As the budget approaches, weighing up almost 30 different tax rumours for the likely options has been something of a juggling act – especially given the twists and turns we’ve had in recent weeks. However, given the announcement is tomorrow, there’s not much room left for U-turns, so while we can’t know what lies in store until the speech itself, some options are emerging as contenders.
There has been an entire wing of the rumour mill devoted to theories about income tax, from speculation that the rate could rise, to a push-me-pull-you trade-off between tax and national insurance. The latest rumour is that instead of all of this, there might be a longer freeze on income tax thresholds.
The government could add another couple of years to the freeze, which is already set to run to April 2028. It means that every pay rise would push more people into paying more tax, and more tipping over into paying higher rates.
If they’re frozen for two more years, instead of increasing with wages, then assuming wages rise at 4%, someone earning £51,000 in the year to April 2028 could pay £1,530 more in tax.
This could be coupled with a revaluation of homes in the highest tax bands to make sure the priciest are being targeted. Revaluation would come at a cost, but would be seen as fairer than simply bumping up council tax across the highest property bands, especially given that there hasn’t been a revaluation in England since 1991.
This tax change would particularly affect those whose property prices have risen the most since 1991 – including owners in London and the South East. It would also throw a bigger tax burden on those living in more expensive homes. This could cause issues for those who are property rich and cash poor, who risk a hit to their lifestyle unless they’re prepared to downsize.
Latest reports suggest that chancellor Rachel Reeves will introduce a so-called “mansion tax” targeting properties worth more than £2 million. About 100,000 properties are likely to be affected. The levy would be an annual surcharge on council tax bills, applied on a sliding scale depending on the value of the property above the £2 million threshold.
There could be changes to rules around salary sacrifice. These are schemes run by employers that let you give up a portion of your salary, in exchange for the equivalent amount in specific benefits – including pensions. It means employees save tax and national insurance on that chunk of their salary and employers save national insurance too.
The government could limit how much you could save for retirement through this approach, which risks putting people off boosting their contributions. This could prove counter-productive at a time when only 42% of the highest earning households are on track for an adequate retirement income, according to Hargreaves Lansdown’s Savings and Resilience Barometer.
Chancellor Rachel Reeves will deliver the autumn budget on Wednesday 26 November. ·Leon Neal, PA Images
Think-tank the Resolution Foundation has suggested changes, such as cutting the annual allowance or increasing the rate of dividend tax, as a way to make the taxes on employed people and those who run their own company (and take their income at least partly in dividends) more equal. But investors would be caught in the crossfire.
Income investors have already been hit with a succession of cuts in the annual dividend allowance. Plus, of course, the dividend tax rate was hiked in April 2022 too – up 1.25 percentage points for every tax bracket. Given the government is working so hard to encourage investors to hold UK equities – which are often known for their dividends – there’s a risk another tax rise could put them off.
Reeves is set to make changes to cash ISA. The allowance will be cut from £20,000 to £12,000, according to a report in the Financial Times. However, the chancellor has reportedly dropped her plan to make the 20% UK equities allocation mandatory.
In a recent survey of Hargreaves Lansdown clients, there was an even split between those who said a change like this would encourage them to use the stocks and shares ISA more and those who said they’d save outside the cash ISA instead.
There will be people for whom cash ISAs are the most sensible home for their money, especially if they’re saving for the short term. For money they don’t need for five to 10 years or more, investments are a sensible option; however, the jury is out on whether cutting the cash ISA would make a difference.
Cash ISAs can be a gateway to stocks and shares, so there’s also a risk that the amount of cash available to be invested will actually end up being lower if this change were introduced, according to Hargreaves Lansdown.
The best way to protect savings from income tax is to hold them in an ISA. You have an allowance of £20,000 in the current tax year. This is particularly valuable for higher earners who have a smaller savings allowance, and pay a higher rate on the excess.
To protect against higher rates of dividend tax, especially after moving tax brackets, it makes sense to invest within a stocks and shares ISA, which are free of both taxes. If you have existing investments outside an ISA and the available allowance, you can use share exchange (Bed and ISA) to move them into the ISA and protect them from tax. This will also protect you from capital gains tax into the bargain.
The best way to guard against needless income tax on your earnings is by making pension contributions. This won’t leave you with more money in your pocket, but you’ll get income tax relief at your highest marginal rate. That way you get more bang for your buck and can build your retirement resilience at the same time.
If you currently make contributions through salary sacrifice, it’s worth considering the impact of any change. If it were to happen and your employer reduced the generosity of their contributions as a result, it would be worth assessing the possible impact on your retirement income and whether you need to take any action to boost it.
Possible ISA changes would be highly unlikely to happen overnight, so if there was a change, there would be plenty of opportunity to use your allowances in the interim. It’s worth considering the right balance of cash and stocks and shares for your circumstances, and making the most of your allowances while you know where you stand.
