HMRC has started demanding an additional £992 from UK households as a "stealth tax" hits low-income earners hard. The tax authority will contact families directly to collect £596 in income tax and £396 on savings interest due to frozen personal allowances.
The tax grab stems from the personal allowance being frozen at £12,570 until 2030. If it had increased with inflation, the threshold would stand at £15,550 today. This means people start paying tax at much lower income levels than they would have otherwise.
Financial experts warn the burden could grow even larger. Workers face an additional £555 by 2030 from a combination of frozen thresholds, potential salary sacrifice caps, and reduced ISA allowances, according to data from Finder.
Expert advice on avoiding the tax
Sarah Coles, head of personal finance at Hargreaves Lansdown, highlighted a lesser-known protection. The "starting rate for savings" allows individuals earning below the personal allowance to receive up to £5,000 in interest tax-free.
«It means you don't have to worry about the freeze in the threshold, or the impact of inflation-linked rises on your income – your savings interest is completely protected from income tax,» Coles said.
Charlene Young, senior pensions and savings expert at AJ Bell, offered another strategy. «You could give your spouse cash savings to use up their tax-free personal savings allowance,» she advised.
«That's especially helpful if you're a higher or additional rate taxpayer and your partner is a basic rate taxpayer, meaning they benefit from the full £1,000 personal savings allowance,» Young added.
Broader tax burden ahead
The frozen thresholds will push 3.3 million people into paying income tax for the first time by 2030. Another four million will move into the higher rate band, while 1.7 million will become additional rate taxpayers.
A worker earning £40,000 faces an extra £321 in tax between 2028 and 2030 from the threshold freeze alone. For someone on £80,000, that figure jumps to £961.
Chancellor Rachel Reeves is also reportedly considering a £2,000 cap on salary sacrifice pension contributions. Research by the Association of British Insurers found nearly two in five savers would reduce or stop contributions if the measure goes ahead.
Pension warnings
Coventry Building Society issued a specific warning to state pensioners. Jeremy Cox, head of strategy at the firm, said members on fixed incomes could end up «paying more» to HMRC despite no headline rate increases.
The frozen thresholds mean higher-rate taxpayers see their interest allowance on cash savings halved from £1,000 to £500. Cox warned this creates a «cliff edge» for benefits like child benefit and childcare, making financial planning difficult.
Amanda Blanc, chief executive of pension firm Aviva, called potential salary sacrifice changes bad news for the UK. «What you're effectively doing is penalising those employers that actually contribute more to employees' pensions,» she told The Times.
«But you're also saying to people who save for their pension that perhaps they shouldn't do it, and I think that's bad news long-term for the UK if you think about the fact that 15 million people in the UK are not saving enough,» Blanc added.
Gary Smith, senior partner at Evelyn Partners, described the proposed cap as a «stealth tax» on remuneration that could damage pension pots and hiring incentives.
Immediate actions
Pension savers should review their retirement funds before November 26, when Reeves may announce changes to pension lump sums. Higher-rate taxpayers should ensure they claim additional tax relief from HMRC through self-assessment forms.
Rajan Lakhani, personal finance expert at Plum, urged higher earners to maximize contributions now. «If you have a personal pension and are a higher-rate or additional-rate taxpayer, make sure you're contributing as much money to your pension contributions as you can afford,» he said.
Helen Morrissey of Hargreaves Lansdown noted that restrictions to tax-free cash are «reported to be firmly off the table.» She said this would bring «a huge sigh of relief» to those concerned about losing the valuable benefit.
Downing Street said the Chancellor remains focused on stability. «The chancellor has been clear on the need to deliver stability in the public finances. As she said last week, one of the objectives of the budget is to build more resilient public finances with the headroom to withstand global turbulence,» a statement said.
Note: This article was created with Artificial Intelligence (AI).
