Answers that can ease a taxing burden for British workers - Sarah Coles

The calculation assumes you allocate all your pay to tax from January 1 until the full year’s tax bill is paid. Tax Freedom Day is the day you finally earn enough to pay all your tax for the year, and you start earning for yourself. This has shifted noticeably in recent years. In 2021 it was on 31 May. Last year, it had moved by more than a week – to June 8th. Now we’re seeing another shift to ten days later. Compared to 1996, when it fell on 1 May, the day falls more than six weeks further into the year.

It demonstrates the profound impact of the freeze in income tax thresholds in April 2021. This has been even more drastic than originally planned, as inflation accelerated and was in double-digits for eight months this year. As a result, the tax take in the year to March was up an incredible £40.2 billion from a year earlier. And this is only the start: those thresholds are frozen until 2028. By that stage, Tax Freedom Day is likely to kick in towards the end of June.

The thought of working for the government for the best part of six months isn’t why anyone goes to work. But in reality, your own Tax Freedom Day will depend on all sorts of things. In general, higher earners will work for the government for longer, because they pay more tax on both their earnings and their spending: the top earning 10% pay more than 60% of all income tax.

Savers and investors also face the prospect of tax on the money they have put away for the future. This year, investors have been clobbered by the cutting of the dividend tax allowance from £2,000 to £1,000, which will hit anyone earning dividends on investments held outside of tax wrappers – as soon as they exceed the new smaller allowance. They also face capital gains tax on any profits from investments - including stock market holdings and second properties over the annual allowance - which has been slashed from £12,300 to £6,000.

However, the ramping up of the tax burden hits everyone. The poorest two fifths of earners will pay around 15% of their income in direct taxes – like income tax and national insurance. On top of that, the lowest earners will pay well over 20% of their income in indirect taxes like VAT and fuel duty. It’s a burden they can ill-afford in the midst of a cost of living crisis. It means we need to take steps to protect ourselves from paying over the odds, so we bring our own personal Tax Freedom Day forward as far as we can.

There are a handful of ways to pay less income tax, and one of the most effective is to use your pension. You get tax relief at your highest marginal rate on contributions – so you effectively get the income tax you paid on this slice of your pay refunded. The annual limit on what you can pay in was raised to £60,000 in April, and the lifetime limit removed, so you might want to think about whether you can pay in more and enjoy more tax breaks. Unfortunately, this won’t leave you with more cash in your pocket, but will mean you’re handing over less of it to the taxman.

The second income- tax-saving option can actually leave you better off today. You’ll pay income tax on interest from savings above the personal savings allowance (which is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and £0 for additional rate taxpayers). Now that interest rates have risen, it means more people are potentially liable to this tax, so you can consider a cash ISA and escape the clutches of the taxman entirely. Cash ISAs tend to have lower rates than their equivalent savings accounts, so it won’t be the right move for everyone, but additional rate taxpayers, and higher rate taxpayers with larger balances may well be better off.

In terms of tax on investments, the best way to protect yourself from tax is to move them into a tax shelter - like an ISA. In practical terms, this means selling assets (trying to keep your gains within your capital gains tax allowance of £6,000 this year), and then using the bed and ISA process to move up to £20,000 into an ISA. If you have both growth and income-producing investments outside your ISA, it usually makes sense to prioritise moving income-producing ones into an ISA, because the rate you pay on income tends to be higher than that on capital gains, and you can choose when to take gains, whereas you can’t choose when to take income.

If you’re married or in a civil partnership, you can transfer assets between spouses without triggering a tax charge, so you could hand over enough assets for you both to go through this process, and shelter up to £40,000.

If you’re going to continue getting dividends outside an ISA and above the allowances, it makes sense for those investments to be held by the spouse paying the lowest rate of tax.

There will be admin involved in all of these things – plus a bit of maths. It might feel a bit too much like hard work.

However, at least for once you’ll be doing this work for yourself, rather than the taxman.

Mortgage mayhem

Last week we got a surprisingly strong set of jobs figures, which spooked the bond market, causing more headaches for anyone hunting for a fixed rate mortgage.

It was partly the fact we had record numbers of people in work, and partly the fact that wage rises were the highest we’ve seen outside the pandemic period. Both convinced a lot of traders that inflation was going to be higher for longer, so we could expect more interest rate rises.

The figure to watch at this point is the bond yield – which tends to rise on rate expectations and is what’s used to price fixed rate mortgages. The two-year bond yield hit 4.89% this week - well above the level it reached in the aftermath of the mini-budget. We’re likely to see an awful lot of rates pulled from the market or hiked again as a result.

However, there’s still hope that things won’t get as bad as they did last autumn, because there are plenty of commentators who think the market is over-reacting.

Some even think the Bank of England might press pause on rate rises next week, while others think we’ll get a couple of rises, but not as many as the market expects. An awful lot will rest on what the Bank says next Wednesday when it sets rates, but for the short-term at least, life isn’t getting any easier for remortgagers.

SARAH COLESHead of Personal Finance and Podcast Host for Switch Your Money On