Few investors would say “no” to beating the market. Even the most passive among us would happily filter-feed a few extra quid – like a financial blue whale – if we didn’t need an ‘edge’ to make it happen.

Last week we looked at one way to potentially do that. The small value strategy has earned a 2% annualised premium versus the market over the long-term. Outside the US, small value has beaten the market by 1.5% annualised since 1990. Which is just as well, because it’s had a torrid time against the S&P 500 these past 20 years.

But other systematic market-beating strategies are available!

The cast of credible candidates includes:

• Momentum – You buy recent winners, sell recent losers
• Quality – Firms with high return on equity, low debt, and stable earnings growth
• Low volatility – Low beta stocks that don’t fizz or fizzle as violently as the market. The draw here is the potential for superior risk-adjusted returns

We can invest in any of these strategies using an ETF, they’re backed by independent research, and the risks are pretty well understood.

But how well do they actually work? If in fact they do…

Are there any diversification benefits to be had if you combine the strategies?

Let’s turn to the data!

While we’re at it, let’s look at the dividend growth / leader / aristocrats strategy, too. Dividend growth is not widely considered to be a market-beating wheeze but we have the numbers, so let’s see.

Investing returns sidebar – All returns quoted are nominal total returns. US data is from the astounding Simba’s backtesting spreadsheet and compiled by members of the Bogleheads to further public knowledge of investing. World data is quoted in GBP and is from the spiffing justETF.

Market beat-’em-up

Which strategies socked it to the market over the longest comparable timeframe?

Here’s our contenders’ annualised returns versus the S&P 500 for the 40 years from 1985-2024:

Strategy	Annualised return (%)	Sharpe ratio
Broad market (US)	11.7	0.69
Momentum	13.7	0.71
Quality	12.9	0.72
Dividend growth	12.4	0.88
Low volatility	11.1	0.84
Small value	11.1	0.63
Small cap	10.5	0.58

US stocks only. USD returns. Small value and small cap included for comparison purposes.
The Sharpe ratio is a measure of risk-adjusted returns. Higher is better.

On these numbers momentum looks like a must-have.

That’s not too surprising. The long-short version of the momentum strategy stands out as the most profitable of the so-called risk factors in academic literature. And here we can see that a long-only iteration has delivered a 2% premium in the all-important US market.

Moreover, my numbers (not tabulated) show momentum’s volatility is pretty normal for an equity holding. Volatility averages 19.3% across the period.

Also-rans worth running

What about our other belligerents?

Quality also looks good. It beat the market by 1.2% per year on average. That will add up. Again there’s no sign you must endure sickening volatility to snaffle the extras.

The biggest surprise to me is dividend growth. High dividend stocks are routinely found by academics to lack any special sauce. But the strategy has topped the market by a commendable 0.7% over the period we have data for.

Dividend growth also delivered the best risk-adjusted returns. That is, you got more bang for your buck per unit of risk taken (as measured by volatility).

Low volatility1 didn’t beat the market but it isn’t meant to. A low volatility strategy touts superior risk-adjusted returns versus the broad market – and on that score, it delivered.

You might think of low vol as the antacid of equity strategies. It offers relief against stomach-lurching drawdowns without sacrificing too much return.

Finally, small value and small cap were poor over this time horizon. But if that encourages you to write-off small value then I’d urge you to read our recent musings on small caps first.

Time trial

Let’s split apart the 40-year timeframe. Doing so may reveal extra nuance:

Strategy	5yr ann return (%)	10yr ann return (%)	15yr ann return (%)	20yr ann return (%)	25yr ann return (%)	30yr ann return (%)
Broad market	14.5	13.1	13.8	10.3	7.7	10.9
Momentum	11.8	13.2	14.5	11.1	8.6	13.2
Quality	13.6	12.9	13.8	10.8	8	12
Divi growth	11.5	11.4	12.3	9.7	9.6	11.1
Low volatility	8.1	10.2	12.1	9.5	11.1	10.1
Small value	9.9	8.9	11.2	8.5	9.8	10.7
Small cap	9.3	9.1	11.6	9.1	8.7	10.2

Firstly, we can see that none of this lot laid a glove on the S&P 500 these past five years.

Don’t bother with risk factors unless you’re prepared for the long haul. If they beat the market all the time, then they would stop being risk factors. The key word is risk.

With that said I’ve highlighted momentum because it’s the only factor that’s consistently beaten the US market across every timeframe beyond five years.

Quality has been more erratic – while you have to push your view back at least 25 years before dividend growth bests the S&P 500.

Timely reminders

The table shows how considering different time frames can influence our view. For example, low vol and small value would look pretty hot right now, if all we had to go on was 25 years worth of returns.

Is there anything special about this quarter-of-a-century mark?

Well, the broad market nose-dived 38% during the Dotcom Bust (2000-02). But low vol, small value, and dividend growth all climbed during the crash. They hedged your losses at just the right time.

Low volatility and dividend growth also suffered far less than the S&P 500 during the Global Financial Crisis and 2022’s inflationary surge. Meanwhile, small value enjoys a lower correlation with the market than the other strategies across the entire period.

So there is some strategic value in thinking beyond the raw returns, especially if your objective is to limit drawdowns.

For example:

• Want to curtail your losses in a crisis? Consider low volatility and dividend growth.
• Want to diversify your returns away from big tech? Think small value.

Incidentally, I find the risk factor framework more convincing than geography as a basis for diversification. Perhaps that’s one we can debate in the comments?

Diversification potential

A correlation matrix can help us assess the diversification benefits of each asset pair. The lower the number the better.

Strategy	Broad market	Small value	Momentum	Quality	Low volatility	Divi growth
Broad market	1.0	0.71	0.90	0.96	0.94	0.87
Small value	0.71	1	0.5	0.59	0.71	0.78
Momentum	0.90	0.5	1	0.91	0.86	0.75
Quality	0.96	0.59	0.91	1	0.90	0.85
Low volatility	0.94	0.71	0.86	0.90	1	0.92
Divi growth	0.87	0.78	0.75	0.85	0.92	1

Small value demonstrates the most diversification potential across the board. It’s the only strategy that’s not highly correlated with the broad market.

Even more intriguing is small value’s relatively low correlation with momentum and quality. That indicates these are likely complementary assets if you’re interested in a diversified multi-factor strategy.

Dividend growth also has some diversification value, so I’d also like to test how well it performs when paired with other strategies…

Multi-factor mash-up

Let’s dial up the fortunes of three equity portfolios:

• 50/50 momentum/small value (SCV) – best performer + most diversified
• 50/50 momentum/dividend growth – two strong performers + moderate diversification
• 50/50 dividend growth/small value – just to see!

Here’s the returns for each portfolio ranged against the market and their component strategies:

Portfolio	10yr ann return (%)	15yr ann return (%)	20yr ann return (%)	25yr ann return (%)	30yr ann return (%)	40yr ann return (%)
50/50 Mom / SCV	11.2	13.1	10	9.5	12.3	12.7
50/50 Mom / Divi	12.4	13.5	10.5	9.3	12.4	13.2
50/50 Divi / SCV	10.1	11.8	9.2	9.8	11	11.9
Broad market	13.1	13.8	10.3	7.7	10.9	11.7
Momentum	13.2	14.5	11.1	8.6	13.2	13.7
Small value	8.9	11.2	8.5	9.8	10.7	11.1
Divi growth	11.4	12.3	9.7	9.6	11.1	12.4

The portfolios are rebalanced annually.

What I’m looking for from my backtest portfolios is only a modest reduction in long-term 40-year returns2 versus the strongest component in the mix.

I’d also like to see strong positive diversification potential at the 25-year mark. That’s the best period for getting a quick bead on the benefit of holding an otherwise weaker seeming asset.

I also want to check if holding two imperfectly correlated assets (for example momentum and small value) essentially delivers the market return. That is, do they just neutralise each other?

Not bad

The good news is that momentum and small value do not cancel each other out.

You still earn a 1% premium versus the market over the long-term, despite SCV’s poor showing overall.

The portfolio result also significantly improves on the performance of the market and momentum over 25 years – the period most affected by the background radiation of the Dotcom Bust.

Yes, you can rightly point out that small value has proved to be a drag overall. But you couldn’t have known that in advance.

Moreover, international3 small value has beaten the international market – even over the past five years. And it’s lagged international momentum by only 0.5% annualised over those last five years, too.

In other words we can’t conclude small value is dead (although it’s clearly resting in the US).

Dividend growth also proves out its diversification chops, while otherwise the numbers show what we already know – the strategy delivered strong returns over 40 years.

Beyond that, I don’t think there’s any point me torturing the data to find some mythical sweet spot involving, say, 17.37% of quality and eye of newt and whatnot.

Essentially, I just wanted to check that choosing moderately correlated factors can produce a diversification uptick without banjaxing the return premium.

If you don’t want to invest in something that hasn’t outperformed for the last ten years then fair enough. Stick to the market, I think that’s a perfectly rational place to be.

Show me the world

We can gain an alternative perspective by checking live fund data. A raft of World risk factor ETFs launched in Europe in 2015, so we can just about scrape up ten years worth of GBP returns by comparing them:

Asset class	5yr ann return (%)	10yr ann return (%)	Sharpe ratio
Broad market	12.4	12.6	0.79
Momentum	12.5	14.8	0.82
Quality	11.7	12.9	0.79
Multi-factor	11.6	11	0.69
Low volatility	6.9	9.9	0.76
Small cap	9	9.5	0.56
Small value	12.9	7.8	–
Dividend growth	8.3	7.2	0.48

Nominal total returns. ETF returns courtesy of justETF. 10-year return is actually 9-years and 9-months due to the youngest ETF’s inception date. Small value is DFA’s Global Targeted Value fund courtesy of Morningstar. Sharpe ratio is based on 10-year returns (not available for small value).

On this view, small value is the best performer over five years but the second worst over ten.

Momentum is the only strategy to beat the market convincingly over ten years.

Dividend growth had a particularly tough time of it.

What does this tell us?

• It’s been a great time to be a momentum investor
• Don’t believe small value is dead
• Don’t count on any strategy beating the market while you happen to hold it
• Don’t rely exclusively on return comparisons or the experience of a single market to form a view

Personally, before I commit a penny I want to read independent research that can offer:

• Some confidence the strategy will work in the future
• A guide to the risks
• A reason to believe this is more than just an eye-catching pattern in the data or a conveniently arranged backtest

Take it steady,

The Accumulator

1. Also minimum volatility. [↩]
2. The maximum comparable timeframe. [↩]
3. International means ex-US in this context. [↩]

What caught my eye this week.

I don’t remember spending reviews being such a media event in previous years. But this week’s got nearly as much attention as a Budget – despite telling us almost nothing we didn’t already know.

I suppose it’s because the free-spending days for Britain are long gone. Everyone is now watching their pennies.

Of course even before the financial crisis, Brexit, Covid, and the war in Ukraine, there was never enough money.

But after all these shocks the country has become like a working class family of yesteryear who has fallen on hard times.

The head of the household budget takes the too-slim pay packet from the breadwinner – and any pocket money scavenged up by the kids – and parcels it out into envelopes and jars to budget for the month ahead.

Food. Rent. Money for the coal man.

A few little treats for the baby.

It’s tough. More money is going out – but not enough is coming in.

It’s not that Rachel Reeves is taking us back to post-financial crisis austerity.

Real terms spending is set to rise.

Rather it’s that not enough money is being generated at the top of the funnel to pay for the British state that we’re used to, let alone the one we aspire to be.

Tax…

This lack of cash persists even as the government taxes us until we squeak.

The average Briton was handing over all their income to HMRC until the Thursday just gone – the so-called Tax Freedom Day for 2025.

To quote the right-wing Adam Smith Institute:

Tax Freedom Day [fell] on the 12th June.

This year, Brits are working 162 days solely to pay taxes, six days longer than last year.

But [we] expect that by 2028 the UK will have its latest Tax Freedom Day ever, 24th June.

This would mean that the tax burden could be higher than it was during WW2 and The Napoleonic Wars.

This is based on current Government taxation and spending plans, and OBR projections.

By as soon as 2030, Tax Freedom Day could fall over half way through the year with taxation exceeding 50% of Net National Income.

The research also shows that the rich are carrying an increasingly large proportion of income tax.

Cost of Government Day, which factors in borrowing as well as taxes, is July 22nd – the latest since the pandemic.

The Adam Smith Institute has its own agenda to promote. But you can’t really argue with the numbers.

…and spend

I didn’t find much to object to in the spending review, in terms of where the money is going.

The tilt towards thinking about the future versus short-term bungs is admirable, in so far as it went.

Support for infrastructure and house building is sensible. Insulating Britain’s draughty homes and money for more nuclear reactors are no-brainers if you believe like I do that humanity is behind in the battle to avert serious climate change.

Higher defence spending is inevitable. Albeit frustrating in that if it works as a deterrent, then we (hopefully) won’t ever use in anger much of the expensive hardware we’ll be paying for.

Personally I’d like to see far more spent on education and training. A better educated and more skilful population could help to address Britain’s lamentably low productivity.

More capable homegrown workers are also necessary to fill the structural vacancies following Brexit, especially if – as I accept is politically required – immigration is to really be brought down.

Not least when it comes to building those 1.5m new homes we’re promised.

Little Britain

Of course we all have our priorities as to how the government should redirect that tax money it takes in.

Have a read of the links below. Applaud or fume to suit your fancy.

What did dismay me though was the nationalistic tone of some of Reeves’ rhetoric.

Britain will make this! British workers will do that!

As if this isn’t obvious.

And as if doing it ourselves is always the best solution versus trade.

Well, it’s not.

Just one example is the hullabaloo over British Steel. Despite various governments intervening and spending to keep this industry on its last legs for decades, the total number of workers employed has fallen from over 330,000 in the 1970s to barely 30,000 today.

We’re producing vastly less steel too.

But is that such a tragedy?

If you are a steel worker and you can’t find work elsewhere, then yes – and Britain for sure did a lamentable job in helping its skilled workers as their industries declined through the 1970s and 1980s.

But from a national perspective?

The world makes far too much steel. That’s why there’s a glut and why these plants are permanently imperilled. And with our high energy costs and general dislike of dirty and polluting industries, Britain is one of the worst places in the world to make it. Not that we even need so much of the stuff these days.

But that’s fine. We can just import it and do other things we’re better at!

It’s called comparative advantage and it was all hashed out hundreds of years ago.

The idea that Britain can – or should – have an independent steel-making industry is for the birds, and for Reform voters.

Britain isn’t even self-sufficient when it comes to food. In any now-unthinkable conventional war where imports were somehow permanently blockaded, we’d half-starve.

Besides even if we have steel plants, we don’t produce our own coking coal or iron ore anymore. So that would need to be imported anyway.

“Well we should be digging that up too!” you might retort.

I fervently disagree, but understand that if we were to go down that path it would mean billions and billions more in government subsidies and interventions that could instead be spent on boosting something we’re actually good at and the world wants more of from us.

As a nation we’d be poorer as a result of your sweatshop fetish.

If we must have a more secure steel supply, then let’s just import five year’s worth of it as a buffer while it’s cheap, stockpile it in a few giant warehouses, and call it a strategic reserve.

I’m sure we’ll never need to draw upon it. But it’d be a cheaper solution than to keep making the stuff with everything against us.

Votes have consequences

Then again, all the jingo-lite stuff wasn’t in the spending review for me.

It was aimed at peeling off Reform voters by reminding them that yes, shock horror, the overwhelming majority of spending done by the British government goes on British interests. Not on bunk beds for asylum seekers or goats for Burkina Faso.

And sadly, these numpties are still calling the shots as the marginal power players in British politics.

It’s a sorry situation. You would think that after the absolute failure of Brexit to deliver anything material except the loss of £40-50bn a year in tax receipts due to lower-than-otherwise economic growth, that Nigel Farage’s flush would be thoroughly busted by now.

But his support has never been about facts, it’s all about feelings. Anyone still backing Farage’s nationalistic agenda for economic reasons can’t use a calculator, let alone a spreadsheet.

Of course it’s true that many Reform voters don’t believe or care about the consequences of Brexit-y policies on economic growth.

At best they are staunch constitutionalists and are happy to pay the price for that – which is fair enough.

Or maybe they just prefer a Britain that was more like it was and less like, say, London has been getting. Not my view but also mostly fair enough, if it’s expressed nicely and politely.

Many Reform voters have unrelated worries that would be better tackled by any other party than Reform.

And some are just xenophobes and racists.

It’s a broad church and you might think Reform would never be elected to run the country, so who cares?

Well firstly, never say never. Look at the polls.

But more pertinently, the resultant accommodation of Faragian language and even thinking by the mainstream parties expands the Overton Window of what’s acceptable.

This doesn’t just make immigrants feel unwelcome or scared, say, which you might say you can live with.

It will also lead to wrong-headed choices for the country, do yet more damage to the economy, and leave us with even less money to spend in future years.

So if you’re annoyed your taxes are still going up, these are the people to blame.

More to read:

• The spending review 2025 – UK Government
• Key points at a glance – Guardian
• Seven reality checks – Politico
• Which government departments were the winners and losers? – Guardian
• Seven ways the spending review will affect you – BBC
• Progress, but gaps remain for business – CBI
• Understanding the government’s two ‘phases’ – IFS
• Key climate and energy announcements – Carbon Brief
• Why we should all hope Rachel Reeves can deliver growth – This Is Money
• The spending review was a major political shift – Prospect
• Smoke, mirrors, and no strategy [Podcast] – Spectator

Have a great weekend.

[continue reading…]

Hey, do you know your tax brackets? I’m talking about the critical bands that determine whether you’re a basic (20%), higher (40%), or additional-rate (45%) taxpayer.

Everyone knows their height and their shoe size. Most teenage boys even spend a furtive moment with a ruler.

But many of us have no idea where the various tax brackets start and end – nor where our income falls within these bands.

True, the freezing of personal tax allowances and income tax thresholds in recent years has made people more aware.

Yet too many people still don’t know how much of their own salary they get to keep, or even how to figure it out.

Let’s begin with some hard numbers. We’ll then get into what your tax bracket means for your take home pay.

2025/2026 UK tax brackets

The rate of tax you pay depends on your total income from all sources. This includes salary, interest, dividends, pensions, property letting, and so on.1

You add up all this income to get your total income figure.

You then subtract your personal allowance from the total to see which tax bracket you fit into. More on that in a moment.

For England, Wales, and Northern Ireland, the income bands after allowances are currently:

Income Tax Rate	2024/2025	2025/2026
Starting rate for savings: 0%	£0-£5,000	£0- £5,000
Basic rate: 20%	£0- £37,700	£0- £37,700
Higher rate: 40%	£37,701-£125,140	£37,701-£125,140
Additional 45% rate	£125,141 and above	£125,141 and above

Source: HMRC

Note: If your non-savings taxable income is above the starting rate limit, then the starting savings rate does not apply to your savings income.

Scotland has its own (similar) tax rates. Refer to the Scottish Government for the gory details.

If you prefer to think in terms of tax bands – that is, before deducting the personal allowance – then for England, Wales, and Northern Ireland these are:

• Personal allowance at 0%: £12,570
• Basic rate 20% – £12,571 to £50,270
• Higher rate 40% – £50,271 to £125,140
• Additional rate 45% – £125,141 to the moon

Again, the higher rate threshold has been frozen until 2028.

Complicating factor alert! If you earn over £100,000 you’ll pay a marginal rate of 60% on some of your income. What joy! More below.

2025/2026 personal allowance

The tax year runs from 6 April to 5 April the next year.

All of us have a basic level of income – whether we’re employed or self-employed – that we can earn during this period before we have to pay income tax.

But once your allowance is used up, the government starts to take its cut via income tax.

Everyone starts with the same personal allowance:

• For 2025/26, this personal allowance is £12,570

Your personal allowance may be bigger if you qualify for Married Couple’s Allowance or Blind Person’s Allowance. It’s reduced if your income is over £100,000. We’ll get to that in a minute.

Note the £12,570 personal allowance is still the same as it was in 2021/22, and it’s frozen until 2028. This was purportedly to raise revenue to pay for extra State spending during the pandemic.

Freezing the allowance means that as your salary rises over the years, proportionally less of it is covered by the tax-free band. You’ll therefore lose a greater share of your income to tax.

Another consequence of freezing the personal allowance is it will soon be insufficient to fully cover the state pension.

The state pension is currently £11,973 a year – just squeaking under the £12,570 personal allowance. But if the pension continues to rise as expected over the next two years then an estimated 12 million people will pay some income tax on their state pension from 2027.

Blind Person’s and Married Couple’s allowance

There are two other personal allowances you might qualify for:

• Blind Person’s Allowance – £2,600
• Married Couple’s Allowance – £1,260

These are added to the standard personal allowance, if you qualify. They can give you or your spouse a slightly higher personal allowance.

• MoneySavingExpert has a good guide to the Married Couple’s Allowance.

The 60% tax trap for those earning £100,000 or more

If you’re on a six-figure salary then I’ve got some unpleasant numbers for you.

Anyone with an income of over £100,000 sees their personal allowance reduced by £1 for every £2 of income above the £100,000 threshold.

This effectively pushes up the marginal rate of tax you pay on income between £100,000 and £125,140 to 60%.

On earnings above £125,140, the 45% additional tax rate applies.

Ironically, you’re taxed at a lower rate on your income above the £125,140 than on what you earn between £100,000 and £125,140. That’s because your personal allowance has been totally whittled away by this point.

The effective 60% marginal rate you’ll pay on the £25,140 chunk of income between £100,000 and £125,140 is far higher than official tax rates indicate.

If your income falls within the tax trap band, there’s a strong case for increasing your pension contributions by enough to reduce your taxable income to below £100,000. Rather than paying 60% tax on your income above £100,000 to HMRC, you’ll instead get generous tax relief on your extra pension savings.

Remember: you can put up to £60,000 into a pension every tax year.

The child benefit booby-trap

Got kids? There’s a similar effective hike in the marginal tax rate when either parent earns over £60,000 a year.

Child benefit is available to parents of children under 20. But this benefit is progressively withdrawn above the £60,000 threshold, via a fiddly High Income Child Benefit Charge that sees you repay 1% of your child benefit for every £200 you earn above the threshold.

For example, if you earn £70,000 – that is, £10,000 above the income threshold – then you would need to repay 50% of the full child benefit amount. (Because £10,000/£200 = 50).

At £80,000 you’ll pay it all back. (£20,000/£200 = 100).

Depending on how many kids you have – and hence how much child benefit you’ll be repaying – this could equate to an effective tax rate of as much as 56% on earnings between £60,000 to £80,000 if you have three qualifying children.

Again, you might want to see if you can increase your pension contributions to keep your child benefit whilst improving your long-term financial future.

How tax brackets work to determine the tax you pay

Let’s run through a couple of examples to show how this all works.

Basic-rate tax payer

Let’s say you will earn £45,000 in 2025/26 from all sources. Your taxable income is £45,000 minus your personal allowance of £12,571.

So £32,429.

This means all your income is in the 20% tax bracket, as it’s less than £37,701 in the first table above.

In practice you’ll pay no tax on the first £12,571 you earn, and 20% on the remaining £32,429.

You’ll therefore pay £6,486 in tax on your income.

Higher-rate payer

Now let’s imagine your total income adds up to £60,000.

By the same method (£60,000 minus £12,571) your taxable income is £47,429.

The first £37,701 of this will be taxed at 20%.

The rest – £9,728 – is taxed at 40%.

You’ll pay:

• Basic rate tax of £7,540
• Higher rate tax of £3,891
• Total tax paid is £11,431

In nearly all cases you’ll also pay additional and hefty National Insurance contributions.

National Insurance

National Insurance works separately from income tax. But in practice it’s just an extra tax you pay on your earnings.

National Insurance comes with its own fiddly rules – and in recent years the Government has been prone to messing with them.

That’s because people find it even harder to keep track of what they’re paying in National Insurance than with income tax. National Insurance rates are therefore less politically contentious than income tax rates.

The big news recently was a hike in employer National Insurance contributions (NICs) in the October 2024 Budget. From April 2025, the government reduced the threshold at which employer NICs become payable from £9,100 to £5,000 per annum and it raised the main rate of employer NIC contributions from 13.8% to 15%. To slightly ease the resultant pain on employers, it also made certain allowances that companies can claim a bit more generous.

The net result is a higher ‘tax on jobs’, as the tabloids put it. The Treasury estimated at the time the changes would raise an additional £24bn in revenues in the 2025 to 2026 tax year.

You don’t directly pay employer’s NICs. The company you work for does. But I’d say the chances of employers absorbing all the cost of these hikes without a hit to wages or job creation are remote.

At least the rates of NICs we pay directly were not changed in 2024, thanks to pre-election pledges concerning taxes on working people.

This arrested a pattern of messing around with NIC rates that has seen the goal posts move multiple times over the past few years.

Sidebar: a brief history of recent NIC changes

The main National Insurance rate for employees was cut from 12% to 10% on 6 January 2024.

The rate was cut again to 8% in April 2024.2

Yet it was only in 2022 that National Insurance rates had been hiked by 1.25%. Ostensibly this was to pay for the NHS and social care.

No wonder so few people have any idea where NIC rates stand today.

One recent-ish change was sensible, however. From 6 July 2022 the personal allowance became the threshold for starting National Insurance payments. This means everything you earn within the personal allowance is now 100% yours to keep – with no tax or National Insurance to pay.

It was a welcome piece of simplification in a sea of complexity.

Indeed, anything else we write here about National Insurance will not be exhaustive enough to stop someone saying “what about X?” in the comments.

Don’t blame us! Blame the labyrinthine UK tax system.

National Insurance rates

Just briefly then, most employees currently pay what are called ‘Class 1’ contributions at the following rates:

Your salary	6 April 2025 to 5 January 2026
£242 to £967 a week (£1,048 to £4,189 a month)	8%
Over £967 a week (£4,189 a month)	2%

Source: HMRC

As discussed, your employer also pays National Insurance contributions, based on your salary. This gives rise to the technique known as salary sacrifice.

With salary sacrifice you give up pay in return for some other benefit – usually extra pension contributions. You get the benefit, and you and your employer also pay less National Insurance.

Self-employed people make different contributions, depending on profits. These are typically worked out via a self-assessment tax return.

In a sensible world National Insurance would be merged with income tax. This doesn’t happen because (a) supposedly the money raised is set aside for state pensions and other welfare funding (it’s not) and (b) no UK government wants to been seen setting an income tax rate that’s explicitly above 50%.

• If you’re a masochist you can read more on the official National Insurance pages.

Your tax bracket determines your take home pay

Like many students, I was philosophically a left-wing tax-and-spender.

It was a pretty low-stress position to hold when I paid no taxes…

…but then I got a job.

Suddenly I saw how much money would be taken out of the meagre pay I received for ramming my head repeatedly into the coalface for 40 hours a week. Economically speaking, I turned more to the right.3

As my dad used to say, quoting someone else:

If you’re not a socialist at 20 you haven’t got a heart.

If you’re not a capitalist at 30 you haven’t got a head.

I’d add: if you don’t know your tax bracket by now then you haven’t got a clue.

Most of us care about what we get to keep, after tax. We’re not so preoccupied with how our taxes help to fund the NHS or to pay interest on the UK’s national debt – vital though all that may be.

So when we start working – and we start paying taxes – we’re shocked by how little of our pay actually makes it into our bank accounts.

Beyond the sticker shock

Knowing your tax bracket is about more than just stopping you from fainting when you see your take home pay, though.

Armed with your knowledge of tax brackets, you can be more strategic about adding money to ISAs and pensions.

As we’ve seen above, the tax system gets progressively more punishing as your salary passes through various thresholds. You might therefore prefer to put more of your more higher-taxed earnings into a pension, for example.

Thanks to pension tax relief, you’ll sacrifice less of a share of your post-tax disposable income, while you’re also building up a bigger retirement pot.

A fiscal drag

The tax take from British workers has been rising for more than a decade.

This was partly achieved by ‘fiscal drag’.

Fiscal drag sees rising salaries pulling more workers into the higher-rate tax bands, because the tax band thresholds and allowances are frozen or only raised by a bit – despite high inflation.

After the financial crisis of 2008/2009, the threshold for higher-rate tax was actually explicitly lowered, despite inflation running above target. That move dragged millions more people into the higher-rate tax bracket.

National Insurance rates also rose for higher-rate tax payers. And the wheeze that cut the personal allowance on incomes above £100,000 was introduced at this time, too.

True, the additional rate of income tax was reduced from a short-lived 50% to 45% in 2013. And eventually both the personal allowance and the higher-rate tax thresholds were lifted.

But as we’ve seen above, they were later frozen until 2028. (And maybe they won’t be lifted even then).

In short, if you remember the arcade game Frogger, that’s a good analogy for the ever-changing UK’s income tax landscape.

Bring me higher (tax) love

Some may quibble with my simplified narrative. But it’s directionally correct.

See this graph from the IFS, and pay particular attention to the yellow line:

Source: IFS

You can see that the numbers paying higher rates of tax (yellow line) has hugely increased since 2009 – let alone 1990.

Perhaps that’s fine. You might even argue the rise in higher-rate taxpayers is a reflection of rising income inequality as much as frozen tax bands.

We can debate that another day. I’m just pointing out how things have been going – and what might happen next.

We just lived through a period of historically high inflation. After peaking in double-digits, inflation is still above-target at 3.5%. Yet both the personal allowance and the thresholds for higher-rate taxes remain frozen.

Unless the government changes course, millions more workers will be dragged into paying higher and additional-rate taxes over the next few years.

A higher calling

If you’re a higher earner wondering why you’re not feeling as wealthy as you think you should, higher taxes will have something to do with it.

Okay, and higher mortgage rates and energy and food bills since 2022.

(Not to mention hedonic adaption! But let’s stay on-topic.)

The truth is being a higher-rate tax payer no longer means you’re wealthy.

Yes, I’m aware that the median annual earnings in the UK for full-time employees is still less than £38,000 – well below the higher-rate bracket. Nobody needs to get on a soap box to shout at me.

But the fact stands. Paying higher-rate tax hardly makes you Bertie Wooster these days.

Resistance is tax-efficient

I’m all for taxing, spending, and the UK offering a decent welfare safety net.

But I’m not going to leave a tip.

I’m a law-abiding citizen. However there are sensible and legal steps you can take to mitigate your total tax bill.

Use your ISA allowance and/or a pension to shelter your savings as much as as possible. Take steps to manage capital gains tax. You could also consider VCTs and EIS schemes if you’re up for the research, extra costs, and greater risks.

Higher-rate taxpayers should consider making maximal contributions into their pension. Most people are allowed to pay up to £60,000 into a pension in a year without any tax penalties4, so there’s lots of headroom.

If you can cut your spending by enough to allow for very big pension contributions, then you might be able to get the higher-rate tax you’d otherwise pay entirely wiped out by tax relief. Depending on how much you earn, of course.

Such pension contributions accelerate the growth of your retirement pot. Just remember you’ll almost certainly have to pay some tax when you drawdown a pension income later.

Changes over the past decade have made pensions much more attractive. Even I, a former pension-phobe, would prefer to lock away some of my money for many years in a pension than to chuck it away by paying a 40% or 45% tax rate today – let alone an effective marginal rate of 60%.

The bottom line? Taxes are continuing to rise. Take cover, or take the pain.

Note: This article was updated in June 2025 with the latest figures for UK tax brackets, personal allowances, NICs, median pay, and more. Comments below may refer to old numbers. Please check the dates if unsure.

1. There exist allowances and reliefs for some of these income sources, such as dividends and savings. These can reduce how much of that income is taxable. [↩]
2. Class 2 National Insurance contributions for the self-employed were scrapped that April, too, and the class 4 rate cut to 6%. [↩]
3. To be clear, I’ve no problem with a reasonable level of taxation, public spending, and redistribution. But back then I had no idea what was already being taxed and spent! [↩]
4. Or 100% of income, whichever is lower. [↩]