Britons set to pay up to £16,000 extra in tax on income by 2026

interactive investor comments on the new National Insurance threshold.

The threshold for National Insurance (NI) is set to rise to £12,570 (from £9,880) on 6 July, benefiting 30 million people with a typical employee saving more than £330 a year. And around 2.2 million people will be taken out of paying NI entirely.

The change means that people categorised as Class 1 (employed) and Class 4 (self-employed) can earn an extra £2,690 before paying anything towards NI.

However, fiscal drags means that UK taxpayers are set to pay as much as £16,000 more in tax on their income by the end of 2026, when a series of tax-free allowances and thresholds are set to be lifted, according to calculations by interactive investor.

Last year, chancellor Rishi Sunak froze the basic and higher-rate tax thresholds from 2022 to 2026. At a time of high inflation and increasing average wages, this will suck more and more people into the higher-rate tax bracket.

Our calculations show that by 2026, a basic-rate taxpayer earning £30,000 will see their take home pay reduced by £1,816 in real terms due to the personal allowance and the NI threshold not keeping pace with inflation*.

That takes into account the recent 1.25 percentage points increase in NI (to better support the NHS) as well as the increase to NI starting threshold. The calculations also assume salary increasing with inflation, but the personal allowance remaining unchanged.

Higher-rate taxpayers will see an even bigger impact on their earnings. Someone earning £50,000 will have £4,271 less in their pocket in real terms by 2026, while a top earner with an annual income of £150,000 will fork out an extra £15,596 in tax.

More parents paying back Child Benefit

Those of us with kids may also feel the pinch as more and more have been dragged into paying the higher income child benefit charge.

The tax charge affects earners on more than £50,000 and means that you’ll have to pay back some or all of your child benefit. An earner on £60,000 with two children has to pay back a total £1,885 every year. That’s on top of £4,711 extra tax due to the higher-rate tax band being frozen.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The raising of the NI threshold is effectively a tax cut, with 30 million people set to benefit from an additional £330 in their pay packet over the course of the year. Unfortunately, that’s going to be decimated by the freeze in personal tax allowances in place until 2026.

“All workers will see a modest uptick in their take home pay in July compared to what they’ve received since April – in fact, most will pay less NI than they did in the previous take year despite the 1.25% percentage points increase to the NI rate back in April due to the higher threshold. However, the reverse is true for those who earn more than £50,000 a year.

“The upping of the NI threshold will go some way in easing the cost-of-living squeeze felt most acutely by lower earners.  However, squeezes to various tax-free allowances and thresholds and rampant inflation is a toxic combination that is set to wipe thousands off pay packets in the coming years. The effect of the freeze is now far harsher than first feared, as inflation is forecast to soar to 11% per cent this year. This leaves less money in our back pockets and makes it harder to save and invest to build wealth.

“Known as ‘fiscal drag’, this is the ultimate stealth tax which feels particularly tough at a time when so many people are struggling to keep up with rising prices. It is a bleak outlook which is even worse for families who also face losing some child benefits thanks to a baffling rule which leaves payment subject to high income child benefit tax if just one parent earns above the £50,000 threshold but does not apply if both parents earn just below the threshold.

“The current child benefit rules and the £50,000 threshold was set back in 2013 at a time when £50,000 was worth a lot more than today. Many parents earning around that figure would say that that they don’t feel particularly wealthy – especially with runaway inflation.”

Alice Guy, Personal Finance Expert, interactive investor, says: “The chancellor is carrying out a secret £3,631 tax raid on millions of struggling families. It will push many families to the brink as they cope with a crushing tax burden on top of the existing cost-of-living crisis.

“It’s a bleak picture as our new research shows that ordinary taxpayers earning £30,000 will have to find a painful extra £1,816 of Income Tax and NI by 2026. That’s £3,631 extra for a family with two average earners.

“It’s all because Income Tax and NI thresholds aren’t keeping up with inflation and tax thresholds have been frozen until 2026. It means that as wage rises with inflation, a bigger and bigger chunk will be eaten up by tax.

“And the recent NI changes simply aren’t enough. Middle earners on £30,000 will still pay an extra £638 NI by 2026, despite the primary threshold being raised to £12,570 in July this year.

“For higher earners, currently on £50,000, the figures are even worse. They’ll have to pay a massive £4,271 extra in Income Tax and NI by 2026. On top of this, someone currently earning £50,000 with two children will lose £1,850 in child benefit by 2026. They will be hit with the higher income child benefit charge as their wages rise with inflation. That means a higher earner will lose a punishing £6,121 by 2026 and see most of their extra pay wiped out by tax.

“And top earners will be paying a staggering £15,596 extra in tax by 2026 as the additional rate threshold is also frozen.”

Fight back with these tax tips

Alice Guy says:

Make the most of pension tax relief

If you’re a higher-rate taxpayer then you can still get an extremely generous 40% tax relief on any pension contributions to a workplace or private pension scheme. It means that a £60 investment to a workplace pension will be topped up to £100. If you pay into a private pension you may need to write to HMRC to claim your tax rebate as it won’t be paid automatically.

You’re allowed to contribute up to £40,000 per year into your pension if you’re not yet drawing an income. And even pensioners or those who are in the income drawdown phase are still allowed to contribute £3,600 per year to their pension.

Invest via ISA for tax-free investing

You can also use a pension or stocks and shares ISA to protect your investment wealth from capital gains and income taxes. You can save up to £20,000 per year into a cash or stocks and share ISA, per person. The allowance can’t be backdated so you need to use it or lose it.

Use your pension to avoid inheritance tax

And, if you’re lucky enough to have enough income and not need to use your pension pot, you may be able to use it to avoid inheritance tax. That’s because investments held in a pension scheme can be passed on outside your estate and won’t usually attract inheritance tax.

If you need help with tax planning, then it’s a good idea to consult an independent financial advisor who will be able to assess your financial situation and give you tailored advice.