ISAs, allowances and more ways to protect your wealth from tax hikes

Tax hikes are on the way this year...so how can you safeguard your finances?

The UK tax burden may be at its highest level for 70 years, but there is likely even more pain to come.

Prime Minister Keir Starmer warned yesterday that October's Budget would be "painful", paving the way for a raft of tax hikes on hard-pressed households.

As we don’t yet know exactly where or how these increases will be made, what can you do to safeguard yourself from financial pain? 

Here we look at the steps you can take now to protect your wealth from the taxman.

Tax on savings interest

What’s the problem?

In the days of miserly savings rates, tax on savings interest was only an issue for those with the very biggest savings pots.

But rises in recent years have meant more and more savers are now paying tax on their cash holdings despite the Personal Savings Allowance, which lets you earn up to £1,000 free of tax (depending on your Income Tax bracket).

Research by Shawbrook Bank has suggested more than six million savings accounts are now liable for tax.

This is a huge earner for the Government: HMRC estimates that it will rake in a whopping £10.4 billion in tax on savings interest during the 2024/2025 financial year.

What’s the solution?

Cash ISAs let you shield your income from the taxman and you can currently earn up to 5.2% from a top-paying account.

You can pay up to £20,000 into ISAs each tax year, which runs from April 6 to April 5. 

Depending on your financial situation, you can also consider using up your partner’s Personal Savings and ISA allowances to help reduce your household tax bill.

You can bag £100 cashback AND earn up to 5.05% guaranteed when you open a savings account with Raisin (minimum £10k deposit). Head this way for all the details. 

Dividend tax

What’s the problem?

The number of people expected to pay dividend tax has almost doubled due to the Government cutting the tax-free Dividend Allowance, according to a Freedom of Information request from AJ Bell.

HMRC is set to rake in just under £18 billion in the current tax year, with nearly 3.6 million taxpayers facing the prospect of paying tax on dividend income.

What’s the solution?

The good news is that all investments held in an ISA or pension aren’t subject to Dividend Tax, so either of these routes will offer protection.

If you don’t want to lock your money up for a long time, an ISA may be the best solution. It will also offer you some flexibility should your priorities change.

Ready to invest but want to shield your returns from the taxman? Open a Stocks & Shares ISA with Hargreaves Lansdown now.

Capital Gains Tax

What’s the problem?

CGT is already a great earner for the Government: it's expected to raise £15.2 billion in the current tax year, according to the Office for Budget Responsibility. This is equivalent to £530 per household.

What's more, it's been widely rumoured that CGT is one of the areas Chancellor Rachel Reeves will target for hikes in her October Budget.

What’s the solution?

Whatever the approach taken by Labour this year, there are some common tax planning advice that’s worth considering when it comes to CGT.

These include making the most of this year’s allowance, spreading gains over previous tax years and offsetting losses against gains.

You can read more in our guide to cutting CGT.

Inheritance Tax

What’s the problem?

Frozen thresholds and rising property prices mean this tax has become more than just a problem for the very wealthy.

In fact, the latest HMRC data shows Inheritance Tax receipts for April 2024 to July 2024 were £2.8 billion, which is £200 million higher than the same period last year.

Despite the rapid rise in receipts, it's believed to be another area earmarked for hikes in October's Budget.

What’s the solution?

There are several ways to tackle the IHT problem. For example, you can give away up to £3,000 in gifts each tax year without them being added to the value of your estate.

You can also give as many gifts of up to £250 per person as you want, as long as you haven’t used another allowance on the same person.

Read our full guide to cutting your Inheritance Tax bill.

Pensions

What’s the problem?

There are two points of concern relating to pensions and tax.

First, a growing number of pensioners are being forced to pay the 'retirement tax'.

In effect, more and more retired households are being hit with tax bills as a result of the ongoing freeze on Income Tax thresholds while the value of the State Pension rises each year. 

The second worry relates to what might lie in store in the Budget: there are rumours the Lifetime Allowance could be reinstated and their could be reductions to tax relief on pension contributions for higher earners.

What’s the solution?

Let's tackle the issues one at a time. Regarding the growing 'retirement tax' problem, there are a host of steps you can take to reduce or delay the amount of tax you'll have to pay, which we outline in this guide.

As for any possible pension tax changes coming in the October Budget  – especially the Lifetime Allowance  – think very carefully before making any drastic changes.

When rumours of changes to the allowance first surfaced earlier this year, I chatted to various financial advisors to see what they recommended, and the consensus was to stick tight and carry on saving.

Read our analysis on the possibility of the Lifetime Allowance being reversed.

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