The freeze on income tax thresholds is dragging millions more people into higher rates of tax, as their wages rise but the tax thresholds don’t increase alongside them. 

The OBR estimates that by 2028-29 the deep freeze on tax thresholds will see almost four million extra taxpayers, 2.7 million more moved to the higher rate of income tax, and another 600,000 paying the additional rate.  

As a result, millions of people will pay thousands more in income tax than they would have done had thresholds been indexed in line with inflation. At the same time, many will be pushed into the next tax bracket, which has a knock-on effect on other rates and allowances that they pay. 

Here we run through some of the things you need to consider as your salary rises and you hit a new tax band. 

SALARY HITS £12,570: CANCEL MARRIAGE ALLOWANCE

The marriage allowance is a tax break offered by the Government to married couples or those in a civil partnership, and is worth up to £252 a year. But when your salary rises above the personal allowance you lose the ability to claim the marriage allowance. 

To claim it one half of the couple must be a basic-rate tax payer, which means they earn £50,270 or less a year in the current tax year, and the other half of the couple must earn less than the personal allowance, which is £12,570 in this tax year. This means that once the higher earner crosses the £50,270 earnings threshold they will also no longer be eligible for the tax break. 

SALARY HITS £50,270: CLAIM 40% PENSION TAX RELIEF 

Once you hit the higher rate income tax band you’ll be eligible for more tax relief on your pension – but often people aren’t aware that they need to claim it.  

It depends on the type of pension scheme you’re in – if you make personal contributions to ‘relief at source’ schemes you’ll need to claim the additional tax relief back from HMRC. Many workplace pensions operate this way. This might feel like an admin headache, but you could easily reclaim hundreds, or even thousands of pounds, owed to you in unclaimed tax relief, especially if you were a higher rate taxpayer already and can backdate the claim. 

If you’re in a relief at source scheme you’ll need to file a tax return to claim your additional tax relief. This money will be paid out to you or offset against your tax bill. You can also claim through the government gateway, where you’ll be able to login and claim. You can backdate claims up to four years. 

SALARY HITS £50,270: PREPARE FOR REDUCED SAVINGS ALLOWANCE 

If you’re in the higher rate income tax threshold you’ll see the amount you can earn in savings interest before paying tax slashed in half. Basic-rate taxpayers have a £1,000 limit but once you hit the higher-rate tax band you’ll see that cut in half to £500. It could land you with an extra tax bill of up to £200. 

One way around this is to move your money into an ISA, so that you don’t get taxed on any savings income. Sometimes ISAs will pay a lower interest rate, but for higher rate taxpayers that will often be balanced out by the fact that you don’t have to pay tax on the money.  

SALARY HITS £50,270: PREPARE FOR HIGHER CGT AND DIVIDEND RATE 

At the higher rate of income tax you’ll pay a higher rate of dividend tax and capital gains tax. Anyone with dividends over the current £500 annual tax-free limit will go from paying 8.75% tax on dividends to 33.75%.  

It’s the same case for those with capital gains, who will go from paying 10% tax to 20% tax on their gains over the tax-free limit of £3,000 a year. It’s an even bigger tax rate on any gains made from second properties, with the rate going from 18% to 28% once you hit the higher rate of tax.  

To beat both taxes you could do a ‘Bed & ISA’ transaction now, where you sell assets outside an ISA and re-purchase them inside the tax wrapper. It often makes sense to do this anyway if you have unused allowances, regardless of your tax band.   

SALARY HITS £100,000: YOU’LL LOSE TAX-FREE CHILDCARE AND ADDITIONAL FREE HOURS  

Once you or your partner hit earnings of more than £100,000 you’ll no longer be eligible for tax-free childcare or the full funded hours entitlement. You’ll need to stop claiming the tax-free childcare through your Government gateway account and also cancel the 30 hours free. You can divert money into your pension to keep your taxable earnings in five figures to avoid losing childcare support. 

SALARY HITS £100,000: PREPARE FOR PERSONAL ALLOWANCE TAPER 

Once you hit more than £100,000 of earnings you start to lose your tax-free personal allowance at a rate of £1 for every £2 you earn over the limit. It means the entire personal allowance is wiped out once you hit £125,140 of earnings. Because of this, in this band of earnings you’ll effectively be paying a very high rate of income tax on the money – 60%. 

It can be very tax efficient to pay money into your pension instead. Once you factor in pension tax relief and any employer matching, you can often make a sizeable pension contribution with very little impact on your take-home pay. 

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