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Rishi Sunak’s ‘stealth tax’ slammed as millions pay more – pensions are ‘silver lining’

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HMRC figures have shown in the 2022/23 tax year, 6.1 million people are set to pay either the 40 percent higher rate, or the 45 percent additional rate. This is up from the 4.3million recorded in 2019 when Boris Johnson first became Prime Minister. 

Last year, the Chancellor Rishi Sunak announced the Government would freeze the income tax personal allowance, dragging more people into higher tax brackets due to inflation. 

There may, however, be a silver lining for higher rate taxpayers, and the answer could be found in their pension.

While many will find themselves crossing the threshold for a higher tax burden, they could relieve some of the pressure through pension contributions, it has been suggested.

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Steven Cameron, Pensions Director at Aegon, explained: “Pension contributions are deducted from earned income before income tax is calculated.

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“Currently, someone earning over £50,270 pays 40 percent income tax on income above this. So someone earning £53,270 will pay 40 percent tax on the top £3,000. 

“If instead they pay that £3000 into a pension, none of their income will be subject to higher rate tax. 

“Put another way, a £3000 pension contribution costs them just £1,800 out of after tax pay.”

Understandably, many individuals are currently feeling financial pressures which are difficult to shake.

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Amid the cost of living crisis, some will need every penny of their earned income just to make ends meet.

However, for others, the sacrifice could be one which is not particularly missed.

Individuals earning just above the threshold, Mr Cameron suggested, could put a little extra aside to make a substantial difference.

He added: “Now might be a great time to boost pension savings with some extra help from the taxman.”

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However, like all pension related decisions, seeking financial advice can be key, especially when it comes to tax implications. 

The latest data from HMRC, however, provided a bleaker picture according to Clive Gawthorpe, Partner at UHY Hacker Young. 

He suggested the main reason for the increase in taxpayers on the higher rate is due to fiscal drag.

Fiscal drag occurs when income tax brackets do not move with inflation, creating a deflationary effect.

As a result, taxpayers fall into higher tax brackets, and overall income tax payment increase.

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With inflation continuing to creep upwards, it is likely even more Britons will find themselves at risk of being propelled into a higher rate tax bracket.

This could be the case even for those who have seen their incomes fall in real terms.

Mr Gawthorpe added: “Even by HMRC’s standards, the past year has been a bumper one for creating new higher rate taxpayers.

“For years, HMRC has allowed ever more taxpayers to be dragged into the higher rate as a stealth tax increase.

“It is worth noting that due to inflation, taxpayers sucked into the higher band were already having to make their monthly pay checks stretch further – without the additional burden of higher tax.”

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