Sarah Coles, head of personal finance, Hargreaves Lansdown: “The scale of the financial challenges for the government right now mean the Budget is likely to involve some incredibly tough decisions. The fact this speech has been made at all is likely to demonstrate that the government wants to highlight its position: to meet its fiscal rules, it’s likely to have to make spending cuts and raise significantly more tax. When these figures emerge in the Budget, they often attract less attention than the tax and spending decisions that follow, so drawing attention to the challenges early gives them space.
It does mean people will worry about the tax and spending decisions that are on the way. It is going to raise concerns that it could mean the government is laying the ground to make a big change, which could even run contrary to manifesto pledges. This could mean one of the big three: income tax, National Insurance or VAT.
Given that VAT runs the risk of being inflationary, it could put income tax front and centre. HL research shows that this is the biggest concern that people across the UK have ahead of the Budget – worrying 16% of people, 20% of Millennials, and 25% of higher rate taxpayers. It will make tax planning even more valuable in the coming weeks.
The cost of a rise in basic rate income tax would vary with earnings, but a 1p rise would add £224 to the tax bill of someone earning £35,000 each year. If they earned £55,000, it would cost an extra £377 – and it would be the same for someone earning £75,000.
A rise that only affected higher and additional rate taxpayers might be easier politically, as by falling only on higher earners the government could make the case that the average earner wouldn’t be affected. If you earned £35,000 a year, an extra 1p on higher rate tax wouldn’t cost you anything. The more you earn, the harder this hits, so if you earned £55,000, it would cost you an extra £47 a year and if you earned £75,000, it would cost you an extra £247.
Raising both would mean someone making £35,000 a year would pay £224 more. Meanwhile, if you earned £55,000, it would cost you an extra £424 and if you earned £75,000, it would cost you £624 more.
There are some key no-regrets moves worth considering to protect yourself from these possible changes.
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Making extra pension or SIPP contributions is an incredibly useful way to reduce your total taxable income. They may also enable you to stay below a tax threshold – cutting your highest rate of tax. It won’t give you more money in your pocket today, but it will help you build a more resilient retirement. Assuming that tax relief remains at your highest marginal rate, it would also raise the rate of tax relief, so you get more out of every penny you put into your pension.
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If you’re worried about tax on your savings, and you have the ISA allowance available, saving in a cash ISA will protect your interest from a higher rate of tax.
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It also makes sense to plan ahead. If you’re aiming for a retirement income that may exceed future tax thresholds, you can consider using cash and stocks and shares ISAs alongside your pension. Income you take from an ISA is tax free, so it gives you real flexibility in managing your tax bill in retirement.
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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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Defer income. If there’s a time when you expect to be paying a lower rate of tax, consider whether you can take income then rather than now. Business owners can manage their dividend payments, but employed people can also take steps. You can, for example, use fixed term savings that pay interest annually, instead of easy access paying more frequently. This often makes sense just before retirement. If this money is currently sitting in accounts paying interest, then from a tax perspective, the sooner you move them, the better.”
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