Sarah Coles, head of personal finance, Hargreaves Lansdown: “After months of Budget speculation, you might think you’ve heard every variation of any tax that could possibly rise in the Budget – and a number that are never going to happen. But you’re wrong. Even after Rachel Reeves sits down after the speech, there are some taxes that might not be mentioned at all – and yet we’ll end up paying more of them.
There are 12 thresholds and allowances that you may not hear anything about in the Budget – but still those stealth taxes will rise without a sound.
1. The threshold for losing the personal allowance: Once you earn £100,000, your personal allowance is cut by £1 for every £2 over this level – until your allowance is zero once you earn £125,140. This is an effective tax rate of 60%. This threshold hasn't moved since it was introduced in April 2010. Over that time, wages have risen just over 64%, so to keep pace with wages it would have had to rise to over £164,000. If a pay rise pushes you over the threshold, your tax bill will rise dramatically – without the government having to make a single announcement on the subject.
2. High-income child benefit charge: The high-income child benefit charge kicks in at £60,000. If your income (or your partner’s) has pushed over the threshold, and you receive child benefit, you will need to repay at least some of it through self-assessment. Once you earn £80,000 you need to repay it all. The charge was introduced in January 2013 at £50,000. It has since risen to £60,000, but not kept pace with inflation – to do that it would have had to rise to more than £78,500. It means although the charge is highly unlikely to make the speech, pay rises will continue to push people into the danger zone, so they pay more and more of this charge.
3. Loss of tax-free childcare: This is worth up to £2,000 a year and is available until one parent earns £100,000, at which point parents no longer qualify. This threshold hasn’t moved since 2017. Over that time wages are up 45%, so the threshold would have had to have risen to almost £145,000 to keep pace. If the threshold isn’t moved with wages in the Budget, more people will pass it and lose the tax break.
4. Loss of free childcare hours: Once one parent earns £100,000, you lose your entitlement to free hours of childcare. As the scheme has rolled out to younger children, the cost of missing out has ratcheted up. However, the threshold was in place from 2017, when parents of 3 and 4-year-olds benefited from free hours. Wages since then are up 45%, so to keep pace, the threshold would have had to rise to almost £145,000. Without an announcement of an uprating, yet more parents will pass the threshold and lose the benefit.
5. Income tax on earnings for this year: We’re unlikely to hear about this tax unless the current freeze is extended, but even if it isn’t mentioned, yet more damage will be done, as more pay rises push more people into paying higher rates of tax. These thresholds were frozen in April 2021, and since then wages have risen 26%. To keep pace, the personal allowance would have had to rise to £15,838 and the higher rate threshold to £65,860. The additional tax rate was cut from £150,000 to £125,140 in April 2023. If it had risen from £150,000 from 2021, at the same pace as wages, it would be £189,000.
6. IHT nil rate bands: The nil rate band has been in place since 2009, and the residence nil rate band has been at £175,000 since April 2021. Both have been frozen until 2030. By freezing these allowances, it means rises in the value of investments, savings and property will push more of people's estates into tax-paying territory. The government doesn’t need to say anything in the Budget, because rising asset values will do the work for them.
7. IHT gifting allowances: These are rarely mentioned in the Budget, because they hardly ever move. The annual gifting allowance of £3,000 hasn’t moved since 1981, and never comes up in the Budget speech. By leaving it untouched, it stops people doing more to protect themselves from inheritance tax, so another year out of the spotlight would mean more estates paying more tax.
8. Dividend tax allowance: The cuts made by the former government have done serious damage, but the current government can make the tax bite harder by saying nothing in the Budget. Higher inflation means dividends will tend to rise each year, so failing to announce an inflation-linked rise means automatically pushing more people over the allowance.
9. Capital gains tax allowance: Previous cuts and then the hiking of the rate have caused more pain, but the government doesn’t need to make any changes in order to hit investors harder – a frozen allowance and rising asset values will do the work for them.
10. Stamp duty thresholds: We’ve had a fair amount of change to thresholds and even to the way the tax operates in recent years – so the thresholds have moved about significantly. However, in 2006 the threshold was £125,000 – the same as today. Average house prices have risen by more than £100,000 in the interim. If the thresholds don’t get uprated in the Budget with house prices, and prices keep rising, tax bills for house buyers will increase.
11. VAT tax take will rise: The VAT rate is the same as it was in 2011, and the government has pledged not to change it in the Budget. Governments know they don’t need to raise VAT in order to make more money from it. Inflation means we spend more, and as VAT is a proportion of what we spend, the amount of tax we pay automatically rises.
12. The overall ISA allowance may well stay frozen: The real concern is that changes to the cash ISA limit could make them less generous, which would be a horrible blow to savers. Meanwhile, it’s likely that the overall allowance will remain in place, but given the £20,000 limit has applied since 2017, even if we don’t get any changes, inflation has eaten away at the real value of the limit – leaving more of people’s savings and investments vulnerable to tax.
7 ways to cut tax your tax bill
1. Use your ISAs: You can save or invest £20,000 in the current tax year. The earlier you take advantage, the more tax you can save. A stocks and shares ISA will protect you from higher capital gains tax, while a cash ISA will protect you from income tax.
2. Use your capital gains tax allowance: You can protect yourself from higher capital gains tax by realising gains as you go along. You can make gains of £3,000 then use the Bed and ISA (share exchange) process to move the assets into an ISA, to protect them from any future capital gains too.
3. Don’t forget pensions: You can pay up to £60,000 into a pension in the current tax year. Contributions to pensions attract tax relief at your highest marginal rate. There’s tax relief on pensions, including SIPPS, even for non-taxpayers – on the first £3,600 a year. It means you can contribute tax-efficiently to a pension on behalf of a child or a non-working partner.
4. Look into salary sacrifice: In some cases, 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.
5. Explore spouse exemptions: If you’ve used your ISA allowance and you have assets that produce an income – like shares paying dividends or a property – they can be passed between spouses (or civil partners) without triggering a tax bill – so you both use your allowances and the balance can be held by the spouse paying the lower rate of tax
6. Consider gifts: If you’re worried about inheritance tax, you have an annual gifting allowance of £3,000, which falls out of your estate immediately for IHT purposes. If you didn’t use it in the last tax year, you can carry it forward and give £6,000. You can also give smaller gifts of up to £250 to as many people as you like – although not to anyone benefitting from your annual allowance. If you’re married, you can both take advantage of your allowances. On top of that you can make larger gifts, which will fall out of your estate after seven years, so you may want to get the clock ticking on those. There’s also a rule that allows you to make regular gifts from your ‘surplus income’ which should fall straight out of your estate.
7. Marriage allowance: If one spouse is a non-taxpayer and the other is a basic rate taxpayer, the marriage allowance lets the non-taxpayer give £1,260 of their personal allowance to their spouse, to cut their tax bill.”
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