Autumn Statement: Key announcements from Jeremy Hunt
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However, the implementation of fiscal drag is likely to impact people in a double hit. Fiscal drag occurs when tax thresholds and allowances do not keep up with inflation or wage growth.
With the Chancellor Jeremy Hunt taking the decision to freeze income tax thresholds until 2028 amid a high inflationary environment, the tax burden for Britons is likely to be higher.
This is because larger numbers of people are set to be dragged into a higher tax bracket as inflation increases their income.
Many experts view frozen thresholds as a “stealth tax”, impacting large numbers of Britons in a specific way.
Losing more of one’s income to tax is something most people will want to avoid.
Steven Cameron, pensions director at Aegon, suggested how Britons can stop going into a higher rate tax band.
He explained: “While times are very tight, if you can afford to, one way to avoid this is to pay more into your pension.
“Personal contributions to pensions are deducted from your earnings before you’re assessed for income tax.
“So for example, if you are in England and are earning £50,270, you’ll just escape paying higher rate tax.
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“But if you received a £2,000 increase, you’ll pay higher rate tax of 40 percent on the pay rise.
“This leaves you with £1,200 a year extra in take home pay.
“But if you can afford to increase your pension contributions by £2,000, you’d no longer pay higher rate tax.
“Put another way, your £2,000 pension contribution costs you £1,200 in terms of take-home pay.”
If a person receives interest in normal savings or investment accounts, this is taxable.
For example, if a person earns £50,000 per year, and receives £300 in interest before tax, they would automatically fall into the higher-rate band of tax.
interactive investor recommends people use their ISA allowance for saving as much as possible to avoid this.
The current ISA allowance is currently £20,000, giving Britons a fair amount of scope for saving.
The income from accounts or investments held in an ISA is tax-free.
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In addition, people do not need to declare this income on tax Self Assessment forms.
Mr Hunt justified the tax threshold freeze, stating it would be a “difficult decision”.
However, he added: “Although my decisions today do lead to a substantial tax increase, we have not raised headline rates of taxation, and tax as a percentage of GDP will increase by just one percent over the next five years.”
He has reduced the threshold at which the 45 percent tax rate becomes payable from £150,000 to £125,140.
Mr Hunt also explained: “I am maintaining at current levels the income tax personal allowance, higher rate threshold, main national insurance thresholds and the inheritance tax thresholds for a further two years taking us to April 2028.
“Even after that, we will still have the most generous set of tax-free allowances of any G7 country.”
The decision superseded that of former Chancellor, and current Prime Minister Rishi Sunak who decided to freeze allowances until 2026.
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