Soaring levels of inflation, including wage inflation, have been pushing earners into higher tax brackets; how can you offset the damage to your pay packet in real terms?

With 14 consecutive Interest Rate rises in the last 18 months, more UK workers than ever before are paying the higher 40% tax rates. Russell Brett explores the issue – and what you can do to downplay the damage to your spending power.

How to avoid higher Income Tax rates - Matthew Douglas

Income Tax brackets are currently frozen at 2021-22 levels and will be for another three years. This is a direct result of the debt incurred by the nation when millions of workers were put on furlough during COVID lockdowns. 

By freezing Income Tax as inflation climbs and people negotiate higher wages to offset the strain on their finances, more taxpayers now fall into the higher tax brackets – and more of their taxable income is liable to be affected.

However, while this is unfortunate, it isn’t entirely unavoidable. There are a number of steps you can take to limit the impact the freeze on taxation has on your income.

Bypass Income Tax increases with ‘salary sacrifice’ 

‘Salary sacrifice’ is the scheme through which employees pay into their pension. 

One way to enjoy a greater salary without being subject to higher Income Tax fees is if you choose to pay a larger percentage of your wages into your pension pot. While this doesn’t provide a short-term solution to rising costs, it does mean that you can confidently negotiate a higher salary without incurring increased taxation. 

As this contribution comes from you and not your employer directly, it does not cost organisations more. So, for those looking to advance their career but not diminish their earnings due to fiscal drag, temporarily investing more in your pension pot and then changing your preferred contribution after April 2026 could be a logical step to shore up your finances in the long term.

Use your Spousal Income Tax Allowance

If you are married or united under a civil partnership, you have the option of transferring some of your spouse’s Income Tax Allowance to yourself – or vice versa.

This allows your partner to legally transfer up to £1,260 of their Personal Allowance to you and could reduce your tax by up to £252. This is a good option if your spouse is not currently working, is retired or has been made redundant, as it entitles your household to a greater proportion of tax-free income – which could lighten the load on those day-to-day expenses.

Negotiate a higher salary 

While this is part of the larger problem and a natural result of global inflationary pressures, it can also be an immediate solution that offers short-term spending power and long-term career advancement benefits.

By applying for another job or negotiating a higher salary in your current position, as long as the pay rise is higher than inflation, you can confidently offset your tax liability and enjoy more disposable income.

Of course, there are just some of the options open to you. For more information and to explore your financial opportunities, get in touch with our expert team today.