Millions of workers will end up paying more in tax over the next few years thanks to a stealth raid on working Brits.
During his Budget last month, Chancellor Jeremy Hunt confirmed he was to keep an extended freeze on income tax thresholds.
The income tax personal allowance is set at £12,570 and is currently frozen until April 2028.
The personal allowance is how much you’re allowed to earn before you start paying tax.
You currently pay the basic 20% rate of income tax when you earn above £12,570, then the higher rate of 40% on earnings above £50,270.
From April 6, the additional rate of 45% will apply when you earn above £125,140.
The threshold for when you start paying National Insurance contributions - also £12,570 - has been frozen until April 2028 as well.
Workers pay 12% in National Insurance contributions when their salary reaches £12,570, then 2% on earnings over £50,270.
The freezing of tax brackets is known as fiscal drag.
This is where the income level at which taxes are collected does not increase in line with inflation or income growth.
This means over time, people are dragged into higher tax brackets as their pay increases but the level where you start to pay tax stays the same.
The process of doing this is often referred to as a stealth tax raid, as it is designed to go unnoticed but results in people paying more.
The Office for Budget Responsibility estimates this policy will result in 3.2 million more people paying income tax, and 2.1 million more people being brought into the higher rate band.
But there are things you can do to help you reduce your tax burden and be more tax-efficient with your money.
Here are some tips from Bestinvest personal finance analyst Alice Haine.
Contribute to your pension
When you earn tax relief on your pension, some money that would otherwise have gone to the taxman goes into your retirement pot.
Contributing to your pension - workplace or private, not your state pension - attracts tax relief at your highest marginal rate.
Basic rate taxpayers get 20% tax relief, higher rate taxpayers can claim 40% and additional rate taxpayers get 45%.
Alice explained: "A 20% taxpayer looking to add £1,000 to their pension only needs to contribute £800 to their pension as they receive £200 in tax relief.
"For a 40% taxpayer, the actual cost is just £600 and for an additional rate taxpayer, it falls to £550."
Pension saving "has become even more attractive" since Jeremy Hunt scrapped the Lifetime Allowance (LTA) – the total amount you can build up in your pension pot without incurring an extra tax charge.
The Pension Annual Allowance – the maximum you can contribute to a pension per tax year - is also rising from £40,000 to £60,000 on April 6.
However, you can carry forward unused allowances from the previous three years.
Alice added: "Just remember that it is either £60,000 or 100% of your salary if you earn less than that figure and the limit encompasses contributions across all your pension arrangements, tax relief and employer contributions.
"Look to use up your allowances before April 5, particularly if you are a higher earner.
"Once the money is added to your pension, you cannot touch it until you are 55, or 57 from 2028 – so heavy contributions to a pension are only suitable for those either nearing retirement age or those who won’t need their money for shorter-term savings goals.
"Plus, go over the pension contribution limit and you risk incurring a tax charge."
Salary sacrifice
Salary sacrifice is where an employee gives up a portion of their earnings in return for a non-cash benefit such as topping up a pension, a company car or a cycle-to-work scheme.
This can be an effective way to tip your income into a lower tax band if your salary is about to move into a higher threshold.
Alice explains: "Those close to earning above the £50,270 earnings threshold, for example, where the higher 40% tax rate kicks in, could dip under it by using salary sacrifice pension contributions.
"Both employee and employer will pay lower National Insurance contributions (NIC) as a result, which makes pension saving even more tax efficient."
Of course, as the name suggests, you will be giving up a portion of your take home pay - so make sure you can afford to do this.
Interspousal transfers
This is where savings and investments can be switched to a spouse subject to lower rates of tax without triggering a tax event.
This allows the couple to make use of two sets of allowances, such as two sets of pension allowance or two sets of the ISA allowance - so that more assets are held by whichever spouse is subject to lower rates of tax.
Alice said: "Before transferring shares, funds or cash to your other half, just remember that they will become the full, legal owner of the assets, so tread carefully if you have any doubts about the strength of your relationship.
"If you transfer your investments to your spouse, they become the legal owner.
"It’s a pretty straightforward process, though there can be a few signatures required along the way and forms to be filled in – so again make sure you leave plenty of time to get all the paperwork complete."
Claim marriage tax allowance
Marriage tax allowance allows you to transfer £1,260 of your personal allowance to your partner to cut their yearly tax bill.
Your personal allowance is the amount you can earn tax-free each tax year.
For the current 2022/23 tax year, the tax break you can get is worth £252 - but it is possible to claim back for all four previous tax years.
If you claim for this tax year and backdate the maximum four years, you'll get up to £1,242.
At the moment, you can go as far back as the 2018/2019 tax year but after tomorrow (April 5) you'll only be able to backdate your claim to the 2019/2020 tax year.
You need to be married or in a civil partnership to claim marriage tax allowance, and both of you must also have been born on or after April 6, 1935.
One of you also needs to be a non-taxpayer while the other person needs to be paying the basic 20% rate of tax.
Claim tax relief on charitable donations
Someone paying tax at the 40% rate or higher can claim the difference between the highest rate of tax they pay, and the 20% basic rate, which the charity has already reclaimed through Gift Aid.
Alice said: "This means higher-rate taxpayers could reclaim an extra 20%, and additional rate taxpayers an extra 25%.
"Spouses should consider making sure that any charitable donations are made by the spouse with the higher marginal tax rate to maximise income tax relief."
