Britons face a dirty half-dozen tax hikes next year, with income tax, National Insurance (NI), capital gains tax (CGT), inheritance tax (IHT), dividend tax and the pensions lifetime allowance all getting more punitive. Tax bills are at a 70-year high and we’ll all pay £3,000 more on average as a result, the Resolution Foundation has calculated.
In March, Sunak froze current income tax thresholds for five years, so that tens of millions will pay more to HM Revenue & Customs as wages rise. He also froze CGT, IHT and lifetime allowance thresholds, and hiked dividend tax.
Last month, the Government announced the new 1.25 per cent NI levy for health and social care, which comes into force next April.
The total bill will top £40 billion and Hargreaves Lansdown personal finance analyst Sarah Coles said make sure you do not pay more tax than is necessary to HMRC. “Don’t sit back and let the taxman fill his boots, start planning now.”
Here are some of your options.
1. Use salary sacrifice. If still employed, check if your employer offers a salary sacrifice scheme. These involve you and your employer agreeing to cut your salary and pay the equivalent into benefits such as pensions and cycle-to-work schemes. “It means you get the full value of your pay, without any tax or NI taken off,” Coles said.
2. Claim back tax on charitable giving. Higher rate taxpayers who make charity donations can claim back the additional tax relief through their self-assessment tax return.
3. Claim businesss expenses. The self-employed should claim for every eligible expense, including pension contributions and charity donations.
4. Use your Isa allowance. Make maximum use of your tax-free Isa allowance, which Sunak has left untouched, allowing you to shelter £20,000 a year from income tax, dividend tax and CGT.
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5. Use spouse exemptions. Remember that spouses and civil partners can pass assets between each other without triggering a tax bill. Consider passing assets into the name of the partner who pays income tax at a lower rate.
6. Start inheritance planning. If IHT tax worries you, reduce your exposure by giving your family gifts during your lifetime, rather than leaving it all in your will, Coles said. “Not only does it have tax benefits, it also means you see loved ones enjoy their gifts while you’re still around.”
Everyone gets a gift allowance of £3,000 each year that falls out of their estate immediately for IHT purposes, Coles said.
“You can also give small gifts of up to £250, specific gifts for family weddings and unlimited regular gifts from income.”
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Larger gifts will be completely free of IHT, provided you live for seven years after making them. “If you die sooner and your estate is subject to IHT, you may have to pay tax but on a sliding scale,” Coles said.
7. Claim pensions tax relief. Making pension contributions is another good way to reduce your tax bill, said Tom Selby, head of retirement policy at AJ Bell. “For each £800 you put in, the government adds £200 to your pension. Higher rate taxpayers can then also knock a further £200 of their tax bill, through their tax return.”
Victoria Scholar, head of investment at Interactive Investor, said plan now as Sunak could be back for more. “Income tax, IHT, CGT and even pensions tax relief may soon be in the firing line again.”