Temporarily low temperatures may delay the arrival of 'Tax Freedom Day' to the latest point in the 21st century.
Tax Freedom Day Might Arrive This Week: Here's What You Need to Know
Gird your loins, folks! Tax Freedom Day could finally arrive this week on June 12th, according to forecasts by the Adam Smith Institute. This symbolic date represents the point in the year where you've paid all your taxes to HMRC, assuming you've funneled all your earnings towards taxes upfront (yuck!). If their prediction is correct, this means you've toiled away for 163 days this year just to pay your taxes.
Tax Freedom Day, while a noteworthy milestone, is merely symbolic and not a real event on the calendar. However, it underscores the hefty tax burden we carry during the first few months of the year. Last time Tax Freedom Day landed this late was back in 1982, falling on June 12th.
Fiscal drag is largely to blame for this year's delay. Personal tax thresholds have been frozen since 2021 – part of an attempt to balance the books post-Covid lockdown spending. Rishi Sunak fixed these thresholds for four years, with his successor Jeremy Hunt extending the freeze until 2028. Labour chancellor Rachel Reeves has vowed not to extend the policy beyond this date, but we're still looking at a rising tax burden until 2028.
The UK government hauled in a mind-blowing £302 billion in income tax during the 2024/25 tax year, marking a 10% annual increase. Compared to 2021/22, the figure has swelled by 37%, thanks to the thresholds being frozen from the beginning.
"The tax assault doesn't stop there," warns Sarah Coles, head of personal finance at Hargreaves Lansdown. She highlights additional sneaky taxes like the slashed dividend allowance from £2,000 to £500, the reduced capital gains allowance from £12,300 to £3,000, and the £40 billion in tax hikes introduced in last year's Autumn Budget, which affected areas like pensions, inheritance tax, and more.
"In order to protect ourselves from overpaying taxes, we need to take proactive steps to move our own personal Tax Freedom Day forward as much as possible," Coles adds. Strategies include:
Strategies for Lowering Your Tax Bill
1. Maximize Pension Contributions
Pensions are a highly tax-efficient way to save for retirement. For every pound you contribute, the government kicks in 20% (25%, 40%, or 45% for high-income earners) in tax relief. The maximum you can contribute tax-efficiently is £40,000 per year, including employer contributions and tax relief.
"Pumping funds into a workplace pension or SIPP won't leave you with more cash in hand today, but it will mean you'll have less dough for the taxman," Coles explains.
2. Pay into an ISA
ISAs are popular savings and investment vehicles, thanks to their tax-efficient nature. You can stash up to £20,000 per year in an ISA, and any income or capital gains earned within the wrapper are free from taxation. Especially valuable these days when taxes seem to be on the rise.
3. Transfer Assets to a Lower-Tax Spouse
Spouses and civil partners can transfer assets to each other without triggering a tax charge. This opens up opportunities to take advantage of lower tax rates or unused tax-free allowances in a tax-efficient manner.
4. Time the Selling of Assets Carefully
Capital Gains Tax (CGT) can be a heavy burden for investors. Be mindful of the tax exemption, currently set at £3,000 per year. Careful timing of selling assets can enable you to stay below this limit, sweetening the deal with tax-free gains.
Be aware of your income levels as well, since they don't always remain consistent year-over-year. Delaying the sale of an asset could result in a lower CGT rate if you expect a lower income – and subsequently a lower tax bracket – in the future.
By employing these strategies, you can potentially lower your tax liability and keep more hard-earned cash in your pocket (or bank account). Happy tax planning!
- To minimize the tax burden, one strategy suggested by Sarah Coles is to maximize pension contributions, as pensions are a tax-efficient way to save for retirement, offering a government Tax relief of 20% (25%, 40%, or 45% for high-income earners) on each pound contributed, with an annual limit of £40,000.
- another approach to protect yourself from overpaying taxes is to pay into an ISA, which allows you to stash up to £20,000 per year, and any income or capital gains earned within the wrapper are free from taxation.
- Transferring assets to a lower-tax spouse or civil partner is another tax-efficient strategy, since spouses and partners can transfer assets without triggering a tax charge, creating opportunities to take advantage of lower tax rates or unused tax-free allowances.
- Careful timing of selling assets can help minimize Capital Gains Tax (CGT) by enabling you to stay below the annual exemption of £3,000, and potential lower tax liability if you expect a lower income and subsequently a lower tax bracket in the future.
