How to make Tax Freedom Day come earlier and keep more of your money

UK workers have finally reached the point of the year where their earnings aren’t solely going to the taxman – known as Tax Freedom Day.

Research by the Adam Smith Institute (ASI) thinktank has found that Brits are now working 161 days just to pay taxes - four days longer than last year.

That means that from today, 10 June, any earnings for the rest of the year are - at least figuratively - yours to keep.

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The bad news is that the impact of fiscal drag and frozen thresholds means that Tax Freedom Day may start to arrive even later, with more money going to the Treasury and HMRC.

“High taxes don’t just eat into our pay packets, they hinder the UK’s economic prospects as a whole, says James Lawson, chairman of the ASI.

“They make starting or investing in a business more risky, and contribute to our stagnant wages, low productivity, and sluggish growth.”

What is Tax Freedom Day?

UK taxpayers will fork out more than £998.6 billion in taxes this year, according to the ASI.

The thinktank takes into account the total tax burden including direct income tax and national insurance as well as VAT and corporation tax and calculates how long an average worker has to earn money to fully cover this.

It estimates that every penny the average person earned for working up to and including 9 June went to the taxman

After this, workers have reached Tax Freedom Day.

The figure is based on average earners so everyone’s Tax Freedom Day will be different depending on their individual earnings.

It is taking longer each year though, made worse by frozen tax thresholds pushing more people into higher tax brackets.

This means that Tax Freedom Day could be on 22 June by 2028, the ASI warns, almost three weeks more of work.

As the general election approaches, Lawson is calling on politicians to be honest with voters about the size and nature of the tax burden.

“This includes frozen tax thresholds, which is dragging workers into paying high rates of tax, and increased taxes on businesses, the costs of which are often passed onto consumers and employees,” he says.

“Whoever wins on 4 July, they will need to grapple with the fact that Tax Freedom Day is getting later and later. But a government which finds ways to let people keep more of their own hard-earned money will be rewarded by the electorate.”

How to cut your tax bill

You can make Tax Freedom Day come earlier by using your earnings and savings more efficiently.

Shaun Moore, tax and financial planning expert at Quilter, suggests one of the most effective ways is to increase your pension contributions.

“By boosting your pension contributions, you can lower your taxable income, potentially avoiding higher tax brackets and enhancing your retirement savings,” he says.

“Other salary sacrifice schemes can have the same impact.

“Pension contributions attract tax relief at your marginal tax rate, which means that for higher rate taxpayers this can result in significant savings.”

Other options include using cash ISA and stock and shares ISAs to shelter your savings and investments from a taxman.

Married couples and civil partners can also benefit from sharing tax allowances.

“If you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.

“It means you can both take advantage of your tax allowances. You can also use all the tax-efficient vehicles at your disposal, including your ISAs and pensions, as well as the Junior ISAs and Junior SIPPs of any qualifying children.”

Nicholas Hyett, investment manager at Wealth Club, suggests wealthier and more experienced investors could make use of Venture Capital Trusts (VCTs) and Enterprise Investment Scheme/Seed Enterprise Investment Scheme qualifying investments.

“The tax burden is rising across the economy," adds Hyett.

"For individuals, that’s driven by the combination of frozen tax thresholds and strong wage growth – itself the product of stubbornly high inflation over the last 12 months. People may be earning more, but they’ll keep less of their pay, and in real terms may be meaningfully worse off.

"This only looks likely to get worse, regardless of who wins the election. Promises not to raise a host of taxes still leaves space to keep thresholds frozen, and the spending pledges will have to be funded somehow and at a cost to the taxpayer– suggesting under-the radar stealth tax hikes and changes to things like pension relief may be on the cards."