The National Insurance threshold is set to rise next month from £9,880 to £12,570 in a move which has been widely welcomed. However, with inflation forecasted to soar to 11 percent by the end of the year, calculations from interactive investor show UK taxpayers are set to pay as much as £16,000 more in tax on their income by 2026.
The issue has been compounded by the decision to freeze the basic and higher rate tax threshold from 2022 to 2026, which will ultimately suck more people into a higher rate tax bracket.
This can have major implications, not only in terms of tax payments, but also eligibility for Child Benefit, and payment of the Higher Income Child Benefit Charge (HIBC) impacting those who earn more than £50,000.
Alice Guy, Personal Finance Expert at interactive investor, said: “The Chancellor is carrying out a secret £3,631 tax raid on millions of struggling families.
“It will push many families to the brink as they cope with a crushing tax burden on top of the existing cost of living crisis.
She continued: “The recent NI changes simply aren’t enough. Middle earners on £30,000 will still pay an extra £638 NI by 2026, despite the primary threshold being raised to £12,570 in July this year.
“For higher earners, currently on £50,000, the figures are even worse. They’ll have to pay a massive £4,271 extra in income tax and NI by 2026.
“On top of this, someone currently earning £50,000 with two children will lose £1,850 in Child Benefit by 2026.
“They will be hit with the higher income Child Benefit charge as their wages rise with inflation.
“That means a higher earner will lose a punishing £6,121 by 2026 and see most of their extra pay wiped out by tax.
“And top earners will be paying a staggering £15,596 extra in tax by 2026 as the additional rate threshold is also frozen.”
The expert did, however, signal towards ways Britons will be able to “fight back” against the additional tax burden.
Firstly, she encouraged looking towards pension tax relief, which could provide significant financial help – albeit with the benefits delayed until the future.
Higher rate taxpayers could get 40 percent tax relief on any pension contributions into a workplace or private pension scheme.
Britons are permitted to contribute up to £40,000 per year into their pension if they are not yet drawing an income from it.
Pensioners or those who are in an income drawdown phase can still contribute £3,600 annually to their pension.
In a similar way, a pension can be used to avoid a potentially hefty inheritance tax bill of 40 percent of the value of an estate above a certain threshold – usually £325,000.
Investments held in a pension scheme fall outside of a person’s estate and can usually be passed on without a tax burden.
Finally, investments could be made via a stocks and shares ISA for those wishing to protect wealth from capital gains and income tax.
Individuals can save up to £20,000 per year into a cash or stocks and shares ISA, per person. However, the allowance cannot be backdated.
Investment is not suitable for everyone, and comes with a level of risk – as people could get less back than they put in.
As a result, it can be sensible to consult an independent financial advisor who will be able to offer tailored assistance.