A few weeks ago, a new government moved into Number 10. Labour’s victory in the 2024 General Election sparked speculation on what the new Chancellor of the Exchequer, Rachel Reeves, could plan for tax.
In her first speech as chancellor, Reeves reinforced Labour’s pledge that there would be no rises to National Insurance (NI) or value added tax (VAT).
But there was no mention of changes to income tax or capital gains tax. These weren’t mentioned in Labour’s manifesto either.
That means, for now, income tax rates will stay where they are – here’s what this could mean for you.
This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice.
Fiscal drag – what is it and will you pay it?
Back in 2022’s Autumn Statement, then chancellor Jeremy Hunt committed to freezing tax thresholds, like the personal allowance (PA) or higher-rate threshold (HRT) until 2028, extended from 2026.
Fast forwarding to today and we’re now seeing wages rising in the UK, but tax thresholds staying the same. This leads to more taxpayers moving into higher tax bands and paying more tax.
This is called ‘fiscal drag’.
For the government, it means more money will flow into the Treasury, without having to publicly raise tax rates.
The Office of Budget Responsibility (OBR) estimate that close to a whopping seven million people will have moved bands by 2029. And by keeping the thresholds frozen, the government’s tax take will increase by more than £41bn by the 2028/2029 tax year.
Number of taxpayers moving up a band (in millions)
Will Labour unfreeze tax thresholds?
After winning the election, Rachel Reeves said Labour had inherited the worst set of financial circumstances since the Second World War – with a ‘£20bn black hole’ needing to be filled.
By keeping income tax rates as they are, Labour will benefit from higher tax receipts, helping plug the ‘black hole’ and potentially go towards funding new policies.
Ultimately, it means there’s little incentive to change them.
What can you do about frozen tax thresholds?
With the prospect of paying more income tax, there’s no better time to consider using your tax-efficient allowances.
It means you could save more money by not having to pay more tax than you need to, as well as saving and investing in your future.
Remember, pension, ISA, and tax rules can change, and benefits depend on your circumstances. Scottish tax rates and bands are different. You also can’t access money in a pension until at least 55 (rising to 57 from 2028). All investments fall as well as rise in value, so you could get back less than you invest.
Maximise your employer contributions
A lot of employers stick to auto-enrolment minimums when it comes to how much they’ll pay into your pension, but some are willing to pay in more.
Certain employers will even hike how much they put in if you increase your contributions – known as employer matching.
If your employer offers this, and you can afford to take advantage, you could boost your pension prospects and save more of your income for your future. Especially if a salary sacrifice scheme is used which reduces your income before you’re taxed.
It also means you don’t need to claim higher rates of tax relief and you save on National Insurance (NI) contributions.
Add to your pension
Putting money into your pension could considerably cut the amount of tax you pay. You could potentially lower your income tax liability by paying into a workplace or personal pension (like a Self-Invested Personal Pension). And for higher earners in particular, the tax perks are even more attractive.
If you’re a UK resident under 75, you can usually pay up to £60,000 into pensions each tax year and get tax relief from the government. You’ll only get tax relief on personal pension contributions up to 100% of your earnings, or £3,600 depending on which is higher.
If you’ve already taken money from your pension, or you’re a high earner, you might have a lower annual allowance.
Basic-rate tax relief is paid automatically on top of anything you pay into your pension. If you’re a high earner, you can then claim up to a further 20% or 25% (different rates will apply for Scottish taxpayers).
Any money in a pension is also free from UK income and capital gains tax (CGT). Just remember, you have to pay sufficient tax at the higher or additional rate to be able to claim the full 40% or 45% tax relief.
Don't forget your ISAs
Individual Savings Accounts (ISAs) also offer a tax-efficient way to save and invest for the future.
You can pay in up to £20,000 each tax year. If your investments grow, you won’t have to pay CGT. And you won’t pay UK income tax on any income either.
This tax year you can split your ISA allowance across any number of different types of ISAs (Stocks and Shares ISA, Cash ISA, Lifetime ISA (LISA), and Innovative Finance ISAs) if you don't exceed the total allowance across them all each tax year.
There’s no tax to pay on ISA withdrawals. But if you take money out, you won’t be able to pay it back into an ISA without using more of your ISA allowance.
LISA withdrawals are different and usually carry a 25% charge if not used for an eligible first house purchase or after age 60, unless due to ill health. However, you have to be between 18 and 40 to open one.
