In recent years, the government has introduced a number of so-called “stealth taxes” – subtle changes that can increase how much tax you pay without officially raising tax rates.
In particular, frozen allowances and shifting thresholds are gradually pulling more people into higher tax brackets.
So, what does this mean for you, and what should you be aware of?
In simple terms, tax traps occur when your income increases but tax thresholds stay the same, meaning you can end up paying more tax without realising it.
England & Wales only – Scotland sets its own tax rates and bands!
Following the mini-budget in November 2022 the Government has introduced what we would call “stealth-taxes” and “tax-traps” designed to allow them to announce that there are no major tax rises whilst dragging more and more people into either paying tax or higher rates of tax over the next 5 years or so. So, what should you be aware of and what do you need to check?
Personal Allowance Freeze
The personal allowance (£12,570) has been frozen until 2028.
What this means for you: As your income increases over time, more of it may become taxable, even if your real spending power hasn’t changed.
Basic and Higher Tax Bracket Freeze
Basic rate tax bracket (£12,571 to £50,270) has been frozen until 2028.
What this means for you: If you are just below the higher rate tax bracket (£50,270), again with pay rises over the next 5 years or so then you are likely to find yourself paying higher rate tax at 40%. Remember also, if this was to affect you then you will also become subject to what we call the “child benefit tax-trap”!
Child Benefit Tax Change
Loss of child benefit where total income is between £50,000 and £60,000. (TAX TRAP!)
What this means for you: Where any person in a household earns more than £50,000 and someone else (in the household) received child benefit then it will need to be repaid at the rate of 1% of child benefit received for every £100 you earn over £50,000. Therefore, if you earn over £60,000 you will need to repay back all your child benefit!
£100,000 Income “Tax Trap”
Income over £100,000 and the reduction in your personal allowance. (TAX TRAP!)
What this means for you: If your income is over £100,000 per year (or gets there between now and 2028 through pay-rises) then you will begin to lose your personal allowance (the amount you can earn tax-free, ie: £12,570). Your personal allowance is reduced (taken away) by £1 for every £2 your income is over £100,000. Meaning if you are lucky enough to earn £125,140 then you also now have no personal allowance atall! This equates to a 60% rate of tax!
Additional Tax on Income Over £125,140
Income over £125,140 – now paying additional rate tax (45%)
What this means for you: In the past you needed to earn over £150,000 to pay the additional rate of tax, however this has now been brought down to £125,140. Therefore more people will be dragged into paying 45% tax on income rather than the 40% rate.
National Insurance
National insurance rates remain frozen until 2028.
What this means for you: See points 1 and 2. More lower earners will start to pay national insurance sooner as their income rise through pay reviews.
So, how can you reduce the impact of these tax traps?
Ways to reduce your tax exposure:
- Make pension contributions (can reduce your taxable income)
- Consider salary sacrifice options
- Use ISA allowances to grow savings tax-efficiently
- Claim all available allowances and reliefs
- Record charitable donations correctly
- Review workplace benefits (e.g. childcare, transport, low-emission vehicles)
Tax rules don’t always change through headline announcements, sometimes the biggest impact comes from what doesn’t change.
Reviewing your position regularly can help you avoid being caught out and make more informed financial decisions over time.
That’s why here at Financial Fortress we offer a free second-opinion service that gives you an independent, clear, expert review of your pensions, investments, and current financial position with no cost and no obligation – even if it just provides you with reassurance all is ok.