How might the Government's expected tax increases later this year affect you?
Chancellor Rachel Reeves has warned that taxes are likely to rise in the Autumn Budget – but where are these expected to hit?
Labour ruled out increases to National Insurance, Income Tax or VAT in its election manifesto, so those areas are off-limits.
Here we look at some taxes that could be in the firing line.
Tax bands – fiscal drag
Due to the freezing of Personal Allowances and Income Tax rate bands, the Government is already benefitting from fiscal drag – where more people are drawn into higher taxation.
The new Labour administration could extend this fiscal drag until at least April 2029, according to Robert Salter, director of advisory firm, Blick Rothenberg.
“This would not break any of the promises that the Labour Party made during the election, and it would increase their tax and NIC revenues significantly,” he said.
“It would also help avoid the negative publicity associated with a direct increase in tax rates or a formal reduction in tax bands.”
Capital Gains Tax
However, Gary Smith, partner in financial planning at Evelyn Partners, believes making a change to the CGT rates in October, to come in next April, is unlikely.
“That would spark an exit from assets in the intervening periods as investors rushed to bring forward disposals to take advantage of the current rate,” he said.
Inheritance Tax
Could changes make this already hated form of taxation even more unpopular? Well, it’s not off the table, according to Sarah Coles, head of personal finance at Hargreaves Lansdown.
“Inheritance Tax could be considered a soft target for a hike in the October Budget,” she said.
“Even if the new Government leaves the tax rules unchanged, it’s going to rake in more of this tax thanks to frozen thresholds, and if it chooses to tinker, taxpayers could end up forking out even more.”
Fuel Duty
This is another lucrative area for the Government. The Office for Budget Responsibility (OBR) estimates fuel duties will raise a whopping £24.7 billion in 2023-24.
In the Spring Budget, the temporary cut in the Fuel Duty was extended for a further 12 months, while the assumed inflation increase also wouldn’t take place.
Pensions Tax Relief
There are several ways to reduce tax relief and increase the tax take associated with pensions, according to Robert Salter Blick Rothenberg.
“They could reduce the tax-free lump sum, presently 25% of the pension savings pot in most cases, which pensioners can take out on a tax-free basis on retirement,” he said.
He also suggested the Government could restrict the tax relief that individuals qualify for on their personal and employer pension contributions.
“Such contributions presently qualify for tax relief at a taxpayer’s ‘marginal tax rate’, 40% or 45% for higher or additional rate taxpayers,” he said.
“Reducing the tax relief in such cases to 20% or 25% would be a significant tax saving.”
Pensions Annual Allowance
The Annual Allowance is the amount that a saver can contribute to a pension in a tax year while still benefitting from tax relief.
The headline allowance for most savers was increased from £40,000 to £60,000 alongside the removal of the Lifetime Allowance at the March 2023 Budget.
Gary Smith at Evelyn Partners said: “It would certainly be easier and less costly administratively for the Chancellor to reduce the annual allowance, back to or below the £40,000 mark, which would restrict the amount of tax relief being claimed by bigger savers.”
Changes to Individual Savings Accounts
How about Individual Savings Accounts? According to Sarah Coles, head of personal finance at Hargreaves Lansdown, any alterations would be unpopular.
“Making a change to ISAs would risk upsetting the plans of a huge swathe of people, so would come with real risks,” she said.
“Given the fact that we don’t save enough in the UK, and that UK companies are crying out for more investment, the tax system needs to support more investment, so changes that make it less attractive would be counterintuitive.”
New taxes
Robert Salter at Blick Rothenberg believes it would be easy for the Government to introduce new taxes on items that can currently be provided on a tax-free basis.
“Work-based car parking and work-provided mobile phones are both a tax-free benefit,” he said. “It could tax these on a ‘fixed charge basis’, to capture income tax and NICs from the employee and employer.”
What can you do?
Whatever happens in the upcoming Budget, you can act today to help safeguard your finances, according to Sarah Coles of Hargreaves Lansdown.
The first is to make use of this year’s Capital Gains Tax allowance.
“If you’re building up a gain, and you can realise it over a period of years, it’s worth considering how you plan to do it, and when to start,” she explained.
Safeguarding your investments in an ISA is next on the list. “The best way to protect investments from both dividend tax and capital gains tax is to hold them in an ISA,” she said.
Elsewhere, Coles suggested using the Junior ISA allowance to help put aside a nest egg for qualifying children, as well as topping up your pension.