Tax bills are on the rise for millions, so how can you safeguard your finances?
People are paying billions more in Income Tax as the Government's aggressive stealth tax plans really start to bite.
Official figures from HMRC revealed the number of Basic Rate taxpayers increased almost 3% in the 2022/23 financial year, the latest year data is available.
There was a far sharper 15.3% jump in the number of people classed as Higher Rate payers, with the total rising 680,000 in just 12 months to pass the five million mark.
As a result, the amount of tax collected for just this category rocketed £11.5 billion to £85.1 billion.
The number of earners in the Additional Rate category also increased by a hefty 9.5% during that year, with their total bill hitting £83.4 billion.
This dramatic rise in household Income Tax bills has likely continued in recent tax years – and will keep doing so for years to come as part of a deliberate strategy agreed by successive Governments.
Tax hike that isn't a tax hike
In order for a person's Income Tax bill to remain unchanged in real terms, the thresholds at which the various levels apply should increase each year to reflect rising costs and the declining buying power of the money they earn.
But these thresholds have been frozen since 2021.
The initial plan was for this to end in 2026 but it has since been extended to 2028, and it's rumoured the current Government is planning to extend it until 2030.
This creates a process known as fiscal drag, where people pay more Income Tax as they are dragged into higher tax brackets when their income rises over the years.
This feels very much like a direct tax hike for the millions affected, but it allows Governments to claim they haven't actually raised taxes.
As we mentioned earlier, the impact of fiscal drag will be felt more keenly – and by more people – each year the freeze is maintained.
As independent economist Julian Jessop explained to the Daily Mail: "The continued freeze on personal tax allowances could drag another four million people into the net by 2028.
"Moreover, there is already speculation that Rachel Reeves will extend the freeze for another two years in an emergency budget later this month.
"This could take the total number of Higher Rate taxpayers to 10 million."
Not just Income Tax bills that are rising
Sadly, it's not just Income Tax bills that people need to worry about.
Later this month, the official spending watchdog is expected to reveal that the £10 billion of fiscal headroom the Government had back in October has been wiped out by rising borrowing costs and weaker-than-expected economic growth in recent months.
As a result, Chancellor Rachel Reeves could announce a raft of spending cuts and more tax hikes in her Spring Statement on 26 March.
It's rumoured the State Pension triple lock and gifting allowances could be targeted among other areas as part of her revenue-raising plans.
Given we don’t yet know exactly where or how any increases might be made, what can you do now to safeguard yourself from financial pain?
Here, we look at the steps you can take now to protect your wealth from the taxman.
1. Tax on savings interest
What’s the problem?
In the days of miserly savings rates, tax on savings interest was only an issue for those with the very biggest savings pots.
But rises in recent years have meant more and more savers are now paying tax on their cash holdings despite the Personal Savings Allowance, which lets you earn up to £1,000 free of tax (depending on your Income Tax bracket).
Research by Shawbrook Bank has suggested more than six million savings accounts are now liable for tax.
This is a huge earner for the Government: HMRC estimates that it will rake in a whopping £10.4 billion in tax on savings interest over the course of the 2024/2025 financial year.
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What’s the solution?
Cash ISAs let you shield your income from the taxman and you can currently earn up to 5% from a top-paying account.
You can pay up to £20,000 into ISAs each tax year, which runs from April 6 to April 5.
Depending on your financial situation, you can also consider using up your partner’s Personal Savings and ISA allowances to help reduce your household tax bill.
There had been talk in recent weeks that the allowance on Cash ISAs could be slashed from the 2025/26 tax year, making this year's allowance especially important to use.
However, the Financial Times reports the chancellor has cooled on this idea – for now, at least.
2. Dividend tax
What’s the problem?
The number of people expected to pay dividend tax has almost doubled due to the Government cutting the tax-free Dividend Allowance, according to a Freedom of Information request from AJ Bell.
HMRC is set to rake in just under £18 billion in the current tax year, with nearly 3.6 million taxpayers facing the prospect of paying tax on dividend income.
What’s the solution?
The good news is that all investments held in an ISA or pension aren’t subject to Dividend Tax, so either of these routes will offer protection.
If you don’t want to lock your money up for a long time, an ISA may be the best solution. It will also offer you some flexibility should your priorities change.
Ready to invest but want to shield your returns from the taxman? Open a Stocks & Shares ISA with Hargreaves Lansdown now.
3. Capital Gains Tax
What’s the problem?
CGT is already a great earner for the Government: it's expected to raise £15.2 billion in the current tax year, according to the Office for Budget Responsibility.
This is equivalent to £530 per household.
What’s the solution?
There are some simple tax planning tips worth considering when it comes to CGT.
These include making the most of this year’s allowance, spreading gains over previous tax years and offsetting losses against gains.
You can read more in our guide to cutting CGT.
4. Inheritance Tax
What’s the problem?
Frozen thresholds and rising property prices mean Inheritance Tax (IHT) has become more than just a problem for the very wealthy.
The Government has raked in a whopping £7 billion between April 2024 and January 2025, which is £700 million higher than the same period a year earlier.
This means it is on track to comfortably exceed the record £7.5 billion haul
What’s the solution?
There are several ways to tackle the IHT problem. For example, you can give away up to £3,000 in gifts each tax year without them being added to the value of your estate.
As we mentioned earlier, there are rumours this gifting allowance could be reduced, so make sure you (and your spouse if relevant) make maximum use of it before the tax year ends in April.
Note you can also give as many gifts of up to £250 per person as you want, as long as you haven’t used another allowance on the same person.
Read our full guide to cutting your Inheritance Tax bill.
5. 'Retirement tax'
What’s the problem?
A growing number of pensioners are being forced to pay the 'retirement tax'.
In effect, more and more retired households are being hit with tax bills as a result of the ongoing freeze on Income Tax thresholds while the value of the State Pension rises each year.
What’s the solution?
Regarding the growing 'retirement tax' problem, there are a host of steps you can take to reduce or delay the amount of tax you'll have to pay, which we outline in this guide.
6. Income Tax
What’s the problem?
As outlined at the start, millions more people will find themselves dragged into a higher Income Tax bracket as a result of fiscal drag, adding billions of pounds to the Treasury's coffers.
What’s the solution?
For those who aren't retired, your workplace pension is your best way of shielding yourself from this stealth tax grab.
By paying in as much of the money you earn above the next threshold (while still ensuring you can make ends meet today) you'll reduce your Income Tax bill.
Read: how to claim Higher and Additional Rate pension tax relief
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