Sarah Coles, head of personal finance, Hargreaves Lansdown: “As the Budget countdown creeps closer to a conclusion, we can be confident that the Budget is going to include tax hikes. The only questions are which taxes, how much they’ll rise, and how it will impact our finances.
Income tax has been the focus recently, and a longer freeze to thresholds is now widely anticipated. This has been an effective stealth tax already, dragging over 6 million more people into paying income tax, and 3.36 million more into paying higher or additional rate tax.
HL calculations show that freezing the thresholds for two more years, instead of increasing with wages (assuming wages rise 4% a year), means someone earning £60,000 might pay an additional £1,529 by the end of 2029/30. However, crossing a threshold doesn’t just mean you pay a higher rate of income tax. It also means any dividend tax or capital gains tax may be paid at a higher rate. Plus, your personal savings allowance halves or disappears overnight.
This is only the latest rumour though. Everything from capital gains tax to dividend tax and inheritance tax has been debated over the past few months, making it difficult to know what might be on the way.
Fortunately, there are some steps you can take that will help protect your finances from any number of possible tax hikes, which you’ll be grateful for, even if your biggest Budget fears don’t materialise. This isn’t the time to panic, but it’s definitely a good time to plan.”
Seven sensible last-minute moves
Helen Morrissey, head of retirement analysis. Hargreaves Lansdown:
1. “Pay into a pension to protect against the rumoured extension to the freeze on income tax thresholds and make the most of tax relief as it stands. There have been rumours that the Chancellor may look to introduce a flat rate of tax relief on pensions. Depending on what level it is set at, higher and additional rate taxpayers would likely see the amount of tax relief they can receive drop. Making a contribution to your pension now will lock in tax relief at your current marginal rate. There are also rumours that salary sacrifice could be made less generous - a contribution now would also make the most of the current system.
2. If you’re worried about income tax in retirement - consider using cash and stocks and shares ISAs alongside your pension. Income from an ISA can be taken tax free, so it can be a valuable way of managing your tax bill in retirement.
3. If you’re worried about a potential inheritance tax change, you can make gifts. This can give you the benefit of seeing your loved ones make use of the money while you are still alive. You can make use of the various gifting allowances available to help loved ones achieve their financial goals and you can even make use of gifting out of surplus income rules to make gifts of any size that fall out of your estate straightaway. However, you need to be careful with this particular rule. Gifts must be made out of income, not capital, be made on a regular basis and not impact your own standard of living. Detailed notes are important and it’s a good idea to get financial advice to make sure you stay the right side of the rules. You also need to make sure you don’t give away too much too quickly and potentially leave yourself short of money later on.”
Sarah Coles:
4. “If you’re worried about paying income tax on your savings interest, and you have the ISA allowance available, saving in a cash ISA will protect your hard-earned savings. At the same time, you can make the most of this year’s ISA allowance. The government said it won’t rush into any changes on ISAs, but there’s still the chance we could see tweaks proposed in the Budget – and changes to the cash ISA haven’t been ruled out. This is an opportunity to save tax-efficiently while you know where you stand.
5. If you have concerns about possible rises in dividend tax or capital gains tax and you’re just starting on your investment journey, it makes sense for a stocks and shares ISA to be your first port of call, protecting you from both capital gains tax and dividend tax regardless of how your investments grow.
6. If you have existing assets outside an ISA or pension, you can realise gains within your £3,000 allowance each tax year, as you go along. You use the share exchange (Bed & ISA or Bed & SIPP) process to sell and buy the same assets immediately in an ISA or pension – which protects them from capital gains tax and dividend tax in future too.
7. If you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name. It means you can both take advantage of your tax allowances. You can also use all the tax-efficient vehicles at your disposal, including your ISAs and pensions, as well as the Junior ISAs and Junior SIPPs of any qualifying children.”
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