Around 3.2million more people are expected to pay income tax than if the personal allowance had risen with inflation, while another 2.5million will pay higher and additional rate tax.
We’ll also be paying more national insurance, capital gains tax, dividend tax, stamp duty and council tax under Labour Chancellor Rachel Reeves.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said the UK’s record tax haul makes it essential to use every break you have. “The appeal of generating tax-free income has never been stronger.”
She lists 17 ways of fighting back. Have you tried them all?
The Personal Allowance. Every individual can earn up to £12,570 per year before paying income tax.
This is reduced by £1 for every £2 earned above £100,000, creating a 60% effective tax rate for earnings between £100,000 and £125,140.
“Higher earners can consider making additional pension contributions to reduce taxable income,” Coles said.
Rent-a-Room Scheme. Renting a furnished room in your home can earn you up to £7,500 annually tax-free. “This limit hasn’t increased since 2016, so ensure your rental income doesn’t exceed this threshold to avoid filing a tax return.”
Trading Allowance. Income from hobbies or side hustles, such as selling handmade items or reselling goods, is tax-free up to £1,000 per year. Selling personal belongings generally isn’t taxable unless an individual item exceeds £6,000 in value, Coles said.
Property Allowance. You can earn up to £1,000 tax-free annually from a property business or other property-related income outside the Rent-a-Room scheme.
Personal Savings Allowance. Basic rate taxpayers can earn up to £1,000 in interest from a standard savings account tax-free, while higher rate taxpayers have a £500 allowance. Additional rate taxpayers are not eligible.
Starting Rate for Savings. If your total income from wages or pensions (but not your savings) is below the £12,570 personal allowance you can earn up to £5,000 a year in savings interest tax-free. This allowance tapers off as non-savings income increases.
Cash ISAs. Everyone can save up to £20,000 annually in a cash ISA and enjoy tax-free interest for life. Use it or lose it.
Stocks and Shares ISAs Income and gains from Stocks and Shares ISAs are tax-free. This makes them invaluable for those drawing income from investments, as they can provide a tax-efficient income.
Lifetime ISAs. Withdrawals from Lifetime ISAs are tax-free from age 60. They can then used for a first home purchase or retirement savings, with nothing to pay HMRC.
Dividend Allowance Outside of ISAs, the first £500 of dividend income is tax-free in the current tax year. The allowance has been cut back heavily since 2016, when it stood at £5,000, but it’s still worth remembering if drawing income from shares. Invest inside your ISA allowance if you possibly can.
Premium Bonds. Prizes from Premium Bonds, ranging from £25 to £1million, are entirely tax-free. The risk is that you don’t win anything.
Capital Gains Tax. The first £3,000 of capital gains each year is tax free. “While not technically income, this can supplement other income sources efficiently,” Coles said.
Venture Capital Trusts (VCTs). VCTs are high-risk investments in small, unlisted companies that offer substantial tax benefits. Dividends from VCTs are tax-free, and investors can receive 30% income tax relief on investments up to £200,000 per year, with returns also exempt from capital gains tax. Can be risky.
Sharing Assets. Married couples and civil partners can share income-producing assets to double their tax-free allowances. This includes personal allowances, dividend allowances, and ISA allowances.
Income protection cover. Payouts from private income protection policies are tax-free, providing financial security if you’re unable to work due to sickness, injury or stress.
Long-term care annuities. Payments from long-term care annuities are tax-free when paid directly to a long-term care provider, offering a tax-efficient way to fund care needs.
Purchased life annuities. These annuities provide a guaranteed income for life or a fixed term, with a portion of each payment considered a return of your original investment and therefore tax-free. The taxable portion may still fall within your personal or savings allowances, resulting in no tax liability. Seek financial advice.
By understanding and using the available tax breaks, you can reduce your tax burden and keep more of your hard-earned income, Coles said. “As the tax burden rises every year tax thresholds are frozen, explore every option available and create a strategy that works for your personal circumstances.”
