How to keep your tax bill down as frozen thresholds drive millions into paying higher rates
Millions more people are paying higher rates of tax but there are ways to limit how much you owe HMRC.
Millions more people have been dragged into paying income tax in recent years as official data highlights the impact of fiscal drag.
Income tax thresholds have been frozen since 2021 and will remain so until 2031.
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The government’s latest income tax tax data shows an additional 2.17 million people were dragged into paying income tax in 2023/24.
Meanwhile, the total income before tax received by taxpayers in the tax year 2023/24 was £1.53 trillion – up by 9.8% annually.
This has pushed income tax liabilities up by around 11.9% (£29.1 billion) to £274 billion.
“Both the number of taxpayers in each band and the amount of income tax being paid to the Treasury are surging every year – exactly as chancellors past and present have intended.”
The impact of fiscal drag
Income tax rates may not have increased but frozen thresholds mean people are quickly hit by fiscal drag as they move faster into higher tax brackets when they get a pay rise.
The figures show there was an increase in the number of basic rate taxpayers of 1.15 million or 4.1%.
The number of higher rate taxpayers increased by 654,000 (12.8%) to 5.76 million, while the number of additional rate taxpayers increased by 324,000 (56.8%)to 893,000.
Earning £67,400 before tax now puts you in the top 10% of earners, the data shows, while £93,600 puts you in the top 5% and £207,000 in the top 1% of earners.
Rachael Griffin, tax and financial planning expert at Quilter, said: “While this period did see fairly large increases in pay, much of this was simply to keep pace with high inflation. When combined with frozen thresholds, it has left many taxpayers facing materially higher tax bills with little to no improvement in their standard of living.
She said this shift is no longer confined to traditionally high‑paid professions, adding: “Experienced teachers, senior nurses and police officers are increasingly being pulled into higher rate tax through incremental pay rises, overtime or progression, rather than genuinely high earnings. What was once a marginal issue is now becoming a mainstream experience across large parts of the workforce.”
Who pays the most tax?
Despite talk of the need for wealth taxes, government data actually shows that high earners are already paying the largest share of tax.
In 2023/24, the figures show additional rate taxpayers paid 37.7% or £103 billion of tax despite making up just 2.4% of people.
Higher rate taxpayers paid 32% at £87.6 billion, making up 15.7% of people.
Meanwhile, at 29.4 million, most taxpayers pay the basic rate, accounting for just 29.9% of tax, and making up 80.1% of people.
There are other sources of income that are getting caught though, which can hit all types of taxpayers.
The number of taxpayers of pension age increased by 1.02 million or 14.4% since the previous tax year, as the triple lock continues to push retirement incomes up.
This means people of state pension age account for 22.2% of all taxpayers and 16.2% of total income.
There were almost 8.2 million people of state pension age paying tax and 7.8 million people paying tax whose main source of income was their pension, the research shows.
Griffin added: “While part of this increase reflects demographic change as the pension‑age population grows, rising retirement incomes combined with frozen allowances are clearly playing a major role.
"The triple lock has been vital in protecting pensioner incomes during a period of high inflation, but its interaction with frozen personal allowances is creating unintended consequences. In practice, state pension increases designed to preserve living standards are increasingly being clawed back through tax, particularly where even modest private pension income is involved.”
The frozen personal savings allowance and lower dividend allowances are also hitting savers and investors.
Total tax income from property, banks and building societies, dividends and other income increased by 17.2% from £107 billion to £125 billion.
Interest received from banks and building societies was the main driver of growth.
The number of taxpayers with savings interest increased by 28.4% from 15.3 million to 19.6 million, whilst the total amount of savings interest increased by 219%, from £5.75 billion to £18.3 billion.
Griffin said: “Taxable savings interest more than tripled as rates rose, catching millions of savers off guard. While rates have edged down and are unlikely to return to their recent peaks, the episode has reinforced the importance of using ISAs to shelter savings from income tax.
“For those with a longer‑term horizon, it may also prompt a rethink about relying too heavily on cash returns that may already be past their high point.”
How to reduce your tax bill
There are ways to hold on to more of your cash rather than giving it to the taxman.
Savers and investors can make use of their £20,000 ISA allowance to avoid dividend or savings tax. However, the cash ISA allowance for under 65s is being cut to £12,000 from April 2027 so it may be worth putting as much in as possible beforehand.
Another option is to use salary sacrifice to reduce your gross earnings.
One of the most popular routes is by increasing your pension contributions.
However, the benefits of this are being slightly reduced from April 2029 when only the first £2,000 will benefit from National Insurance relief.
Older taxpayers may also want to consider how and when they take pension income to reduce the tax burden.
But bear in mind that unused pension savings will form part of a person’s estate for inheritance tax from April 2027.
Little added: “Beyond making pension contributions, more esoteric schemes to reduce income tax include subscribing to Venture Capital Trusts and Enterprise Investment Schemes, but these are not going to be suitable for most people due to the higher risks involved.
“Finally, drifting into a higher tax band will raise the rate of tax you pay on capital gains and savings interest, and also reduce your personal savings allowance, so those looking to minimise their tax burden must ensure they are sheltering savings and investments where possible in ISAs and using their annual tax exemptions. Couples can use their combined allowances strategically, especially where one is in a lower tax band for earnings.”
