The cost of living crisis that has gripped the UK shows little sign of easing up – but there’s one way to help aid your finances in these tough times. While inflation rises, wages and salaries increase in what can feel like a futile way to keep up. This especially feels difficult when the amount of tax we pay on our earnings has been frozen for many years.
Each individual in the UK has what is called a tax-free Personal Allowance – the amount of money you can earn before you pay any tax. For a long time, this has been set at £12,570 a year.
Thousands have signed a petition to the Government to change the allowance to £20,000. Unfortunately, it doesn’t seem likely to change any time soon – despite calls for a drastic increase on the threshold.
The situation has led to a nightmare for many households, whereby rising earnings have pushed workers into higher tax brackets. This has become known as ‘fiscal drag’.
What is fiscal drag?
Fiscal drag is a term used to describe the way that more and mroe of our earnings goes to the tax man instead of staying in our pockets. This happens because of the progressive tax system in the UK.
Simply, those earning more than certain thresholds are also required to pay more tax. As well as the personal allowance, there is the higher rate of income tax, which is payable on earnings above £50,271 and below £125,140.
Those earning this amount of money must pay 40 per cent in tax. Then there is the additional rate bracket, whereby those earning more than £125,140 have to pay 45 per cent to HMRC.
However, there is one method to boost your tax-free Personal Allowance. Certain households will see it as a relief if they have not already taken advantage of it.
Marriage Allowance – what it is and how to claim
Married couples or those in a civil partnership can increase their tax-free take-home pay by £252 each financial year. By claiming Marriage Allowance, the lowest earner gives up to £1,260 of their personal allowance to their partner, reports the Express.
This can be applied to up to four separate tax years if you backdate the claim, potentially resulting in a tax rebate of up to £1,242. When added to the standard Personal Allowance for the year, this amounts to £14,064 tax-free instead of £12,570.
To qualify, one partner must not pay income tax – so they must earn under £12,570. This could apply, for instance, if one member of the couple is not currently working, has lost their job, or is taking a career break for childcare.
The other individual must be a basic rate taxpayer earning between £12,570 and £50,270 (after pension contributions are deducted).
For the 2024-25 tax year, a slight adjustment was made that also permits someone earning between £11,130 and £12,570 to transfer their Personal Allowance, although earnings within those amounts remain taxable. It still results in savings, albeit not as substantial as for those earning less than £11,130.