Strategies for a high tax environment
Tax burdens change as you earn more
The income tax system has changed significantly in recent years. Until the spring 2021 Budget, governments had focused on increasing the personal allowance, but despite this the number of income tax payers today is much the same as in 2010/11 and will increase sharply in the next few years because of the freezing of the personal allowance.
At the same time, the share of income tax paid by those with higher incomes has increased: the share of total income tax receipts paid by the top 25% of taxpayers rose from 71.3% in 2010/11 to an estimated 78.5% in 2022/23.
The figures reflect a truth often felt by some – that the tax burden increases as you start to earn more. The rapid reversal of many tax reduction plans in the then Chancellor’s September 2022 ‘fiscal event’ underlines how politically difficult it is to reduce tax rates at high income levels. Since then, the new Chancellor has added to the future tax burden with:
- an extension to April 2028 of the freeze applied to the personal allowance and higher rate threshold;
- a near £25,000 reduction in the additional rate tax threshold from 2023/24;
- a halving of the dividend allowance to £1,000 for 2023/24 and a further halving to just £500 in 2024/25; and
- a similar approach to capital gains tax annual exemption, more than halving it to £6,000 for 2023/24 and then cutting it again to £3,000 in 2024/25.
The Scottish Budget in December 2022 followed suit, cutting the top rate threshold to match the additional rate threshold for 2023/24, freezing other tax thresholds and adding one percentage point to the higher and top rates of tax.
