July is a big month in the tax calendar
It looks like there is no sign of us as a nation not discussing the weather, with many asking “Is it July”? Fingers crossed for a long period of summer weather as the school holidays approach.
July is one of the big tax months as many of you will be due to pay your second payment on account for the current tax year on or before 31st July, I'm hoping that you remembered to pay your first payment on account in January and if not you will have incurred a 5% penalty and daily interest. It's worth remembering that you can reduce your payments on account if you believe that your income will fall in the year, however, you must remember HMRC will charge interest on payments that have been decreased incorrectly. As always, my advice would be to prepare your Tax return before July so that any possibilities can be considered in advance.
Frozen Tax Thresholds Trap Over Half a Million
In the 2022-23 fiscal year, the number of UK taxpayers ensnared by the 60% tax rate on a portion of their income surged to 537,000, marking a 23% increase from the previous year's 436,000. This spike highlights a significant flaw in the current income tax system, exacerbated by the freezing of tax thresholds amidst rising inflation.
The 60% tax phenomenon impacts individuals earning between £100,000 and £125,140 annually. This steep tax rate arises from the gradual withdrawal of the tax-free personal allowance of £12,570 once earnings surpass £100,000. For every £2 earned over this threshold, £1 of the personal allowance is lost, effectively creating a marginal tax rate of 60% on income within this range.
Bowmore Financial Planning has urged the new government to rectify this inequity, warning that it could discourage individuals from striving to exceed the £100,000 earning mark. Mark Incledon, CEO of Bowmore, emphasised the disadvantage faced by higher earners due to this tax trap. "Reaching a six-figure salary has long been a significant milestone for many. While we recognize the obligation to pay higher taxes, the reality of HMRC taking 60p of every pound earned above £100,000 severely diminishes the incentive to reach this goal," Incledon stated. "With the increased cost of living eroding the real value of salary increases, it is imperative for the incoming government to address this issue. Failing to do so only discourages hard work, productivity, and ultimately, economic growth."
The sharp increase in the number of people caught in the high-earner tax trap is largely due to inflation driving up wages. As incomes rise, more individuals find themselves crossing the £100,000 threshold and falling into the 60% tax bracket. Moreover, projections suggest that by 2024, an additional 300,000 people will be subject to higher rate tax, bringing the total to a record 4.4 million. Concurrently, over one million taxpayers are now paying the additional 45% rate, with an estimated 180,000 taxpayers exceeding the £125,140 limit by the end of the year. The previous government froze these thresholds until April 2028, and the current Labour government has shown no intention of raising them during this parliament.
Laura Suter, director of personal finance at AJ Bell, highlighted the broader implications of frozen income tax bands. "These latest figures lay bare the real impact of freezing income tax bands during a period of high inflation and wage growth. The data estimates that since thresholds were frozen in the 2021/22 tax year, 4.4 million more people will be dragged into paying income tax in the current tax year as people’s earnings have exceeded the frozen personal allowance of £12,570."
YouTube
Last week I met up with @ClaireHancott from “Profit Growth Cash” to record the first of a series of videos entitled “Ask the Accountants” The first of these videos will be uploaded to my YouTube channel in the next few days, so please make sure you are subscribed so you don’t miss out.
If you have any questions about accounts or tax then please let me know and both myself and Claire will discuss, answer and hopefully agree on a solution for you.
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