Frozen thresholds could push ‘tax freedom day’ to latest date this century

Tax freedom day could finally come around this week. It is due on 12 June, based on previous forecasts from the Adam Smith Institute. If the think-tank is correct, it means taxpayers will have spent the first 163 days of the year working for HMRC.

It is a symbolic date rather than a real event in the calendar. It represents the point in the year you would stop working for the taxman and start paying yourself, assuming you channelled all of your earnings into paying your tax up front. The last time tax freedom day came this late was last century, falling on 12 June in 1982.

According to investment firm Hargreaves Lansdown, tax freedom day was around three weeks earlier before the pandemic, coming on 22 May in 2019. Fiscal drag is largely to blame for the delay in recent years. Personal tax thresholds have been frozen since 2021 – part of an attempt to balance the state’s books after a period of intense spending during the Covid lockdowns.

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Rishi Sunak fixed thresholds for a period of four years, before his successor Jeremy Hunt extended the freeze until 2028. Labour chancellor Rachel Reeves has promised not to extend the policy beyond this date, but taxpayers will continue to be battered by the stealth tax until then.

It means the UK's tax burden will continue to rise. The government raised an eyewatering £302 billion in income tax in the 2024/25 tax year, up 10% annually. The figure has risen by 37% compared to 2021/22, when thresholds were first frozen.

“The tax attacks don’t stop there either,” said Sarah Coles, head of personal finance at Hargreaves Lansdown. She points out that the dividend allowance has been slashed from £2,000 to £500 in recent years, while the capital gains allowance has been cut from £12,300 to £3,000. Last year’s Autumn Budget also included tax hikes worth £40 billion, impacting areas like pensions, inheritance tax and more.

"It means we need to take steps to protect ourselves from paying over the odds, so we bring our own personal tax freedom day forward as far as we can," she added. Paying more into your pension, topping up your ISA, or transferring assets between spouses and civil partners to take advantage of one another’s tax-free allowances could help reduce your tax liability.

How to reduce your tax bill

1. Top up your pension

Pensions are one of the most tax-efficient ways of saving for retirement, as you get tax relief on your contributions up to an annual limit of £60,000. This includes your contributions, any employer contributions, and tax relief from HMRC. Pension tax relief is paid at your marginal rate (20%, 40% or 45%).

“Paying into a workplace pension or SIPP won’t leave you with more cash in your pocket [today], but it will mean you’re handing over less of your money to the taxman,” Coles explains.

Salary sacrifice could also be a tax-efficient option for some pension savers. This involves entering into an agreement with your employer where you give up part of your salary in exchange for a certain benefit, such as a pension contribution.

“Increasing numbers of employers now offer these schemes that let staff reduce their salary or bonus payments in lieu of increased pension contributions,” said Alice Haine, personal finance analyst at investment platform Bestinvest.

“This is because by reducing your gross salary, it reduces the amount of income tax a worker must pay and the National Insurance contributions for both the employee and employer.”

2. Pay into an ISA

“ISAs are an astonishingly popular savings and investment product, with millions of people across the UK taking advantage of the tax perks of an ISA to set aside money for the future,” said Tom Selby, director of public policy at AJ Bell.

It is hardly surprising – the flexibility of the wrapper means it supports a broad range of savings goals.

Adult savers can stash up to £20,000 per year in an ISA and any income or capital gain earned within the wrapper is protected from the taxman. This is more valuable than ever in today’s environment.

Depending on your goals, you can open a cash ISA, a stocks and shares ISA, or a combination of the two. Those saving for a first home or retirement may also want to consider a Lifetime ISA. This has a lower annual allowance of £4,000 (part of the overall £20,000 allowance), but comes with a juicy government bonus of up to £1,000 per year.

3. Transfer assets to your spouse

Sometimes, it pays to be married, as spouses and civil partners can transfer assets to one another without triggering a tax charge. This opens up a range of possibilities, particularly if one partner has already used up their tax-free allowances or pays a higher rate of tax than the other.

“You could hand over enough assets for you both to realise gains within your capital gains tax allowances, receive dividends within your dividend allowance, and take advantage of both of your ISA allowances each year,” Coles added. “If you’re going to continue receiving dividends outside an ISA and above the allowances, it makes sense for income-producing assets to be held by the spouse paying the lowest rate of tax.”

4. Time the sale of assets carefully

Investors have taken several hits from capital gains tax (CGT) in recent years. Since 2023, the annual tax-free allowance has been progressively slashed from £12,300 to £3,000. At the 2024 Autumn Budget, the basic and higher CGT rates were also hiked to 18% and 24%, up from 10% and 20% respectively.

The good news is that investors often have a choice about when to take a gain, so it is worth considering your overall tax position. If you can time the sale of assets to realise less than £3,000 each year, you won’t pay any tax at all.

It is also worth looking at your income, as it isn’t necessarily consistent every year. You might be a freelance worker, for example, who decides to take on more work one year than another. If you expect to earn less income next year (and fall into a lower tax band as a result), deferring the sale of an asset could mean you pay a lower rate of CGT on the gain.