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Income tax UK: You may pay 'higher taxes' despite Rishi Sunak's freezes – full details


Income tax rates were frozen last week as Rishi Sunak delivered his 2021 Budget. As the Chancellor laid out his plans, he confirmed that in “fixing the public finances” the Government would focus its efforts on people and businesses who can afford to contribute more.

As he detailed: “So this Government is not going to raise the rates of income tax, national insurance, or VAT. Instead, our first step is to freeze personal tax thresholds.

“We’ve nearly doubled the income tax personal allowance over the last decade, making it the most generous of any G20 country.

“We will of course deliver our promise to increase it again next year to £12,570, but we will then keep it at this more generous level until April 2026.

“The Higher Rate threshold will similarly be increased next year, to £50,270, and will then also remain at that level for the same period.

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“They shouldn’t come as a huge surprise. It was the overriding message of the Budget.

“However, you’d be forgiven for thinking that you’ll only start to notice the changes very slowly, and often only in a year’s time when key thresholds have been frozen.

“The real stealth taxes coming next year aren’t the ones that were announced in the Budget, they’re the myriad of other thresholds and allowances which haven’t budged at all, and in some cases haven’t moved in so many decades that they’re practically fossilised. “Meanwhile, everything from rising house prices to inflation is propelling us at speed over thresholds and into higher tax territory.

“It means it’s worth taking steps to avoid paying more than you have to in tax. Everything from taking advantage of your ISA and pension allowance to planning for tax with your spouse and considering salary sacrifice could help bring your tax bill under control.”

Sarah went on to comment on how income tax costs may rise: “You’d be forgiven for thinking that higher tax bills will only kick in when tax thresholds are frozen, but there’s every chance you’ll pay more tax next year too.

“This is because the personal allowance and higher rate threshold will rise with last September’s inflation of 0.5 percent.

“Meanwhile, the OBR estimates wages will rise around two percent in 2021.

“It means there’s every chance your wages will rise faster than the threshold, and you’ll pay more tax.

“For bigger earners, the key thresholds are already frozen. The additional rate threshold is £150,000 – as it has been for more than a decade – and the £100,000 threshold at which people start to lose their personal allowance stays the same.”

As it stands, people can earn up to £12,500 before any income tax is levied.

A basic rate of 20 percent will then be levied on earnings between £12,501 and £50,000.

Higher rates of 40 percent will be issued on earnings between £50,001 and £150,000, with 45 percent being paid on anything over £150,000.

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