Sarah Coles, head of personal finance, Hargreaves Lansdown: “Finally, some good news on tax: inflation-adjusted taxes fell in 2023/24. However, don’t get too excited, because there’s a huge, ugly fly in the ointment. Taxes only fell because real wages were down too, so lower taxes didn’t leave people any better off.
Since then, the good news is that wages have been rising faster than inflation, but this allows for another nasty-looking fly to spoil things – because higher wages mean a hike in taxes.
Inflation played a massive role in these figures. It started the financial year at 8.7%, and although it fell throughout the 12-month period, the damage was done. Pay rises simply didn’t keep up. Average household wages after inflation fell during the year. For the poorest fifth they were down 10.1% and for the richest they were down 3.6%. It’s one reason why we were still feeling such a squeeze on our finances.
It means that when you adjust for inflation, taxes actually fell over that period. But it’s hard to get particularly excited about it, because it didn’t leave people any better off. In fact, changes to taxes took a horrible toll. One major contributor was the freeze on income tax thresholds. Even when pay rises didn’t keep up with inflation, they pushed more people into paying higher rates of tax. For higher earners there was also the bitter blow of the cut to the additional rate tax threshold in April 2023. In the intervening period, the number of additional rate taxpayers has more than doubled.
Since 2023/24, wages have been growing faster than inflation, but this isn’t unalloyed good news. On the plus side, it means more money in our pockets. On the downside it means more in the taxman’s pockets too, as frozen thresholds continue to push more people into paying more tax.
This picture isn’t set to change any time soon. Wages are still ahead of inflation – although the gap has been narrowing. However, with thresholds frozen until 2028, it still means more of our money going to tax. This isn’t just a matter of paying more income tax on wages, because once you cross a threshold it means more of your savings interest could be subject to tax. When you move into higher rate tax, it also means a higher rate of capital gains tax and dividend tax. In an environment like this, protecting as much of your hard-earned money from the taxman will be vital, which is why stocks and shares ISAs, cash ISAs and pensions can be so valuable.”
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