How to navigate the higher-rate tax freeze

Tax planning
Views & insights

Find out what the freezing of the higher-rate income tax threshold means for you and some of the ways to mitigate its impact


18 April 2023 | 3 minute read

With government figures showing the number of people paying higher-rate income tax is set to soar, it’s worth checking that your finances are organised as tax efficiently as possible.


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Who pays higher-rate tax?

Higher-rate tax kicks in once your income exceeds £50,270. You pay higher-rate tax on the portion of income that falls between £50,271 and £125,140 (or between £43,663 and £125,140 in Scotland). Higher-rate tax is charged at 40% (or 42% in Scotland).

According to HMRC, 5.5 million people were expected to pay higher-rate tax in 2022/23 – that’s a 43.9% jump from 2019/201.

The reason for the increase stems from the chancellor’s decision in April 2021 to freeze the higher-rate tax threshold rather than increase it in line with inflation. With inflation higher than it has been for many years, pay rises mean significantly more people are being pushed into the higher-rate tax bracket.

Is there anything I can do about it?

Carefully structuring your finances could help to reduce the overall amount of tax you pay. Some of the steps to consider include:

1. Top up your pension

Saving into a pension is a great way of bolstering your long-term financial security – and it can also reduce how much income tax you pay currently. This is because personal pension contributions lower your ‘adjusted net income’ – that’s the income HMRC uses to calculate your tax bill.

Let’s imagine your total income is £55,270. You would pay 40% tax on the £5,000 of income that falls within the higher-rate tax band. If, however, you made a £5,000 gross personal pension contribution (£4,000 plus £1,000 tax relief), your adjusted net income would fall to £50,270, potentially avoiding higher-rate tax.

Bear in mind that you can’t withdraw money from a pension until you reach age 55 (57 from April 2028), so make sure you’re comfortable locking away your money for what could be several decades.

2. Use your ISA allowance

ISA contributions don’t have the same effect of lowering your adjusted net income. However, they are a tax-efficient way of saving for pre-retirement goals, such as funding your child’s university education or buying a bigger house.

You don’t pay income tax or capital gains tax (CGT) on investments inside an ISA and you can withdraw money whenever you like, tax free. You can invest up to £20,000 in ISAs in the 2023/24 tax year.

3. Plan your finances as a couple 

If you’re married or in a civil partnership, your tax allowances effectively double. For example, if you both open an ISA, that’s a combined £40,000 that you can shield from income tax and CGT each year.

For investments outside an ISA, the CGT exemption lets you realise investment gains of up to £6,000 in the 2023/24 tax year without paying tax, which doubles to £12,000 for couples. Meanwhile, the personal savings allowance lets you earn up to £500 a year in tax-free savings interest if you’re a higher-rate taxpayer or up to £1,000 if you’re a basic-rate taxpayer.

If you’re a higher-rate taxpayer but your spouse isn’t, it might make sense to transfer taxable savings and investments into their name to benefit from a lower rate of tax.

Next steps

Tax is pretty bewildering and it shouldn’t be the only factor influencing your financial decisions. It’s really important to speak to a financial adviser about what’s right for you. They’ll take a thorough look at your finances to help you understand the best place for your savings and investments, so you can feel confident you’ve made the right decision with your money.

For smart advice that’s tailored to you, speak to one of our advisers today.

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.


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