Why the tax pain just keeps on coming for so many people - Sarah Coles

And the really ugly news is that this cash hokey cokey is only the half of it: the Government has also been making subtle changes that’ll gradually mean all of us hand over more of our pay as time goes on.

July’s change is the rise in the National Insurance threshold, from £9,880 to £12,570. It means that less of your salary will be subject to NI, which will typically boost pay by about £330. It will also lift an extra 2.2 million people out of paying NI entirely.

Unfortunately, it’s not as good as it sounds, because rather than being a tax cut it’s actually a partial reversal of a tax hike that came in a couple of months ago. In April, the rate of NI was raised by 1.25 percentage points, so you pay 13.25% on everything you earn over the threshold up to £50,270 and 3.25% on everything above that.

For anyone earning just under £35,000 or less, moving the threshold will repair the damage inflicted by the National Insurance hike in April, so 70% of people will see their NI drop below what they were paying before the rise.

That has to be welcome right now, especially for lower earners. They’ve faced the brunt of the rising cost of essentials because it makes up a bigger proportion of their spending, so they need all the help they can get.

However, we’re not talking about vast sums of cash. £330 spread over 12 months is £27.50 a month. It’s a drop in the ocean compared to rising costs. So while it will help ease the pain slightly, those on lower incomes still have a huge headache in making ends meet.

Meanwhile, higher earners will pay more: almost a third of working taxpayers will still be paying more NI than they were before April.

And while there’s not a huge amount of spare sympathy for the well paid when there are working people turning to food banks, the fact they tend to have much higher levels of borrowing means there’s a risk they will be struggling too.

At the same time, while we’ve been distracted by NI hikes and cuts, the freeze on income tax thresholds has been inflicting more damage. The Institute for Fiscal Studies estimates that by 2025/26, when you take inflation into account, the freeze will effectively be a 16.4% cut in the thresholds.

It means that in the current tax year, when you add the NI hike and threshold move to the freezing of income tax thresholds, the Institute for Fiscal Studies estimates that only those earning between around £10,000 and £25,000 will pay less.

To add insult to injury, things are set to get worse as time goes on, so that by the time we’ve lived through four years of threshold freezes, in 2025/26 almost every worker will be paying more tax.

While nobody would begrudge paying the taxes to make essential services function, you should also take steps to ensure you’re not paying more than your fair share. There are five things worth considering.

Marriage allowance

If one spouse is a non-tax payer, and the other is a basic rate taxpayer, the marriage allowance lets the non-taxpayer give a tenth of their personal allowance to their spouse (£1,260 in the current tax year). This will save you £252, and can be backdated for up to four years.

Salary sacrifice

The Government will let you give up a portion of your salary, and spend it on certain things free of tax (and in some cases national insurance). This includes pensions, childcare vouchers, bike-to-work schemes, and technology schemes. This won’t boost your take-home pay, but will cut your tax bill. If you have the cash available, talk to your employer and see if they run a scheme.

Pensions

This won’t put more money in your pocket right now, but will give you more cash later. Contributions to pensions attract tax relief at the highest rate of income tax you pay, and the first 25% you take from it at retirement is usually tax-free.

Tax-free childcare

The idea is that you pay into your tax-free childcare account, and use the money to pay for approved care. You don’t exactly get all your tax back, but for every 80p you pay in, the Government adds another 20p.

It will pay in up to £2,000 a year on this basis, to cover up to £10,000 of childcare per child, per year.

To qualify, you and your partner need to work and make between £152 a week and £100,000 a year each.

Working from home rebate

The usual rules were changed during the pandemic, which made this really easy to claim for. If you were forced to work from home for a single day in the tax years running 2020-2021 or 2021-2022, then you can claim for the whole year.

You can claim the tax on £6 a week, which for a basic rate taxpayer is £1.20. For the full two years that comes to £124.80. In the current tax year – from April 6, 2022 – the rules have been tightened, so it’s much harder to qualify, but there’s still plenty of time to claim for previous years.

Ways to cut the cost of train travel

Bargain-hunting train travellers have been thwarted by fare hikes. The Office for Road and Rail recently published figures which showed Advance tickets, which are sold well in advance of the trip and cost far less than a standard ticket, saw an inflation-busting 8.8% hike over the year to March.

There are a few techniques that can cut the cost of train travel:

Advance fares have become more expensive, but are still far cheaper than standard fares, so you can save significantly by booking advance.

If you’re travelling close to peak fare times, you can consider a split ticket – where you split the journey in half and get a separate ticket for each half of the journey – so at least part of the journey is off-peak. If you select this option on the Trainline app it will automatically look for split tickets for you.

It’s also worth exploring rail cards, which can help you save a third off fares, from a Family and Friends Railcard to a Young Person’s Railcard and a Senior Railcard.

If you often travel with the same person, you don’t need to be related to save, a Two Together card will cut the cost of your journey.