Insights

The government tends to try and make us believe that taxes are going down. After all, the personal allowance is increasing and the threshold at which higher rate taxes begin was increased too. The reality is very different, and the amount of income tax paid by the UK public has actually doubled over the past two decades. Therefore, it is more important than ever to be aware of how you can minimise the tax you pay and take full advantage of available allowances and tax reliefs.

Data released by HMRC shows that during the 1999-2000 tax year, £93bn in income tax was paid by 27.3m taxpayers. By the 2018-19 tax year, this increased to £187bn, generated from 31.6m taxpayers. Forecasts suggest that tax receipts will reach £199bn by 2021-22, collected from 32.2m people. Clearly, a lot more money is being generated from not that many more taxpayers!

The largest single tax receipt increase comes from the 45% additional rate taxpayers. HMRC has estimated there will be 440,000 additional rate taxpayers in 2021-22; a 10% increase from 2018-19. In comparison there is only  a 2.6% increase in the number of basic-rate taxpayers in 2021-22 to 27m. The number of higher rate taxpayers paying the 40% marginal rate actually fell by 2.4 per cent to 4.13m. Although the Conservative party has a reputation for cutting taxes for the very wealthy, the income tax receipt data suggests the reverse is happening.

Over the next few years, the amount of income tax being paid will further increase. This is due to the freeze in the personal allowance and higher-rate tax thresholds. More people will be paying more tax generally and also at the higher 45% rate. Salary levels are continuing to rise but the tax bands are not increasing in line with salary inflation, pushing more people into the higher rate brackets.

Rishi Sunak confirmed in the March 2021 Budget that personal allowances will stay at £12,570 until April 2026 whereas previously they had been rising each year with inflation.

There are many tax allowances available to help reduce the amount of tax you are paying. For example, higher rate and additional rate taxpayers might wish to consider investing in EIS companies or VCTs to reduce their tax liabilities; these have the advantage of also offering shelter from capital gains tax. Pension contributions and salary sacrifice schemes may also be worth investigating. Finally, don’t forget about charitable donations – these will also reduce your income tax liability.

To discuss how to minimise your tax bills contact us via partners@rjp.co.uk