Do frozen tax thresholds affect more women than men? 3 ways to protect your wealth

In his autumn statement and spring Budget, chancellor Jeremy Hunt announced that he was extending a number of tax threshold freezes. These are designed to help the Treasury raise funds to pay down national debt. Tax thresholds including the Personal Allowance, higher-rate Income Tax band, and the nil-rate band for Inheritance Tax have all been frozen until April 2028.

While freezing tax thresholds doesn’t usually have an immediate effect on household incomes, over time the effects become more apparent as wages typically rise and asset values increase, causing people to pay more tax.

Now, new data has revealed that the tax threshold freezes are likely to have a much more significant effect on women and female pensioners than on men.

Read on to learn more and discover how you may be able to protect your wealth from the effects of tax freezes over the coming years.

Freezing tax thresholds raises funds for the Treasury as wages rise

Freezing tax thresholds is a deflationary measure, the effects of which are known as “fiscal drag”. It’s the idea that, as wages and asset prices rise over time, frozen tax thresholds mean that a greater proportion of a person’s income or wealth will become liable for tax.

One of the tax thresholds that has been frozen is the Personal Allowance, a tax-free threshold for earnings before Income Tax is payable. In 2023/24, the Personal Allowance is £12,570, so you will usually only need to pay Income Tax on any income you receive that exceeds this threshold.

A report by interactive investor shared how this could affect your personal tax position over the coming years.

If you were earning £23,348 in 2022, then 43% of your income would have been liable for Income Tax. Assuming your income rises with inflation, by the 2027/28 tax year 56% of your income could be liable for Income Tax because of the freeze on the Personal Allowance.

This demonstrates how fiscal drag can affect how much of your income is liable for Income Tax, and how much stays in your pocket.

Tax freezes affect women and female pensioners more significantly than working men

The same report from interactive investor found that working women and female pensioners are more severely affected by fiscal drag than men. This is because, on average, these groups tend to have lower incomes than men. So, the Personal Allowance being frozen at £12,570 means that a greater proportion of their income could start being taxed in the coming years.

The report found that, on average, the freeze on the Personal Allowance will create the equivalent tax bill rise for a single working woman as a 6p rise in Income Tax by 2028. For female pensioners, the rise would be equivalent to a 7p rise in Income Tax by 2028, assuming their pension income rises with inflation.

In comparison, on average a male pensioner will experience a tax bill rise equivalent to a 4p rise in Income Tax by 2028, assuming their pension income rises with inflation. A working man will experience the equivalent of a 3p rise in Income Tax in that time.

3 ways to protect your wealth from the effect of fiscal drag

Fiscal drag can have a significant impact on your overall wealth and your ability to meet your financial goals. Here are three ways you could reduce its impact on your personal finances.

1. Contribute to your pension to reduce your Income Tax liability

Pension contributions usually receive tax relief at your marginal rate of Income Tax, effectively meaning that you don’t pay Income Tax on the portion of your income that you contribute.

You will usually receive basic-rate tax relief automatically, so if you are a higher- or additional-rate taxpayer, you will need to claim back your additional tax relief through your self-assessment tax return or by contacting HMRC.

It’s important to remember that you only receive tax relief on contributions up to the Annual Allowance each year. In 2023/24, the Annual Allowance is the lower of £60,000 or 100% of your earnings. If you exceed this amount, you may be liable for a tax charge on your pension contributions.

2. Utilise tax-efficient wrappers such as ISAs

Usually, the interest you generate on cash savings is subject to Income Tax at your marginal rate if it exceeds the Personal Savings Allowance (PSA). In the 2023/24 tax year, the PSA is as follows:

• £1,000 for basic-rate taxpayers

• £500 for higher-rate taxpayers

• £0 for additional-rate taxpayers.

By contrast, interest generated by savings held in a Cash ISA are not subject to Income Tax. Moreover, you can also invest through a Stocks and Shares ISA, with any returns being entirely free from Income Tax or Capital Gains Tax.

You can save up to £20,000 across the different kinds of ISAs each tax year, which could help you to grow your wealth tax-efficiently.

3. Consult a financial planner to ensure you’re making the most of your allowances

Depending on your circumstances, you may have access to tax reliefs and allowances that could reduce the amount of tax you pay on your wealth. For example, if you’re married, there may be ways to take your retirement income strategically to make the most of the allowances available to both you and your partner.

This can be complex to unravel, so consulting with a financial planner can be helpful in ensuring you’re holding your wealth and taking income in the most tax-efficient ways possible. Over time, this can help you to minimise the effects of fiscal drag on your wealth, giving you greater opportunities to hit your financial goals.

Get in touch

If you’re looking for a reliable financial planner based in Towcester to help you understand how to protect your wealth from the effects of inflation and frozen tax thresholds, please get in touch.

Email theteam@fortitudefp.co.uk or call us on 01327 354321.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. 

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.