Truss had won a general election on a platform to cut spending and taxes, the government might have been able to pursue such policies with impunity, à la Donald Trump.

Instead, UK voters punished the government in the local elections. The party is slumping in the opinion polls, having lost a third of its support in less than a year. Labour MPs are wondering what they signed up for. Many of them are entering parliament for the first time, scarred by 14 years of Conservative rule.

Anything that smacks of “austerity” must be repudiated. The welfare reforms at which so many of them baulked were only going to reduce the growth of disability spending, not cut it. That was a step too far for enough Labour MPs that the government could no longer rely on its majority.

Our analysis of each Labour MP showed that opposition to the welfare reforms extended well beyond the usual troublemakers. We ranked each MP by a number of quantitative criteria such as their voting record, incumbency and ministerial status to create a ranking for how likely they were to rebel. Even some of those with a relatively neutral score voted against the bill, such was the depth of opposition.

This is the start of an ongoing problem that will stymie the government’s agenda. The rebels succeeded and will now be emboldened. The left of the Labour Party is the political tail wagging the fiscal dog. Hence, there are renewed calls for the government to consider a wealth tax. As much as the gilt market is becalmed by the expectation of higher taxes plugging the fiscal gap, anything that dissuades capital and wealth from flowing into British assets would only serve to make the hole even bigger.

The latest Fiscal Risks and Sustainability report from the OBR has highlighted the dependence of the gilt market on the kindness of strangers. Overseas holders of gilts have become an increasing source of demand for the UK’s government debt. Their share of total gilt holdings has risen from 19% in 1998-1999 to 31% in 2023-2024.

If tax increases are thought to harm growth or hurt capital, foreign holders will need a higher yield or lower sterling to compensate them for the increased risk. All of this adds up to a winter of discontent for gilts. The Budget can’t be tough enough to please financial markets while being loose enough to please Labour MPs. The political and fiscal constraints upon the chancellor have combined to leave her in zugzwang, where no move confers an advantage upon her position. Swapping the pieces on the board won’t improve matters either. Les jeux sont faits.

Helen Thomas is the founder and CEO of Blonde Money, a macroeconomic consultancy.

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More than £1.5 billion in tax was taken by HMRC from special investigations into the wealthy in the 2023/24 tax year, more than double the £713 million it yielded in the previous year.

The tax was collected by HMRC’s Wealthy and Mid-Sized Business Compliance Directorate, a team whose job it is to track down individuals who are suspected of leaving some of their tax bill unpaid, according to law firm Pinsent Masons.

The money was raised from some of Britain's wealthiest, defined by HMRC as individuals with incomes of over £200,000, or those with assets above £2 million.

The total tax that was collected by HMRC from the wealthy in 2023/24 was £5.2 billion, up from £4 billion in the previous tax year.

The government has told the taxman to do more to locate unpaid tax bills.

In her Spring Statement, chancellor Rachel Reeves gave HMRC an extra £100 million to recruit 500 more compliance officers with the hope they can raise £1 billion in extra tax revenue by the end of the 2029/29 tax year.

As a result of this initiative, Pinsent Masons says special investigations into wealthy taxpayers could become more common as HMRC tries to close the £1.9 billion ‘tax gap’ – the difference between total tax liabilities and the tax actually paid.

Ian Robotham, director of tax dispute and investigations at Pinsent Masons, says HMRC has been set “very hard” targets for extra tax collection by the chancellor, and that it is “hard to see” how these targets will be achieved without a “sharp” rise in tax investigations into the wealthy.

He adds: “Wealthy taxpayers who know they have tax issues to settle should urgently seek professional advice.

“Penalties in respect of inaccuracies can be mitigated down where taxpayers are proactive in contacting them to tell them about and assist them in resolving inaccuracies.”

Furthermore, Pinset Masons says HMRC has been increasing its investment in AI tools and ‘big data’ techniques to assist officers in collecting tax, making it even more important to be diligent with your tax returns.

How to make sure you’re reducing your tax liability

With special investigations into the wealthy potentially becoming more commonplace as the government tries to crackdown on unpaid tax, it is a good idea to make sure that you are being smart with your money.

Ian Futcher, financial planner at Quilter, says that once you cross the £200,000 income threshold “the tax system begins to bite in multiple places”.

Futcher says that the effective income tax rate for those earning between £100,000 and £125,140 is already above 60% as the personal allowance tapers out, adding that, for high earners, “additional income and capital taxes can make things worse without careful planning”.

For high earners, it can be worth taking steps to make sure they are minimising their total tax liability.

One of the “key” ways to do this, according to Futcher, is through pension contributions.

Though the annual pension allowance is reduced for some high earners, Futcher says “pensions remain a powerful tool”, though notes that “soon pension wealth will become liable to inheritance tax and therefore this needs to be thought about.”

Wealthy individuals with £2 million or more in assets may be particularly concerned about inheritance tax, as the Residence Nil Rate Band (currently £175,000) tapers away when estates exceed this value – meaning more wealth is liable to IHT.

To make sure you aren’t caught out by this, Futcher says “trust planning, surplus income gifting, and the use of onshore bonds within trusts can help to reduce the taxable value of the estate without sacrificing control or liquidity”.

He adds: “Spreading asset ownership across family members using lifetime gifting strategies, particularly of assets expected to appreciate, can also be highly effective over time.”

“High earners should also pay close attention to how they invest,” says Futcher.

“Structuring portfolios to use ISA allowances each year fully and offsetting gains using capital losses can all help mitigate capital gains tax for any investments not within an ISA.”

Futcher says using family investment companies or limited partnerships can “offer flexibility and intergenerational planning advantages too” but points out these “need to be carefully planned and expert advice is key”.

For example, using a spouse’s ISA allowance and/or a child’s JISA allowance could be effective.

Ultimately, Futcher says the tax system is riddled with quirks and thresholds that “penalise the unwary” and that “the wealthier you are, the more likely you are to stray into inefficient territory without a detailed plan”.

The new financial year has begun, bringing with it several tax changes that could affect business owners and investors.

The start of the 2026/27 tax year was 6 April, and with it comes a range of tax rises, allowance changes, and fee hikes.

While there aren’t any major changes to the main forms of taxation in the UK (income tax and national insurance), the adjustments that have been made still have the potential to take a bite out of your income.

Plus, frozen thresholds mean you could get hit by fiscal drag.

We run through nine key tax changes in the 2026/27 tax year.

1. Income tax rises

While the rate of income tax has not technically increased this tax year, you will still likely pay more than in previous years.

This is because the basic, higher, and additional rate income tax thresholds have remained frozen at their 2022/23 tax year levels, and they will remain unchanged until at least April 2031.

Frozen thresholds cause a phenomenon called “fiscal drag”, where wages increase with inflation but thresholds don’t. This means workers are dragged into higher tax bands despite not earning significantly more in real terms.

Ultimately it means more of your income is taxed, bringing in more revenue for the government.

2. Capital gains tax changes

If you’re planning to sell business assets during this tax year and beyond, you may find yourself with a higher capital gains tax bill.

This is due to changes to Business Asset Disposal Relief (BADR) and Investors’ Relief (IR) – previously known as Entrepreneur’s Relief.

The tax rate on these gains increased from 10% to 14% on 6 April 2025, and has risen again from 14% to 18% since 6 April, 2026.

3. Dividend tax hikes

Dividend allowances have been falling in recent years. Successive cuts have meant it has fallen from £5,000 in the 2016/17 tax year to just £500 in 2024/25.

The current dividend allowance is still £500, but the tax rates on income from dividends is being hiked, effective from the 2026/27 tax year.

Dividend tax rates have increased from 8.75% to 10.75% for basic rate taxpayers and from 33.75% to 35.75% for higher rate taxpayers.

The top, additional dividend tax rate is unchanged.

4. VCT investment reliefs

In another blow for investors, upfront income tax relief on venture capital trusts (VCTs) has been cut from 30% to 20%.

Previously, for every pound you invested in small companies through a VCT, you could get up to 30p back in tax relief upfront. But that has been reduced to 20p, making the product slightly less attractive, although capital gains and dividends remain tax-free.

5. Air passenger duty

Air Passenger Duty rose on 1 April 2026, adding to flight costs that are already under pressure due to the Iran war.

The changes add £2 to the cost of a short-haul economy flight and £4 to a short-haul flight in premium or business class cabins.

This may not seem like much but it will be on top of expected higher flight costs due to the recent Middle East tensions and the resulting rise in oil and fuel prices

6. Benefit in Kind rates

If you pay for an electric vehicle through salary sacrifice at your work, the tax you pay has now increased.

From 6 April 2026 onwards, electric vehicles pay 4% Benefit in Kind (BIK), rising to 5% in 2027/28.

7. Work from home tax relief

Employees who had to work from home could previously claim tax relief at £6 per week for extra household costs such as energy bills.

This has been scrapped for the 2026/27 tax year and staff will instead have to ask to be directly reimbursed.

8. TV licence fee

The TV licence fee increased at the start of April.

The annual cost of a TV colour licence increased from £174.50 to £180 from 1 April 2026 onwards.

9. Fuel duty

A fuel duty freeze, which has been in place since January 2011, is due to be phased out from September 2026 onwards, when fuel duty will increase annually in line with inflation.

There have been calls to continue the freeze due to rising oil prices amid the tensions in the Middle East but the government has so far refused.

One of the most common taxes UK residents will pay is income tax. It is levied at a rate of between 20% and 45%, depending on the amount you earn.

If you receive money from a job, pension, or any other form of income, you will have to pay income tax once your taxable income goes above the £12,570 tax-free personal allowance.

Income tax is used by the government to fund public services such as the NHS, schools and prisons, as well as to pay off debt.

The government is expected to rake in around £329 billion in income tax alone in the 2025/26 tax year, according to estimates by the Office for Budget Responsibility (OBR), making up around 27% of all tax receipts.

With the average household paying around £11,450 in income tax each year, according to the OBR, it is important that you understand how it is raised and how your bill is calculated.

How much income tax will I pay?

The amount of income tax you pay depends on how much you earn in a given tax year, be that through employment, self-employment, pension income, or more.

Income tax rates differ depending on where you live.

There are four main tax bands in England, Wales, and Northern Ireland, with tax rates ranging from 0% on the first £12,570 you earn, to the top rate of 45% on earnings over £125,140.

These rates are shown in the table below.

The rates above apply only to earnings you have within their band. For example, if you earn £90,000, you will be classed as a higher rate taxpayer but you do not have to pay 40% tax on all of your earnings.

Instead, you will pay £0 in tax on the first £12,570 you earn, 20% on the portion of your earnings between £12,571 and £50,270, and 40% on just the earnings you have between £50,271 and £90,000.

This effectively means that while your marginal tax rate may increase when you take a pay rise, you will never have less take-home pay if you increase your earnings.

You start to lose your personal allowance once you earn over £100,000. This reduces at a taper rate, and is lost entirely once you earn over £125,140.

Income tax rates in Scotland

Income tax rates are calculated slightly differently in Scotland, as there are more tax bands than elsewhere in the UK, though everyone still has the £12,570 tax-free personal allowance.

The below table shows Scotland’s income tax bands for the 2026/27 tax year.

How does the personal allowance work?

The £12,570 personal allowance is the amount of taxable income you can receive without paying any income tax at all.

That means that if you have an income of £12,500 in a given year, you will most likely not have to pay any tax.

For incomes up to £100,000, you will receive the full personal allowance. For example, if you earn £30,000 you will not have to pay any tax on the first £12,570 of that.

However, higher earners will see their personal allowances slowly erode when they breach the £100,000 earnings threshold. They will fall victim to what’s known as the 60% tax trap.

Under HMRC rules, for every £2 you earn over £100,000 per year, you lose £1 of your £12,570 tax-free personal allowance until it is fully removed at an income of £125,140.

This leads to higher earners paying a marginal tax rate of 60% on their earnings between £100,000 and £125,140.

For example, imagine someone earns a salary of £100,000, and they receive a bonus of £10,000, giving a total of £110,000.

The higher rate of 40% is payable on the bonus, which means that £4,000 would be deducted.

Since the bonus tips them over the £100,000 threshold, their personal allowance is reduced – in this instance by £5,000. This means there is an additional £5,000 brought into the higher rate income tax bracket.

This results in a further £2,000 of income tax being due, meaning £6,000 is deduced in tax from the £10,000 bonus. This is equivalent to a 60% tax rate on the portion of income above £100,000.

Successive governments have frozen tax thresholds at 2021 levels in recent years, with chancellor Rachel Reeves recently extending the freeze to at least 2030/31. As thresholds are not being raised in line with inflation, as had previously been the norm, it is expected that an increasing number of people will fall victim to this quirk of the tax system.

This is a phenomenon known as “fiscal drag”.

Figures from Rathbones show HMRC expects around 2 million taxpayers to be stuck in the 60% tax trap in the 2026/27 tax year alone, up around 6% from the previous year.

Do dividends count as income for tax purposes?

Dividends are treated as income when the government calculates your income tax unless the investments that are generating you dividends are held in an ISA.

You do not have to pay any tax on your dividend income if it falls within your £12,570 personal allowance, and there is an additional annual tax-free dividend allowance of £500 per person.

So, if you had a taxable income of £13,070 that was made up solely of dividends, you would not have to pay any income tax.

This is because the first £12,570 would be covered by the personal allowance, and the remaining £500 by the dividend allowance.

When you exceed these allowances, you need to pay tax on any dividend income from outside an ISA. This is charged at different rates according to the highest rate of income tax you pay.

The rate for basic rate taxpayers is 10.75%. If the taxable dividend income tipped into the higher rate tax band, the rate of tax applied would be 35.75%, and for additional rate taxpayers, a 39.35% tax rate would apply.

Does the personal allowance apply to capital gains?

The personal allowance does not apply to capital gains. Individuals have a separate annual capital gains tax exemption of £3,000 per person, per tax year.

If the total of all gains and losses in the tax year fall within this amount you don’t need to pay any tax.

Are you charged income tax on savings?

You may have to pay income tax on your savings interest. It will depend on how much money you have in savings and how much interest you are earning on that cash.

You will not have to pay any tax on interest earned on money held in a cash ISA, as this is protected within the tax-wrapper, but if you have savings outside an ISA, you might have to pay tax on your interest.

Basic rate taxpayers receive a personal savings allowance (PSA) of £1,000 each year. This means you can earn up to £1,000 in savings interest without it being subject to tax.

The personal savings allowance is halved to £500 for higher rate taxpayers and additional rate taxpayers receive no PSA.

Any income from savings interest over your PSA is treated as income and is taxed at the same rate as the rest of your income.

The rate your savings are taxed is also set to increase from April 2027, rising to the same rate as your income tax band plus two percentage points.

What is the marriage allowance, and how can it help me lower my tax bill?

The marriage allowance is a mechanism that allows married couples and those in civil partnerships to transfer 10% of their personal allowance to the other partner, who can then claim the value of that allowance.

This means £1,260 of your personal allowance can be transferred to your spouse or civil partner if they earn more than you. However, there are certain eligibility rules that apply.

Who can apply for the marriage allowance?

You must be married or in a civil partnership and one of you must be a non-taxpayer and one must be a basic-rate taxpayer. Higher or additional-rate taxpayers aren't eligible for this allowance.

The marriage allowance could reduce a tax bill by up to £252. It is also worth checking if you are eligible to backdate your claim, as in some cases you may be eligible to claim from tax years since 6 April 2021 (the 2021/22 tax year).

To be eligible for the marriage allowance in Scotland, your partner must pay the starter, basic or intermediate rate, which usually means their income is between £12,571 and £43,662.

How to transfer the personal allowance

The quickest way to apply for marriage allowance is online. You’ll need your National Insurance number and your partner’s National Insurance number.

There is also the option to apply by post, completing a MATCF form –– available on gov.uk.

You can also opt to do it through a self-assessment tax return if you’re already registered and file tax returns anyway.

What is National Insurance?

Alongside income tax, National Insurance (NI) is another tax paid on your earnings. It is paid by both employees and employers, while the self-employed pay it on profits.

You must pay National Insurance contributions to qualify for certain benefits and the state pension.

The rates of National Insurance are different for employed and self-employed people.

For those employed, you pay class 1 National Insurance contributions and the levels are tiered according to your earnings.

You pay no NI on earnings up to £242 a week. Then you pay 8% NI on earnings between £242.01 and £967 a week, and 2% on earnings above £967 a week.

The self-employed pay class 4 NI which is 6% on profits of £12,570 up to £50,270 and 2% on profits over £50,270.

Your NI contributions will be on your self-assessment tax return and are due at the same time as income tax.

You do not pay NI once you reach the state pension age. If you are self-employed you stop paying class 4 NI from the start of the tax year after the one in which you reach state pension age.

Something strange is going on with small businesses. Data published last week by the Office for National Statistics shows that the number of sole traders in the UK fell 4% last year – and has now declined 11% since 2019; by contrast, the number of small-business owners operating through companies rose 1% in 2023 and is up 4% on five years ago. The data feels counterintuitive because tax changes have made it progressively less attractive to run your business through a company structure in recent years.

In other words, some small-business owners may be paying more tax than they need to – possibly, say small-business experts, because the rules are poorly understood. Certainly, there are advantages to incorporating your business rather than operating as a sole trader. In particular, company owners aren’t usually personally liable for losses or liabilities incurred by their businesses, unlike sole traders. A company structure can also make it easier to navigate the IR35 rules on disguised employment, which have made life more difficult for contractors in recent years.

However, it is the tax position that is usually front of mind for small-business owners weighing up the pros and cons of incorporation versus sole trader status. And here, the scales have tipped in recent times. As a sole trader, you’ll pay income tax on the profits you make from your business – at a top rate of 20%, 40% or 45%, depending on whether you’re a basic-, higher- or additional rate taxpayer – as well as national insurance.

By contrast, if you trade as a company, it will pay corporation tax on profits, at rates from 19% to 25% depending on how much it makes. However, you’ll also need to take money out of the company as your earnings, either by paying yourself an income or through dividends. You’ll pay the usual income and national insurance rates if you opt for income, or dividend tax rates on dividends – 8.75%, 33.75% or 39.35% for basic-, higher- or additional-rate taxpayers.

Taxes for a sole trader

The combination of corporation tax and further taxes on earnings means that, for many small-business owners, operating through a company leads to a higher tax bill than working as a sole trader. And that has become much more likely in recent years, following increases in both corporation tax and dividend tax rates, as well as reductions in the tax-free dividend allowance. By contrast, income tax rates have been left untouched.

Some small-business experts are worried that the impact of such changes has been poorly understood. They fear that the idea of a company offering greater tax efficiency has become ingrained among entrepreneurs, even though it is no longer the case for many small-business owners. For individual owners, there is no single right answer.

But it does make sense to review your business’s tax position – perhaps after the Budget later this month – to check that you’re not putting yourself at a disadvantage. An accountant can help you analyse the figures under both structures, and then you can consider other advantages and disadvantages. Equally, for new business founders, don’t assume that incorporation is always the right route to go down.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

The Labour government may have pledged not to increase income tax but many of us will find more of our earnings going to the taxman in the coming years.

A whopping fifth of under-40s will become higher or additional rate income taxpayers by 2028, new research has revealed. The huge increase in higher-rate taxpayers is down to the freeze on income tax bands.

Back in 2021, the then-Conservative government announced it would freeze the income level at which you start paying income tax as well as the thresholds where your income makes you a higher rate or additional rate taxpayer. The tax thresholds are set to remain frozen until the 2027-28 tax year resulting in inflation and wage growth dragging millions more people into the increased income tax bands.

Research by Quilter reveals that by 2028 3.6 million workers under 40 will fall into the higher income tax band, thanks to the frozen tax bands. Meanwhile, a further half a million will become additional rate taxpayers.

“Frozen income tax thresholds, which show no signs of thawing under the new Labour government, were initially introduced in the 2021-22 tax year until 2025-26 and were expected to create a total of just one million more higher rate taxpayers in this time,” says Rachael Griffin, tax and financial planning expert at Quilter.

“Now, however, thanks to the extension of the frozen thresholds to the 2027-28 tax year, coupled with higher wages which increased in an attempt to keep up with high inflation, those aged under 40 are expected to more than quadruple the initial target alone.”

What are the income tax bands?

How much income tax you pay depends entirely on how much money you earn.

• Most people get a Personal Allowance of £12,570. We can earn up to that amount each year tax-free. 
• Then you have the basic income tax band. Anything you earn above the Personal Allowance and up to £50,270 will be taxed at the basic income tax rate of 20%. 
• Next is the higher rate tax band. If you earn more than £50,270 a year, then anything above that level will be taxed at 40%. 
• If your annual earnings are over £125,140 you become an additional rate taxpayer with your income over that level taxed at 45%. 
• Once you earn over £100,000 a year you start to gradually lose your Personal Allowance to the point where additional rate taxpayers get no tax-free earnings allowance.

By freezing all the tax thresholds for seven years the Conservative government found a stealthy way to increase income tax. 

Inflation and wage rises mean we all generally earn more as the years go by – usually, the thresholds are increased to reflect this. But holding them at the same level means more and more of us will become higher or additional rate taxpayers thereby increasing the tax revenues.

3 ways to reduce your taxable income

If you are approaching the higher or additional rate tax brackets there are steps you can take to reduce your taxable income and avoid paying a larger income tax bill. 

1. Increase your pension contributions.
This is “particularly advantageous for higher rate taxpayers,” wanting to avoid the additional tax rate, says Griffin. 

You are entitled to 40% tax relief on your pension contributions as a higher-rate taxpayer (you get 20% relief if you are a basic-rate taxpayer). So, saving into a pension can have a double benefit – you get the tax relief added to your pension savings, and you can also reduce your taxable income.

Employees paying into their workplace pension have their contributions taken from their pre-tax income, so increasing the amount you pay into your pension can help keep your taxable income below the next income tax bracket.

“The majority of people can pay up to £60,000 into their pension each year, which can help you reduce your taxable income considerably,” says Griffin. “What’s more, you can carry forward unused pension annual allowance for up to three years.”

2. Use the marriage allowance
Another option for some people will be to use the marriage allowance. If you are married or in a civil partnership and one of you doesn’t earn enough to exceed your Personal Allowance (£12,570) you can give up to 10% of your unused allowance to your partner to reduce their income tax bill. It can shave up to £252 a year off your household income tax bill.

3. Opt for salary sacrifice
“Salary sacrifice is another useful tool that can help save you money on purchases such as protection policies, and in some cases, it can also help reduce your overall tax burden,” says Griffin. 

With salary sacrifice, you lower your taxable income by giving up part of your earnings to receive a non-cash benefit instead such as health insurance, a bike, a company car or increased pension contributions.

“Salary sacrifice is a great way to reduce your tax burden with no extra cost,” says Alice Guy, head of pensions and savings at interactive investor. “Over a lifetime of working, using salary sacrifice can make a big difference to your long-term wealth, especially if you can afford to save or invest your tax savings.”

Income tax thresholds are set to remain frozen until 2028 if the Conservatives return to power after the general election, Chancellor Jeremy Hunt has confirmed.

Speaking to the Today programme on BBC Radio 4 on Thursday (30 May), Huntsaid “a future Conservative government will not increase income [tax] rates and VAT”. But, when pushed about tax thresholds, he confirmed the current freeze would remain in place. The BBC has reported that Labour will also maintain the existing thresholds.

Should the stealth tax remain in place beyond the 4 July election, it would mean millions of workers could fall into higher tax bands over the coming years due to wage growth - something which is known as fiscal drag. It means high earners may be paying an extra £4,000 a year to HMRC by 2027, with one in five earners dragged into the higher band over this timeframe.

The Personal Savings Allowance (PSA) also remains frozen, although it’s unclear whether it’s also included in the major political parties’ threshold freeze. Banking trade body UK Finance has called for the PSA to be expanded for savers. Tax-free thresholds for capital gains tax and the dividend allowance have already been cut, and are unlikely to change. At the same time, there has been a 4p cut to National Insurance since January.

Both the Conservatives and Labour have said they will not raise headline tax rates if they are elected. Other Tory policies include the triple lock plus and a commitment to bring back national service. Meanwhile, Labour has pledged to keep the triple lock in its current form and bring in a state-owned energy company.

Income tax thresholds freeze means millions will pay ‘substantially more’

Personal tax thresholds have been frozen since March 2021. The policy, which was brought in while Rishi Sunak was Chancellor, was introduced in a bid to help the government make up for the vast amounts of public spending it made during the Covid pandemic.

The Conservative government had already planned to keep it in place as a result of the impact of record inflation on public spending and the hangover from Liz Truss’s stint in 10 Downing Street, which has affected how much the government can borrow.

An assessment of the freeze by the Office for Budget Responsibility (OBR), which was released with the Spring Budget in March, found it would move an extra 3.3 million taxpayers into the higher and additional rate income tax bands by the 2027/28 financial year. There would also be 3.8 million more taxpayers overall.

If the Conservatives are re-elected, the OBR’s overall number could be lowered as a result of the triple lock plus policy. The party’s pledge would decouple pensioners’ tax-free income tax allowance from the £12,570 most workers are entitled to. There are expectations the full amount of the new state pension will exceed the allowance before the end of the decade.

AJ Bell analysis of current inflation figures and OBR forecasts has found that a person with a salary of £15,000 a year in 2021 will have had to have paid an extra £2,816 in income tax by 2027/28 than if the tax-free allowance had risen with inflation, assuming their salary rose in line with the rate of price rises over the period.

It also found that by the 2028 horizon, the personal allowance could be almost £3,500 below where it would have been were it indexed, while the higher rate threshold would be more than £13,500 above the current £50,270 limit.

Director of public policy at AJ Bell, Tom Selby, said: “Working families might understandably feel more than a little aggrieved that, having committed to ending the personal allowance freeze for pensioners, Rishi Sunak and Jeremy Hunt are not making a similar pledge for younger people.

“This works in exactly the opposite direction to the National Insurance reductions announced by the government, not to mention the hints at further National Insurance (NI) cuts to come. The Conservatives are effectively giving with one hand, by lowering NI, and taking away with the other through the stealth tax of frozen thresholds. Creating a different personal allowance for pensioners will also complicate the tax system and add unfairness between generations.

“This all adds up to a pretty incoherent approach to income tax and National Insurance policy which seems to be driven entirely by a desire to win over older voters ahead of the general election.”

Tax codes may not be the first thing you look at on your payslip each month, but the short combinations of letters and numbers tell your employer or pension provider how much income tax to take.

They tell you exactly how much tax you’re paying the government, so it’s important to check your tax code is correct.

Occasionally, they can be wrong, which could leave you with either a big rebate or a hefty tax bill from HMRC.

That in and of itself is a good excuse to make sure that your tax code is right. With the new tax year underway, now could be a good time to make sure that you won’t be caught out by an error.

Your tax code can be found on important documents, such as your payslip or pension statement.

Sarah Coles, head of personal finance at AJ Bell, said: “Millions of tax codes are wrong, so you could be paying too much tax, or you could be underpaying, which will come back to bite you later.

“HMRC says it’s up to every person to check their own code, so it’s worth doing sooner rather than later.”

What are tax codes?

Your tax code is basically a note from HMRC to you and your employer or pension provider that explains how much tax you’re due to pay on a monthly basis between April and March (i.e. over each tax year).

It always comes with a letter that describes your employment status and may have numbers, which usually reflect your tax-free allowance and any reliefs you're eligible for, but can also refer to your tax band.

For example, if you have one job or one pension, you’re likely to see ‘1257L’ on your payslip. This refers to the £12,570 tax-free allowance you get on your income tax. This standard personal allowance has been frozen until April 2031.

However, when the nature of your employment changes, extra complications may be brought into the system which can result in your tax code being incorrect.

Coles says: “Things can go awry if you have changed jobs, if you have more than one job, or have recently retired, so while everyone should check their code, if you fall into any of these brackets, it’s particularly key.”

If you're self-employed, you will not have a tax code. Instead, you will have to file a self-assessment tax return each year.

Full list of tax code letters and what they mean

Your employment or tax status may be a little more complicated. So, here is a full list of the letters you’ll normally see – and what they tell you about your tax status.

Tax code letters in England and Northern Ireland

• BR - It means all of the income from this job or pension is taxed at the basic rate. It’s usually used if you’ve got a second job or a pension.
• D0 - All of your income from this job or pension is taxed at the higher rate. Again, this is most likely to appear on the payslips of those with a second job.
• D1 - All of your income from this job or pension is taxed at the additional rate (if you’ve got a second job or pension pot).
• L - This means you are getting the standard income tax-free personal allowance (£12,570).
• M - This letter shows you’ve received a transfer of 10% of your partner’s personal allowance, as part of the marriage allowance tax break.
• N - This letter means some of your personal allowance has been passed over to your partner as part of the marriage allowance.
• NT - This letter shows you are not paying any income tax on the money you’re getting (for example, if all of your income comes via capital gains).
• T - This letter shows that other calculations are included in working out your personal allowance.
• 0T - This code means your personal allowance has been used up, or that your new employer doesn’t have all of the details they need to give you a proper tax code.

Sometimes, you may see a different letter on your payslip. This is most likely to be an emergency tax code. These are temporary and usually only appear when you’ve: started a new job, become an employee after having been self-employed, started receiving company benefits or a state pension. The codes to look out for are: W1, M1 or X. They will normally follow the standard 1257L code.

Another possibility is that you’ll get a code beginning with ‘K’. You’ll see this if you’ve got an income that’s being taxed in a different way and exceeds your income tax-free personal allowance. For example, you may be paying tax you owe from a previous financial year, or receiving taxable benefits from your company or the state.

Your tax code could change if you receive a bonus or another form of one-off payment from your job. Given HMRC assumes any monthly increases signify a permanent pay rise, it may put you in a higher tax band (assuming the one-off rise would push you above a particular threshold if it continued for the rest of the tax year).

This is a particularly big issue if the bonus makes it look like you'll be earning more than £100,000 a year, as your tax-free allowance will start to taper off. This is known as the 60% tax trap. To avoid this outcome, it's worth keeping an eye on your payslips. If you spot anything that's incorrect, get in touch with HMRC immediately.

It's also an issue for thousands of pensioners who withdraw a large one-off amount from their pension pot and HMRC then assumes they will take that sum out of their pension every month. Pensioners who have been overtaxed on pension withdrawals have reclaimed £1.5 billion since 2015. More than 13,600 repayment claims were processed, amounting to more than £46 million, in the last three months of 2025, HMRC figures show.

Tax code letters in Scotland

Income tax can be set differently by the devolved UK nations. As such, they have different codes to those you get in England. Here’s what the Scottish and Welsh codes look like.

• S - This letter shows your income or pension is being taxed using Scottish rates.
• SBR - This code means all of your income from this job or pension is being taxed at the Scottish basic rate (20%).
• SD0 - This code tells you that all of your income from this job or pension is being taxed at the intermediate rate in Scotland (21%).
• SD1 - This code means all of your income from this job or pension is taxed at Scotland’s higher rate (42%).
• SD2 - This shows that all of your income from this job or pension is being taxed at the advanced income tax rate in Scotland (45%).
• SD3 - This shows that all of your income from this job or pension is being taxed at the top rate in Scotland (48%).
• S0T - This code means your personal allowance (£12,570) has been used up, or that your employer doesn’t have all of the details they need to provide you with a tax code.

Tax code letters in Wales

• C - This letter means your income or pension is being taxed using the rates in Wales (which are the same as they are in England).
• CBR - This code shows all of your income from this job or pension is getting taxed at the Welsh basic rate (20%).
• CD0 - This shows you that all of your income from this job or pension is being taxed at the higher rate for Wales (40%).
• CD1 - This code means that all of your income from this job or pension is taxed at the additional rate in Wales (45%).
• C0T - If you see this, it means your personal allowance has been used up, or your employer doesn’t have all of the details they need to provide you with a Welsh tax code.

What to do if you think your tax code is wrong

If you think your tax code is incorrect, you can contact HMRC either online or by phone.

The Check your Income Tax online service lets you update your employment details and users can tell HMRC about a change in income which could have affected your tax code.

HMRC may then change your tax code following these updates.

To contact HMRC via phone, call: 0300 200 3300 or, if you’re outside the UK, dial: +44 135 535 9022

You can also write to HMRC. Post your letter to: Pay As You Earn and Self Assessment
HM Revenue and Customs
BX9 1AS
United Kingdom

If you need to tell HMRC about a change in someone else’s income on their behalf (e.g. you're their accountant), you should fill in a PAYE Coding Notice query form.

Income tax thresholds have now been frozen for over five years, dragging millions of Brits into higher tax brackets as their earnings increase but the thresholds do not – a process called fiscal drag.

The freeze began in the 2022/23 tax year after then-chancellor Rishi Sunak said in his 2021 Autumn Budget that a temporary freeze on income tax thresholds would keep them at 2021/22 levels until the 2025/26 tax year.

However, as successive chancellors have tried to find ways to raise money, they have each decided to keep thresholds frozen. Jeremy Hunt extended the freeze until 2027/28 in his 2022 Autumn Budget.

Current chancellor Rachel Reeves then extended the freeze again in the 2025 Autumn Budget, meaning earnings will be taxed at 2021/22 levels until at least the 2030/31 tax year despite experiencing a decade of inflation.

These freezes mean the tax thresholds in England, Wales and Northern Ireland will remain at the following levels until at least 2031.

Taxpayers will begin losing the personal allowance once they earn more than £100,000. It decreases by £1 for every £2 of adjusted net income above £100,000, meaning the personal allowance is lost entirely once your taxable income is £125,140. This is known as the 60% tax trap.

As most people with an income of over £12,570 pay income tax, freezing thresholds affects millions of people.

The Office for Budget Responsibility, the UK’s fiscal watchdog, says the freezes will mean that between 2022/23 and 2030/31, 5.2 million more individuals will start to pay income tax for the first time.

Meanwhile, 4.8 million more people will be dragged into the higher tax band and 600,000 more into the top, additional rate tax band.

The government is forecast to be raking in an additional £55.5 billion in the 2030/31 tax year alone.

How much will fiscal drag cost me?

If you are a Brit in the UK who earns more than £12,570 a year, you will be worse off thanks to income tax threshold freezes. But how badly you are affected will depend on how much you earn.

Fiscal drag is expected to cost basic-rate (20%) taxpayers up to £700 in the 2026/27 tax year alone as the personal tax-free allowance has not grown with inflation, according to research by AJ Bell.

By the time thresholds are planned to start increasing with inflation again in 2030/31, that figure will have risen to around £960.

These figures are even more extreme for those on the higher (40%) rate of income tax. This group will be forking out as much as £3,500 more in tax in the 2026/27 tax year than if thresholds had increased in line with inflation.

By 2030/31 the higher rate threshold should be approaching £70,000 had it tracked inflation, but it is set to remain at just over £50,000, AJ Bell’s analysis shows.

The following table compares the income tax forecast to be paid in the 2030/31 tax year using 2021 thresholds and projected inflation-linked thresholds for two example salaries.

Source: AJ Bell

As the table shows, the cost of fiscal drag is significant, as someone on a salary of £35,000 will be £961 worse off in the 2030/31 tax year thanks to threshold freezes.

That difference is even more pronounced for the higher earner on £75,000 in the higher-rate tax band. The cost of fiscal drag for them is almost £5,000.

How frozen thresholds have worsened the 60% tax trap

The £100k or 60% tax trap is a controversial quirk of the tax system, and more people than ever are set to fall victim to it thanks to fiscal drag. Two million taxpayers will be hit by the £100k tax trap by 2026/27.

Once your earnings reach £100,000, a portion of your income becomes subject to what is effectively a 60% tax rate.

This happens because your £12,570 tax-free personal allowance tapers off at a rate of £1 lost for every £2 earned above £100,000 until you reach an income of £125,140 when you return to the usual 45% rate.

That means that for every £100 you earn in this bracket, £40 is deducted in income tax, while another £20 is taken as you lose your personal allowance.That translates to a marginal tax rate of 60% on earnings between £100,000 and £125,140.

Fiscal drag is worsening this issue, as people are being dragged into this bracket as their wages rise but the tax thresholds don’t.

Meanwhile, fiscal drag can be even more damaging for higher earners that currently access certain benefits like free childcare hours. This is entirely revoked the moment you go over the household income threshold of £100,000.

How to beat income tax threshold freezes

While there is little you can do to stop fiscal drag entirely, there are ways to mitigate its effects on your finances.

The main way this can be done is by reducing your taxable income to avoid being dragged into a higher tax bracket.

That does not mean saying no to a pay rise, but may mean delaying when you can use that money.

1. Make pension contributions

One way to beat fiscal drag is by increasing your pension contributions as these receive tax relief, meaning you can effectively claw back income tax.

For example, if you earn £55,000 you will normally pay no tax on the first £12,570 you earn, then 20% tax on remaining earnings up to £50,271, and 40% on the £4,729 left over.

On that final section of your earnings, you get £6 in your pay packet for every £10 you earn. However, if you were to put it into a pension, you would get tax relief on the full £4,729. The catch is that you can’t access this money until retirement.

This may make sense for some people who do not need that extra income right now, helping them lower their tax bill while putting more away for their retirement.

2. Consider salary sacrifice

Salary sacrifice works in a similar way to increasing your pension contributions, as both methods can reduce your taxable income, making it more tax-efficient.

Salary sacrifice can include pension savings, but you can also use salary sacrifice for other benefits like buying an electric car or a bicycle with no tax deducted.

“Through this method you can save on National Insurance as well as income tax, meaning it only costs £68 to pay £100 into your pension for a basic-rate taxpayer, and £58 for a higher-rate taxpayer,” says Rob Morgan, chief investment analyst at Charles Stanley Direct.

3. Make sure to use your ISA allowance

An ISA allows all UK adults to save up to £20,000 in cash or investments each year without being taxed on the interest earned or gains realised.

These can help you avoid some of the consequences of fiscal drag by stopping your income from savings and investments becoming subject to higher savings interest tax, dividend tax, and capital gains tax rates.

Any money you make over your tax-free allowances from your investments or savings interest held in non-ISA accounts will count as income for tax purposes.

That can drag you into a higher tax bracket and foot you a bigger tax bill than you may have otherwise had.

For example, imagine you had earnings of £50,270 from your job.

Your employment income alone puts you right on the upper limit of the basic rate tax bracket, meaning you are only paying 20% tax on this.

As a basic rate taxpayer, you would get the personal savings allowance of £1,000. The personal savings allowance is £500 for higher rate taxpayers. Additional rate taxpayers don’t have a personal savings allowance.

If you had £50,000 in a traditional savings account (rather than a cash ISA) that earns a 4% interest rate, you would earn savings interest of £2,000 per year.

This means your savings interest will push you into the higher rate of income tax.

This means you will lose half of your personal savings allowance, as it would fall from £1,000 to £500 per year.

This savings interest is then also taxed at 40%, footing you a tax bill of £600.

If you had instead saved this money in an ISA, you would not have to pay any tax at all on the savings interest as any interest earned on cash ISA savings or investment gains made in an ISA are entirely tax-free.

Taxpayers wishing to submit a paper tax return must ensure that HM Revenue & Customs (HMRC) receives it by midnight on Thursday, 31 October – or risk being fined.

While most people file their self-assessment returns online, almost 400,000 people choose to fill in and post a paper version.

“If you are planning to complete a paper self-assessment return, remember that the Halloween deadline is the date by which HMRC needs to receive all necessary paperwork - not the last day that you can send your return off,” comments Stevie Heafford, tax partner at accountancy firm HW Fisher.

“If you don’t think you will have enough time, don’t be spooked - you can still decide to complete your return online, for which the deadline is 31 January 2025.”

However, anyone who files a paper tax return after the 31 October deadline could be fined by HMRC. You’ll pay a late penalty of £100 if your tax return is up to three months late. If it’s later than this, you could face fines totalling more than £1,000.

The deadline to pay any tax due for the 2023-24 tax year is 31 January 2025 - regardless of whether you submit a paper or online self-assessment return.

The 31 January deadline to pay tax or file an online tax return may feel like a long way off, but there are actually only 100 days to go. It’s a good idea to submit it as soon as you can, and then you don’t have it hanging over your head during the Christmas break and into the New Year.

According to HMRC, 3.5 million people have already beaten the clock and submitted their tax returns for the 2023-24 tax year.

More than 12 million people need to file a tax return; more than 97% of these are filed online.

Who sends a paper tax return? 

While an overwhelming majority prefer to complete their tax return digitally, there are still some individuals who choose to complete their return via post.

You need to request a paper return if you want to file your self-assessment this way. HMRC says: “We no longer automatically issue paper returns unless there’s a reason a customer can’t file online.”

You can either download the paper tax return (download SA100 on gov.uk), or call HMRC to ask for one (0300 200 3610, Monday to Friday: 8am to 5pm).

Do you need to file a tax return? 

You must submit a tax return if you have self-employed earnings or have received untaxed income over £1,000 - or if HMRC has issued a notice to complete one.

However, it’s not just the self-employed who have to complete a tax return. Here are some more reasons why you may have to file one:

• You're a buy-to-let landlord with untaxed rental income
• You’re a higher-rate taxpayer who pays into a pension or gives to charity
• You receive child benefit and you or your partner have an income above £50,000
• You make more than £6,000 in capital gains
• You have a side hustle and make more than £1,000 a year
• You rent out a spare room, and make more than the rent-a-room limit
• You invest in a VCT or EIS

Top tips for completing your tax return

Stevie Heafford gives the following tips to avoid making common mistakes:

• Allow yourself plenty of time. Gathering all the paperwork takes longer than you think. This includes your P60, which will confirm the total tax deducted at source from your income. You will also need a record of benefits and expenses, which can be found on your P11D or P9D forms. If you have left a job in the last tax year, you will also need a P45 from your previous employer.
• Don’t forget to claim tax relief on pension contributions. Make sure you keep details of any pension contributions made to allow you to claim the right tax relief for them.
• Make sure you include charity gift aid payments. For example, have you sponsored a friend to run for charity? This can be included as HMRC provides some tax relief on charitable giving.
• If you’re submitting a paper tax return, keep a proof of postage on file in case there are any postal delays. You should keep a copy of your completed tax return and related documents.
• Remember your starting rate for savings, personal savings allowance and dividend allowance. You could receive up to £5,000 in interest on savings tax-free in addition to your personal allowance and personal savings allowance. These allowances are reduced depending on income levels. There is also the dividend allowance, which was £1,000 for the 2023-24 tax year.

What happens if I miss the 31 October deadline?  

Don’t worry, if you miss the paper tax return deadline, you can avoid a fine by submitting it online instead. Just make sure it’s done by 31 January.

However, if you submit a paper return after the 31 October cut-off, you'll be charged a £100 penalty, even if there's no tax to pay.

If you still haven’t filed your self-assessment return after three months, further penalties of £10 a day are applied, up to a maximum of £900. After six months, HMRC will fine you 5% of the tax owed or £300 (whichever sum is greater), which is repeated at 12 months.

You’ll also be charged 7.5% interest on late payments.

Watch out for scams 

Self-assessment customers should beware of HMRC scams, as tax return season is a popular time for fraudsters to target victims.

HMRC warns that criminals may use emails, phone calls and texts to try to steal information and money from taxpayers. You should never share your HMRC log-in information with anyone. A fraudster could use them to steal from you or claim benefits or a refund in your name.

We have more information about how to protect yourself from scams and what to do if you are conned in Self-assessment tax scams on the rise.

Most people associate self-assessment tax returns with the self-employed, and think the deadline is in January.

But there are lots of other reasons why you may need to submit a tax return to HMRC - and there’s a deadline in October too.

Anyone who needs to register for self-assessment for the 2024-25 tax year must do so by 5 October 2025. The deadline to then file a tax return online and pay any tax owed is 31 January 2026. Taxpayers who make payments on account make a second payment by 31 July every year.

About 12 million people file a tax return each year, and 97% of customers do so online. There is an earlier deadline of 31 October for those submitting a paper tax return.

“Self-assessment angst usually strikes in January, but there are some people who need to get their skates on well before that, because they need to register for self-assessment before the deadline on 5 October. Those who have started a business or partnership are likely to be well aware of this, but there are other groups of people who may have no idea they need to sign up for the first time,” comments Sarah Coles, head of personal finance at Hargreaves Lansdown.

As HMRC puts it: “New self-assessment customers could be someone who has set up a side hustle to earn money in addition to their PAYE job or disposed of crypto assets; they may be newly self-employed or a new landlord renting out property. Whatever the circumstances, if a customer has any income that they have not already paid UK tax on, they need to register for self-assessment.”

HMRC recently put out a warning urging “side hustlers” to register for self-assessment. "Whether you are selling handmade crafts online, creating digital content or renting out property, understanding your tax obligations is essential. If you earn more than £1,000 from these activities, you may need to complete a self-assessment tax return,” explains Myrtle Lloyd, HMRC's director general for customer services.

Even if you don't owe any tax, you may still need to file a return to claim a tax refund, claim tax relief on business expenses, charitable donations, pension contributions, or to pay voluntary Class 2 National Insurance contributions to protect your entitlement to certain benefits and the state pension.

Here are 11 reasons for registering, from the well-known, such as becoming self-employed or a buy-to-let landlord, to more surprising, lesser-known, reasons.

Note that the list isn’t exhaustive, there are plenty more reasons for filing a self-assessment return, due to our complex tax regime! You can use HMRC’s online checking tool to assess whether you need to complete a tax return.

1. You work for yourself or you’re in a business partnership

As you don’t pay income tax through PAYE, you need to tell HMRC how much you earned and then pay any tax via self-assessment. You will likely have to make two payments each year, one by 31 January and the other by 31 July.

2. You’re a buy-to-let landlord 

If you’re earning money through renting out a property, or several properties, you need to tell HMRC so you can pay the correct amount of tax on this income.

3. You’re a higher-rate taxpayer who pays into a pension 

If you pay into a personal pension like a Sipp, or your employer runs a scheme on a “relief at source” basis, you’ll get basic-rate tax relief and need to claim the rest from HMRC. Higher-rate taxpayers can claim an extra 20% while additional-rate payers can get a further 25%.

If your employer makes contributions before tax (known as “net pay”), you’ll receive the full pension tax relief automatically and you don’t need to tell HMRC. The same is true if you have a salary sacrifice arrangement. If you’re not sure how your workplace pension works, check with your HR team or your pension provider.

If you have extra relief to claim, you can either complete a tax return, or if you’re employed you can write to HMRC and receive a one-off payment. Coles notes: “However, if you opt for a letter you’ll need a new one every time your salary or contributions change significantly, which might actually end up taking more effort.”

4. You’re a higher-rate taxpayer who gives to charity 

You automatically get 20% gift aid when you donate to charity, but you can claim back the rest of the tax relief through a self-assessment claim.

However, if this is your only reason for completing a tax return, there are alternatives. You can fill in a separate form to make the claim, or contact HMRC and ask them to amend your tax code instead.

5. You receive child benefit and you or your partner have an income above £60,000 

This means you’re subject to the high income child benefit tax charge. For the 2023-24 tax year, this kicks in at £60,000 annual earnings, and means you have to repay 1% of the benefit for every £200 you earn over the threshold.

The £50,000 threshold for child benefit rose to £60,000 in April last year, and the top of the taper rose from £60,000 to £80,000. So, some good news for parents for the 2024-25 tax return.

There’s more good news if you pay income tax through PAYE. In future, parents will be able to pay the child benefit tax charge through their payslip, rather than doing it via self-assessment. There are more details about HMRC’s new service on gov.uk.

Bear in mind that once you earn above £80,000, you’ll need to repay all your child benefit, so most parents find it easier to claim it but tell HMRC not to make any payments – which saves the bother of repayment but means you still get National Insurance credits, which count towards your state pension.

6. You make more than £3,000 in capital gains 

Capital gains are the profits you make when you sell something that’s increased in value. It also applies if you give something away to anyone other than a spouse or civil partner during your lifetime, so even if you’re not personally making the profit, the tax is due.

The capital gains tax threshold for 2024-25 was £3,000. If you made more capital gains than this, you need to complete a tax return and pay capital gains tax.

7. You make a capital loss

This information also goes on your tax return. If you make a loss you can set it against other gains in the same tax year, or carry it forward to offset losses in a future tax year.

Note that if you’ve never made a capital gain and you don’t otherwise need to do a tax return, you can write to HMRC instead.

8. You make £10,000 in interest and/or dividends 

If you make money over your personal savings allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers and £0 for additional-rate taxpayers) or dividend allowance (£500 in 2024/25), you will usually have to pay tax, but if you’re employed you can ask HMRC to adjust your tax code to take the money.

If you have interest over your allowance, you’re not employed, don’t get a pension and don’t complete a tax return, HMRC will contact you at the end of the tax year with a tax demand, if applicable.

However, if you need to pay tax on over £10,000 in dividends, or your savings interest is £10,000 or more, you’ll need to fill in a self-assessment tax return.

9. You invest in an EIS or VCT 

Some investments like enterprise investment schemes and venture capital trusts come with tax benefits that you can claim via self-assessment. However, if this is your only reason for filing a tax return, you can arrange for the tax to be repaid through an amendment to your tax code.

10. You have a side hustle and make more than £1,000 a year 

Everyone has a £1,000 trading allowance, which can cover things like selling items through eBay or Vinted, or being paid to babysit or walk dogs. Any more than this and you normally need to do a tax return.

11. You rent out a spare room, and make more than the rent-a-room limit

You can make up to £7,500 a year tax-free by renting out a furnished room in your home, including through Airbnb. Any more than this, and you need to register for self-assessment.

TWO MORE SELF-ASSESSMENT TIPS 

If you think you no longer need to complete a tax return for 2024-2025, you need to tell HMRC before the deadline on 31 January 2026 to avoid any penalties or needing to complete a tax return. HMRC has produced two videos explaining how customers can go online and stop self-assessment if they are self-employed and those who are not self-employed.

Customers should be aware of the risk of falling victim to scams. Never share your HMRC log-in details with anyone, including a tax agent, if you have one. There is more scams advice on this HMRC page.

Self-assessment taxpayers who need to make their second payment on account for the 2024/25 tax year have less than two weeks to do so or face hefty interest charges and penalties.

Workers who make payments on account must do so by midnight on 31 January and 31 July every year.

The deadline applies to all those who are self-employed unless they owe £1,000 or less (as this can be made in a single payment on the first tax return), or they have already paid more than 80% of the tax they owe.

Claire Trott, head of advice at St. James’s Place, says: “With there now less than two weeks remaining until HMRC’s second self-assessment payment deadline on 31 July, it’s vital that taxpayers check what they owe and ensure payment is made on time to avoid facing penalties.”

What is payment on account?

Many self-employed people are required to make two payments on account each year. HMRC works out an estimate for what your tax bill is likely to be, based on previous tax years, and splits this into two payments on account.

So on 31 January, not only will you have to pay your tax bill for the 2023/24 tax year, you also have to pay your first payment on account for the 2024/25 tax year. The second payment on account then needs to be paid by 31 July.

You can request for your payments on account to be lowered if you believe your income will fall and you will therefore be liable for a smaller tax bill.

The tax can be paid online using a debit or corporate credit card; or via bank transfer, direct debit or a cheque in the post – however, plan this in advance to avoid any transfers being received after the deadline.

For those who still receive paper statements from HMRC, it’s also possible to make the payment at your bank or building society.

Penalty interest rate rises

The amount of interest HMRC charges on income tax not paid on time was recently upped, making it more vital than ever to pay your outstanding tax by 31 July.

From April 2025, the government increased the late payment interest rates to 4% plus base rate, which saw the rate initially jump to 8.5%, the highest level since August 2007. The rate fell to 8.25% at the end of May to take into account the latest Bank of England interest rate cut, and remains at that level.

The interest on late payments was previously set at 2.5% over base rate.

The tax authority saw receipts for interest on overdue payments jump from £147 million in 2021-2022 to £252 million in 2022/23, according to a Freedom of Information request submitted by financial advisory firm NFU Mutual.

Sean McCann, chartered financial planner at NFU Mutual, comments: “The change in April saw the interest on late tax payments rise to 8.5%. Even with the recent reduction in the base rate, an interest rate of 8.25% is a heavy charge on taxpayers who pay late.

“Late payment interest accrues daily from the date the payment is due, so this increase makes it even more crucial to pay your tax on time.”

Trott adds: “Given the potential cost of delay, it’s essential that individuals check their self-assessment account now and act ahead of the 31 July deadline. While long-standing self-employed individuals are likely to be familiar with these deadlines, they can easily catch out those newly self-employed who’ve submitted their first return this year.”

'Do I have to file a self-assessment tax return?'

About 12 million people are expected to file a self-assessment tax return each year. While it is predominantly seen as something that self-employed workers have to do, there are many people in regular employment who are also required to file a tax return.

It largely comes down to whether you receive some form of income that is not taxed at the source. As a result, alongside the self-employed, those who receive an income from renting out property or who make large amounts of money from investments (which aren’t held in an ISA) will also have to file a return.

So too will those who need to pay capital gains tax after profiting from the sale of an asset, or who earn an income from abroad.

Other examples include people that earn more than £60,000 and need to repay some of the child benefit they have received, and higher or additional-rate taxpayers who want to claim extra tax relief on their pension contributions.

About 97% of people filing a tax return choose to do so online, while 4% submit a paper return.

Registering to file a self-assessment tax return

You need to register with HMRC in order to file a self-assessment tax return. This must be done by 5 October for the following tax year.

You can do this online through the Gov.uk website, after which you will be sent a unique taxpayer reference through the post. Activation details for the government’s Gateway platform will also be posted to you; the Gateway is used for filing an online tax return.

This process can take up to three weeks, so it’s a good idea to start the registration process as early as possible.

Filing your self-assessment tax return and paying your tax bill

You have until 31 January to file your self-assessment tax return and pay your tax bill, if you’re doing it online.

This deadline is for the previous tax year. So you have until 31 January 2026 to file your tax return and pay your bill for the 2024/25 tax year.

Those who file their tax return by paper have to send it in by 31 October – although the deadline to pay any tax due is still 31 January.

Once you have completed your tax return, and HMRC has told you how much tax you owe, you have a few different payment options for clearing your tax bill.

Many taxpayers opt to pay the bill in full through a single lump sum payment, but there are various ways in which you can do that. A single payment could be made using a debit card, for example, while you can also use a corporate debit or credit card, though this will incur a fee.

You can make the payment through your online banking service to the HMRC bank account. You can also make a payment from your bank or building society’s local branch, or by posting a cheque to HMRC.

These payments can take a few days to go through, so it’s good advice to make the payment in advance of that deadline.

It’s not possible to pay at the Post Office anymore.

The penalties for late tax returns

A £100 penalty fine will be levied if you are late in filing your tax return and paying your bill - with more fines after that if you fail to pay.

This penalty is increased if you are more than three months late. You will also have to pay interest on the money owed.

McCann notes: “A penalty of 5% of the tax due is normally charged 30 days after the due date.

“An additional 5% penalty is charged on sums outstanding after six months with a further 5% penalty on any tax outstanding twelve months after the due date.”

However, HMRC has said it will not slap you with a penalty for 'honest' mistakes. It will accept certain excuses if you want to appeal against a penalty for a late tax return, including the death of a close relative, a spell in hospital, or if your computer fails.

If you are unable to pay, contact HMRC as soon as possible to see if a repayment plan can be put in place.

'What should I do if I make a mistake filing my tax return?'

If you have made a mistake with your tax return, you can correct it yourself within 72 hours. This can be done through the Gateway platform if you file your return online, while those who do their return through the post can download a new form to fill in. The word “amendment” needs to be written on every page.

After this date, you’ll need to write to HMRC to outline any errors made. You must make clear why you think the wrong amount of tax has been paid and how much you either owe or should be refunded.

You are able to claim refunds up to four years after a tax year ends.

Expenses if you are self-employed

You may be able to claim certain expenses when filing your self-assessment tax return, which will lower the size of your tax bill.

These could include office costs, such as for stationery or computer equipment, or travel costs, such as train fares.

Crucially, these need to be expenses that are the result of you carrying out your job ‒ you can’t claim for a laptop which you are actually using for leisure purposes, for example.

You may also be able to claim towards a portion of certain household expenses, should you work from home, such as your energy bill. You cannot deduct the entire bill ‒ instead you will be required to work out what portion of your energy use is the result of your work.

An easier option is the simplified expenses scheme, which allows self-employed people to claim a flat rate. This is determined by the number of hours they work from home each month and ranges from £10 to £26 a month. You will need to work at least 25 hours a month from home.

High Income Child Benefit Charge

One reason for some people needing to file a self-assessment tax return is so they can pay the High Income Child Benefit Charge.

The charge is levied against people who earn more than £60,000 a year, and acts as a taper, gradually claiming back the child benefit paid to such high earners.

The benefit is effectively withdrawn at a rate of 1% for each £200 earned over £60,000 a year by the higher-income partner. Therefore, child benefit is fully withdrawn where the adjusted net income of the higher-income partner reaches £80,000 a year.

The partner who earns the highest amount is responsible for paying the High Income Child Benefit Charge, even if they are not the one that receives the child benefit payments.

'I'm struggling to pay my tax bill. What are my options?'

According to Trott at St. James’s Place, if you find yourself unable to pay what you owe, it’s important to contact HMRC as soon as possible.

She comments: “While it may be tempting to delay or ignore the issue, HMRC does consider reasonable excuses, and reaching out early gives you the best chance of avoiding escalating penalties.

“For anyone simply caught off guard by this month’s deadline [on 31 July for payments on account], now is also a good time to think about how to be more prepared going forward, whether that’s setting aside funds on a regular basis or setting up a Budget Payment Plan with HMRC.”

Some taxpayers who are unable to pay the bill off in full can look to set up a ‘Time to Pay’ arrangement. For some this can be done online, but in other cases you may need to discuss your needs with HMRC staff directly. As the name suggests, Time to Pay allows you to pay the bill off over a longer period, in instalments.

HMRC will look into your financial arrangements to work out how much money you have left each month after the essentials, such as food and utility bills, have been paid. It can then calculate what you can afford to pay towards the bill.

For some taxpayers, the bill can be paid through their tax code. This is not an option for everyone ‒ you can only do this if you owe less than £3,000 and already pay tax through pay as you earn (PAYE), for example because you are employed in some capacity rather than entirely self-employed. You will also have to have submitted either a paper tax return by 31 October or an online tax return by 30 December.

Finally, as Trott mentioned, it’s possible to make regular payments towards the next year’s tax bill by putting a Budget Payment Plan in place. With such a plan, you make payments on either a weekly or monthly basis, which are directed towards your next bill.

It means that when you actually file your tax return, you can then either claim a refund or top up the payments to clear the amount you owe.

With all of your self-assessment tax return payment methods, it’s important to note down your UTR. You will need to include this as a reference, for example when making an online payment, or by writing it on the back of the cheque. This means that HMRC is able to easily work out which tax bill the money is meant to go towards.

One in five taxpayers will be paying higher-rate income tax by 2027, according to a leading thinktank.

The Institute for Fiscal Studies (IFS) says that many teachers, nurses and electricians are among the one in five taxpayers who will be paying the 40% tax rate (levied on those with an income between £50,271 to £150,000) because of a six-year freeze on thresholds implemented by Chancellor Jeremy Hunt and ‘fiscal drag’.

It means there will be 2.1 million more higher rate taxpayers and 350,000 additional-rate taxpayers in five years' time, according to the Office for Budget Responsibility (OBR).

In total 7.8 million people are projected to be paying income tax at 40% or above by 2027-28.

This represents a “seismic shift” and around a quadrupling of the share of adults paying higher rates since the early 1990s, said the IFS.

In 1991-92, 3.5% of UK adults (1.6 million) paid the 40% higher rate of income tax. By 2022–23, 11% (6.1 million) were paying higher rates, the report added.

It shows that over recent decades, higher rates of income tax have gone from being reserved only for the richest to something that a far more substantial proportion of the population can expect to encounter.

The report predicted: “By 2027–28, more than one in eight nurses, one in six machinists and fitters, one in five electricians and one in four teachers are set to be higher-rate taxpayers.

“Among police officers, architects and surveyors, and legal professionals, we also see significant increases in the share paying higher-rate tax over time, with almost half of the latter two groups expected to be paying higher-rate tax in 2027-28.”

What is fiscal drag?

Wage growth is currently 6.7%, according to the Office for National Statistics. Due to the freeze on tax bands, many workers will find themselves ‘dragged’ into a higher tax band, even though they have not had a proper pay rise that leaves them better off in real terms. This is known as ‘fiscal drag’.

Calculations by Quilter show that if wage growth averages 5% per year for the next four years but income tax thresholds remain frozen, then someone earning £50,000 today will be £2,643 worse off in the 2027-28 tax year, and in total be £6,463 poorer over the four-year period.

Rachael Griffin, tax and financial planning expert at Quilter, says “High inflation means that despite someone receiving a pay rise they may not feel wealthier as their buying power remains the same - however, their salaries will be taxed much more.”

“Freezing income tax bands is a form of stealth tax as you’ll end up paying considerably more tax during the time bands are frozen, which will be on top of higher energy and food costs.”

How can I avoid fiscal drag?

Unfortunately, fiscal drag affects us all – even if you don’t change your tax band. That’s because as your pay rises with inflation, more and more of your pay packet is taxed and your overall tax burden increases.

However, prudent financial planning can help lessen the impact. Using an ISA can shelter your savings and investments from the taxman and ensure you don’t pay unnecessary tax. Using a pension can turbo-charge a retirement nest egg thanks to the power of tax relief. We also have plenty of tips on how to reduce a potential inheritance tax bill.

You may be able to take advantage of tax breaks too, like the marriage allowance. This is where one person in the couple has an income below the personal allowance (£12,570), and by transferring part of the allowance, the couple can save up to £252 in a tax year.

If a pay rise means your salary has just tipped into a higher tax band, you could use salary sacrifice to lower it.

Griffin explains: “One option might be to make additional pension contributions via salary sacrifice essentially lowering the taxable portion of your salary and potentially reducing it under the higher rate of tax threshold.”

You can also scrutinise expenses whatever your employment status. “If you’re self-employed, ensure you’re claiming for all those allowed by HMRC as a result of your work,” say Justin Modray of Candid Financial Advice.

Contributions from Katie Binn

With just over a week left until the end of January, many of us are thinking about our tax returns. But this year you have a bit more time to sort out your taxes because HMRC has extended the deadline.

In normal years you have until 31 January to file your tax return, but this year the taxman has pushed the date back to 28 February. However, that doesn’t mean you should wait. Not filing until February could still cost you money.

The new deadline for submitting your tax return

In recent weeks, HMRC has come under increasing pressure to extend the deadline for submitting 2020-2021 tax returns, because the Covid-19 pandemic has left many people struggling to complete their accounts. Accountancy firms have reported “widespread staff shortages caused by the spread of Omicron”, says Harry Brennan in The Daily Telegraph. “They said this was making it impossible for professionals to meet the cut off date, meaning taxpayers faced being unfairly punished for their accountants being off sick.”

Missing the 31 January deadline usually results in an instant £100 fine, plus additional penalties that can leave you owing thousands more. However, HMRC has announced that you won’t face a late filing penalty this year if you submit your tax return online by 28 February.

The end of January also usually marks the deadline for paying any tax due, but this is being extended as well. You won’t face a late-payment penalty provided you pay your bill or set up a “time to pay” arrangement by 1 April. The latter is a new system HMRC brought in to recognise that people could struggle to pay their bills if the pandemic lockdowns affected their income. Under the “time to pay” rules anyone owing up to £30,000 can arrange to pay what they owe in instalments.

You own't be fined, but you’ll still pay interest

However, HMRC isn’t giving you a completely free ride. You won’t pay any penalties if you miss the 31 January deadline for paying your tax bill, but HMRC will start charging interest on anything you owe at a rate of 2.75% from 1 February. So if you can get your tax return filed and your bill paid by the usual end of January deadline, you should make sure you do so.

If you miss the new 28 February deadline, you will immediately be fined £100. After that, £10 a day is added up to a maximum of 90 days. Anyone who is more than six months late in filing will pay the higher of either £300 or 5% of the tax due. If you are a year late filing your tax return HMRC could fine you 100% of the bill.

Still, while you should try to file this month, the benefit of having until 28 February to file without fines is that you don’t need to panic if you’re struggling. Taking the time to get things right could mean you avoid a hefty unexpected bill. HMRC will fine you up to 30% of your bill for careless mistakes, rising to 100% if it thinks the error is deliberate.

Don’t forget Covid-19 loans

It’s particularly important to make sure you understand the rules surrounding any coronavirus-related government handouts you may have received. This is the first year that taxpayers will need to include any Covid-19 support, such as money from the self-employment income support scheme or business support grants. Any payments received through these schemes are subject to income tax, so you need to declare them on your tax return.

“The fact that the Covid-19 support payments are taxable has come as a shock to many and has resulted in unexpected tax bills,” says Michelle Denny-West, a tax partner at the accountancy firm Moore Kingston Smith in The Times.

There are new sections on the tax return where you will need to give details of any Covid-19 loans, grants or payments you received. The money received through these grants will be added to your overall income and taxed accordingly.

Tax comes in many different forms – VAT, capital gains tax, inheritance tax, income tax – and different people pay it at different rates. Typically, the more you earn, the more tax you pay; this is what’s known as a “progressive” tax system.

Your marginal tax rate is simply the tax rate you pay on each extra pound of income you earn. For example, take income tax rates in the UK. As of the tax year that started in April 2025, there is no income tax due on any money you earn up to £12,570. Then, for every pound you earn above that, you will pay 20%. This is your marginal tax rate.

Then once you earn more than £50,270, your marginal income tax rate goes up to 40%. Once you earn over £125,140, it goes up again, to 45%, so for every pound you earn, you keep 55p and 45p goes to the tax office.

So far, so straightforward – as you earn more, you pay more tax.

However, years of government tinkering designed to raise more money without upsetting too many voters has left us with a very complicated tax and benefits system. As a result, different taxes kick in at different income levels, while certain benefits are clawed back. These interactions sometimes create huge spikes in marginal tax rates for certain groups.

For example, child benefit is clawed back once one person in a household starts earning above £60,000 a year. This could result in a marginal tax rate of more than 58% on earnings above £60,000 – or even more in the case of families with more than one child.

Similarly, once someone earns more than £100,000 a year, their personal allowance – the amount on which they pay 0% income tax – starts to be clawed back. This creates a marginal tax rate of 60%.

Taxing marginal income at these levels seems counterproductive. However, a cleaner, more transparent tax system might make it clear just how much we have to pay. And governments tend to lack the political nerve to embrace that sort of transparency.

The tax-return deadline of 31 January is looming, but millions of us still haven’t filed our self-assessment forms for the financial year between 6 April 2019 and 5 April 2020. And this year, thanks to the fallout from Covid-19, the process could prove particularly protracted.

“Each year about 11 million people have to complete a self-assessment tax return,” says Rupert Jones in The Guardian. “There were still 5.4 million taxpayers who hadn’t filed by 31 December 2019 and 5.5 million who were yet to file by 31 December 2018.”

So, if you’ve yet to sit down and work out what you owe the taxman, you are not alone. However, this year, for once, the tax authorities are being understanding. HMRC says it will aim to be lenient with those affected by the pandemic.

The Covid-19 excuse

“The taxman is developing a simplified ‘Covid-19 excuse’ form that will allow the self-employed and landlords to miss the January 31 deadline for filing and paying their returns,” says David Byers in The Sunday Times.

“It will allow those who say they have a reason for late filing due to the pandemic to avoid stiff penalties.” One valid reason for a delay could be “pressures of home schooling”, says Rob Davies in The Guardian. “People who can show that either they or their accountant have recently been ill with the virus are also likely to be shown clemency.”

File on time

Usually, if you miss the deadline you face escalating fines that start at £100 for being three months late. After that you are liable for an additional £10 a day up to a maximum of £900. It continues with fines of a further £300 or more if you are more than six months late. This year these fines are being waived if you are late owing to Covid-19, but you will have to pay interest on unpaid tax at 2.6%.

If you do file your tax return before 31 January, then you may not need to pay your bill by that date. “Once an individual has done their 2019-2020 return, and knows their tax calculation, they can set up a payment plan, provided they owe less than £30,000,” says Jones in The Guardian.

“They can then choose how much to pay straight away and how much to pay each month by direct debit, and it can all be done online. Needless to say, you’ll have to pay interest.”

“We want to encourage as many people as possible to file on time even if they can’t pay their tax straight away,” HMRC has said. If the pandemic prevents someone from doing so, “we will accept they have a reasonable excuse and cancel penalties, provided they manage to file as soon as possible after that”.

Tax relief for working from home

While the bulk of Covid-19’s effect won’t be felt with this round of tax returns – they cover the year to 5 April 2020 – you do need to think about how your work was affected in the early days.

The first national lockdown began on 23 March 2020, but many people weren’t in the office before then. If your employer had told you to work from home in the 2019-2020 tax year, then you can claim tax relief for each week.

“If you go for the easy, no-receipts-required route, your claim will be based on the assumption that you have incurred costs of £6 a week, and you will get back the tax you would have paid on that,” says Jones. That’s £1.20 a week for basic-rate taxpayers and £2.40 for higher-rate taxpayers.

Anyone who thinks working from home has cost you more than £6 a week can put in a claim for more. However, you have to provide evidence of the cost increases and explain why they were directly related to your work from home.

Those that don’t fill in a tax return can claim the relief via a specific “working from home” form on Gov.uk. Otherwise, you’ll need to claim it as an expense on your self-assessment form.

What is proposed?

That there should be just one single positive marginal rate of tax – 20%, say – rather than progressively higher rates as earnings rise (as under the current system). The idea is to simplify the system so as to encourage compliance and create an incentive for higher earners – thus boosting the economy. In theory, a flat-tax structure could be devised in which one single rate covers income tax, national insurance, corporation tax, value-added taxes and even inheritance tax. The US academics with whom a flat tax is most associated, Robert Hall and Alvin Rabushka, argued for a flat tax on both individuals and companies, for example. In general, however, the term “flat tax” typically means replacing the existing income-tax rules with a single marginal tax rate and sweeping away the various tax bands, exemptions and allowances.

Wouldn’t that be regressive?

Not necessarily. Most models do include an exempted amount of income and sometimes a significantly increased personal allowance. Thus the tax remains progressive at lower rates of income and tax, but becomes close to proportional at higher incomes (ie, as the exempt amount becomes a steadily smaller share of the total income). Naturally, much depends on the details. According to economic modelling by the Institute for Fiscal Studies – examining four potential flat-tax structures for the UK, all of them intended to be revenue-neutral – some versions of a flat tax would in fact be progressive, in the sense of favouring lower earners. A simple flattening of income-tax rates alone does redistribute towards those with high incomes, but if NI contribution rates are also flattened, it tilts the reform in favour of lower earners.

Why change?

The rationale is that by simplifying the tax code – and making the single rate sufficiently low – you save people and businesses time and money, drive up compliance rates by reducing the incentive for tax evasion or avoidance and stimulate the economy by increasing the incentives for extra effort and risk-taking. As such, the flat tax is typically favoured by small-state conservatives and economic liberals. Proponents of flat taxes argue that they pay for themselves, since the higher rates of compliance and the expansion of economic activity contribute to the broadening of the tax base. As such, flat taxes bring in more revenue notwithstanding the lower rate, and can even mean the rich pay a bigger proportion of the total. Flat taxes can also cut away all the confusion and complexity that lets evasion and avoidance thrive – and hence allows resentment of the rich to fester.

Have any countries tried it?

Lots, mostly in post-communist Russia and eastern Europe. In 1994, Estonia replaced three tax rates on personal income, and another on corporate profits, with a uniform rate of 26% on both. Latvia and Lithuania followed suit – as did (from 2001) Russia, with a rate of 13% on personal income (but not corporation tax) and Slovakia (19% on personal and corporate income). In the years that followed several other central and eastern European countries, including Romania, Macedonia, Montenegro and Albania, all took the plunge with various forms of flat tax. The most studied of these examples is Russia, where evidence (for example from the IMF) suggests that its landmark 2001 reform did indeed increase compliance.

Would it work here?

Over the years the Tories have occasionally flirted with the idea. But backing for a flat tax has remained largely the preserve of think tanks and lobby groups. One main argument against a flat tax is that current taxes are complicated for a reason – it’s not the number of tax rates that makes the tax code complicated, it’s the fact that defining income is a complicated business – a job made harder in the context of a complex, globally integrated economy where many participants really are trying to avoid as much tax as possible. Income is complex: it makes sense that taxing it is complex, too.

What about the Russian example?

Those countries in eastern Europe that adopted flat taxes were all relatively poor with relatively weak governance and correspondingly large catch-up opportunities. By contrast, the UK has a well-established legal, corporate and fiscal framework, where the view that a flat tax could lead to a big jump in compliance looks much shakier. And the role of flat taxes in generating increases in the tax take in Russia and elsewhere has proved hard to quantify since those economies were at the same time subjected to so much additional radical reform. In recent years Latvia and Lithuania have both dropped their flat taxes and moved to a progressive system.

So forget the whole thing then?

Any revenue-neutral flat tax would be a tough sell politically, since it would inevitably produce a large number of losers, most of them falling in the middle of the income distribution. But the chancellor, Rishi Sunak, will need to think big to fill the giant post-pandemic fiscal hole, says Ross Clark in The Spectator. His review of capital-gains tax is a start: it’s far too easy for the wealthy to avoid tax by engineering income as capital gains. But he could “go the whole hog” and introduce a flat tax that covers income and capital gains, and even inheritances and investment income. Sunak’s challenge is not to use a flat tax to cut the tax base, but increase it. Flat taxes are often seen as politically unviable because of the perception that millionaires pay the same rate as the low-paid. “But it doesn’t have to mean that at all,” as Clark says. One solution would be a “two-rate flat tax”, say of 20% and 40%. “The important element is that all income, capital gains, etc, are treated the same way – and that therefore there are far fewer opportunities for avoidance.” A two-tier flat-tax system would be simpler and fairer – and raise more tax.