"Tax Freedom Day" might be pushed to the latest date of this century due to frozen thresholds

The day of tax freedom is when you quit working for the tax collector and begin working for yourself

It might be moved to June 12 this year, the latest date since 1982, due to an increasing tax burden.

This week may finally be Tax Freedom Day. The Adam Smith Institute's earlier projections indicate that it is due on June 12. According to the think-tank, taxpayers will have worked for HMRC for the first 163 days of the year.

It is not a calendar event; rather, it is a symbolic date. Assuming you used all of your earnings to pay your taxes upfront, it represents the time of year when you would quit working for the tax collector and begin paying yourself. The last time Tax Freedom Day fell on a late date was on June 12, 1982, a century ago.

The investment firm Hargreaves Lansdown claims that tax freedom day, which fell on May 22, 2019, was approximately three weeks prior to the pandemic. A major contributing factor to the delay in recent years has been fiscal drag. Since 2021, personal tax thresholds have been frozen in an effort to stabilize the state's finances following a period of high spending during the COVID lockdowns.

Prior to his successor, Jeremy Hunt, extending the freeze until 2028, Rishi Sunak set thresholds for a four-year period. Despite Rachel Reeves, the Labour chancellor, vowing not to prolong the policy past this point, taxpayers will still be subjected to the stealth tax until then.

It implies that the tax burden in the UK will keep increasing. The government's income tax revenue increased by 10% annually to an astounding 302 billion in the 2024 - 2025 tax year. Since thresholds were first frozen in 2021 - 2022, the number has increased by 37%.

The head of personal finance at Hargreaves Lansdown, Sarah Coles, stated, "The tax attacks don't stop there either." She notes that in recent years, the capital gains allowance has decreased from 12,300 to 3,000, while the dividend allowance has been drastically reduced from 2,000 to 500. The Autumn Budget of the previous year also included 40 billion in tax increases that affected inheritance tax, pensions, and other areas.

As far as possible, she continued, "it means we need to take steps to protect ourselves from paying over the odds, so we bring our own personal tax freedom day forward." Increasing your pension contributions, increasing your ISA balance, or transferring assets between spouses and civil partners to benefit from each other's tax-free allowances could all help lower your tax obligation.

Ways to lower your tax liability.

1. Increase your pension

Because pensions offer tax relief on contributions up to a 60,000 annual cap, they are among the most tax-efficient ways to save for retirement. This covers your contributions as well as any employer-provided funds and HMRC tax breaks. Your marginal rate20, 40, or 45 percentis used to calculate pension tax relief.

Coles says, "You won't have more money in your pocket today if you pay into a workplace pension or SIPP, but you will be giving the taxman less of your money."

A tax-efficient option for some pension savers may also be salary sacrifice. This entails making a deal with your employer whereby you forfeit a portion of your pay in return for a benefit, like a pension contribution.

"A growing number of companies now provide these plans that allow employees to lower their bonuses or salaries in exchange for higher pension contributions," stated Alice Haine, a personal finance analyst at the investment platform Bestinvest.

The reason for this is that lowering your gross pay lowers your income tax liability as well as your employer's and employee's National Insurance contributions.

2. Contribute to an ISA

The director of public policy at AJ Bell, Tom Selby, stated that "ISAs are an incredibly popular savings and investment product, with millions of people across the UK taking advantage of the tax perks of an ISA to set aside money for the future."

Unsurprisingly, the wrapper's versatility allows it to accommodate a wide range of savings objectives.

An ISA allows adult savers to keep up to £20,000 annually, and any income or capital gains made inside the wrapper are shielded from taxes. In the current climate, this is more valuable than ever.

You can open a cash ISA, stocks and shares ISA, or a combination of the two, depending on your objectives. People who are saving for retirement or their first home might also want to think about a Lifetime ISA. This comes with a generous government bonus of up to £1,000 annually, but it has a lower annual allowance of £4,000 (part of the total allowance of £20,000).

3. Give your spouse a share of your assets

Because spouses and civil partners can transfer assets to one another without incurring taxes, marriage can occasionally be advantageous. This creates a variety of options, especially if one partner pays a higher tax rate than the other or has already depleted their tax-free allowances.

Coles continued, "You could transfer enough assets so that you both get dividends within your dividend allowance, realize gains within your capital gains tax allowances, and use both of your ISA allowances annually." It is logical to hold income-producing assets by the spouse with the lowest tax rate if you plan to keep receiving dividends above the allowances and outside of an ISA.

4. Carefully consider when to sell your assets

Capital gains tax (CGT) has hit investors hard in recent years. The annual tax-free allowance has gradually decreased from 12,300 to 3,000 since 2023. Both the basic and higher CGT rates were increased from 10 and 20 percent, respectively, to 18 and 24 percent, in the Autumn Budget of 2024.

The good news is that investors can choose when to take a profit, so it's important to think about your overall tax situation. You won't have to pay any taxes at all if you can time the sale of your assets to bring in less than £3,000 annually.

It is also worthwhile to examine your income, since it may not be constant from year to year. If you work as a freelancer, for instance, you may choose to take on more work in one year than the next. If you anticipate a lower income the following year (and, consequently, a lower tax band), postponing the sale of an asset may result in a lower CGT rate on the gain.