New HMRC stats show an increase in higher-rate taxpayers – have you been caught?
Steve Tebbutt · December 8th 2023 · read
The latest set of HMRC statistics on income tax gives an insight into how the freezes on the personal allowance and higher rate tax threshold are affecting taxpayers. They also offer initial evidence of what April’s near £25,000 cut in the additional rate (top rate in Scotland) threshold means:
- After remaining largely unchanged in the last half of the 2010s, the number of income taxpayers has jumped by over four million in the past three years, because incomes have risen but the personal allowance has not.
- As the taxpaying population has increased, so has the share of taxpayers paying tax at the higher or additional/top rates. HMRC estimates this will be 18.0% in the current tax year, up from 13.9% in 2020/21 and 10.4% in 2010/11.
- Additional/top rate taxpayer numbers are projected to rise by over 50% in 2023/24.
These impacts are not immediately visible as the numbers that set the income tax framework are unchanged. In effect the Chancellor has delegated the task of raising extra revenue to inflation. And inflation has obliged, all too well.
This rise in the number of higher-rate taxpayers indicated by the latest HMRC statistics highlights the importance of proactive tax planning.
Tax planning tips
Below are six key areas where tax planning could help you:
- Pension Contributions Contributing to a pension plan may be desirable as a retirement strategy, but it can also be an effective tax planning tool. Higher- and additional rate taxpayers can benefit from tax relief on their pension contributions, as contributions will increase their basic rate bands and thus reduce higher or additional rate tax. Advice should be taken from a tax advisor before making sizeable contributions as there are limits to annual contributions, but there may be opportunities to make use of unused allowances in prior years.
- Gift Aid Donations Charitable giving is not only a noble endeavor but can also be tax efficient. It would be unusual to donate with tax in mind, but care should be taken to retain evidence of all donations made (and in most cases claim Gift Aid). Making donations through Gift Aid allows the charity to claim back the basic rate tax, boosting the value of the donation. As a higher or additional rate taxpayer, you can claim additional tax relief, further reducing your overall tax bill. It can also be possible, in some circumstances, to accelerate relief for donations by carrying them back a year.
- Utilise ISAs Individuals could consider utilising Individual Savings Accounts (ISAs). These can shield your investments from capital gains and dividend taxes, ensuring more of your returns stay in your pocket.
- Tax-Efficient Investments There are also investment opportunities that offer tax incentives, such as Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCTs). These investments can provide potential returns and significant tax relief.
- Utilise spouse allowances If you're married or in a civil partnership, income-producing assets might be transferred to your spouse to utilise their allowances or basic rate band. Any transfer could have tax consequences, which should be assessed.
- Reviewing tax codes Ensuring tax codes are accurate can help to avoid overpaying tax at source. This can increase monthly net income, which carries greater attraction whilst interest rates are high, and help limit any unwanted tax bills.
Manage your tax obligations with the right planning
These are just some examples of the areas a tax advisor might assist with, but demonstrates that, with the right tax advice, many individuals can still effectively manage their tax obligations and maximize their income. In a tax landscape influenced by inflation and fiscal changes, informed tax planning can make a significant difference in your financial well-being.
Of course, tax is only one consideration and individuals are advised to also seek investment advice from a suitably qualified financial advisor before making any investments, to ensure any investments help meet their wider financial and personal objectives.
Find Out More
To discuss this topic further, or for any questions on personal tax matters, please contact our tax team.
The original version of this article is from the latest edition of the Caves Quarterly newsletter. Download the full copy here.
The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.