More UK taxpayers are being pushed into higher tax brackets due to frozen thresholds, however analysts are highlighting a pension savings hack which could reduce workers' liability.
According to official HM Revenue and Customs (HMRC) figures, the number of people paying higher rate tax estimated to have risen by 30 per cent since 2021-22.
This phenomenon, known as fiscal drag, occurs when taxpayers are "dragged" into higher tax brackets due to inflation and wage growth, even without an increase in tax rates.
With tax bands frozen until 2028 and wages rising, millions of workers are finding themselves paying more tax despite not necessarily feeling better off.
A pension hack could save Britons from losing money to fiscal drag
GETTYAs it stands, the freeze on extending tax brackets means this trend is set to continue for the next couple of years, with more people facing the 40 per cent tax rate (42 per cent in Scotland) on earnings above certain thresholds.
The number of UK taxpayers subject to higher rate income tax has reached 6.31 million in the 2024-25 tax year, up from 4.43 million in 2021-22.
This significant increase affects those whose income rises above £50,271, or £43,663 in Scotland, who must then pay 40 per cent tax on earnings above this threshold.
Dean Butler, the managing director for Retail Direct at Standard Life, notes that while pay rises are welcome, many people are "brought back down to earth upon realising they've been pushed into a higher rate tax bracket".
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The situation is expected to worsen over the next three years as more workers cross these frozen thresholds while wages continue to rise.
Despite the tax implications, Butler suggests there are ways to maximise income through available reliefs and allowances.
"While a higher tax rate inevitably impacts the money you take home, there are several reliefs and allowances available that can work in your favour and help you maximise your income," he says.
Butler particularly recommends pension saving as an effective strategy.
"Pension saving is a particularly good way to protect your income by reducing your tax bill, while also allowing you to save for the future," he explains.This approach offers dual benefits of immediate tax relief while building retirement savings.
For higher-rate taxpayers, Butler outlines specific pension tax relief benefits that can help offset increased tax burdens.
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Parliament TV"UK taxpayers are entitled to tax relief on their own pension payments based on the rate of income tax they pay, with most getting a 20 per cent top-up from the Government. This means it only costs £80 to pay £100 into your pension," he explains.
Higher-rate taxpayers can claim an additional 20 per cent relief, bringing their total to 40 per cent, while additional rate taxpayers can claim an extra 25%.However, Butler warns this extra relief isn't always automatic.
"Depending on how you make your payments, you may need to complete a self-assessment tax return," he advises.
The relief can be received either as a tax rebate or through a tax code adjustment.
