According to a recent Resolution Foundation report, stealth taxes and lingering high inflation are set to cost the UK taxpayer £40 billion a year by 2027/2028.
The Institute for Fiscal Studies (IFS), meanwhile, puts the figure higher, estimating an extra £52 billion a year for the Treasury.
Even the Resolution Foundation’s lower figure marks a £10 billion increase compared to the chancellor’s Spring Budget projections and will see tax receipts reach a 50-year high within the next four years.
The 2027/28 tax year is significant too, as it is the point at which many of the government’s current tax allowance freezes are due to end.
But with thresholds frozen now, and some even dropping, what can you do to mitigate a rising tax bill and which taxes might pose the greatest threats to your wealth?
Keep reading to find out.
1. Capital Gains Tax receipts are soaring as the Annual Exempt Amount falls
Back in 2022/23, the Capital Gains Tax (CGT) Annual Exempt Amount stood at £12,300. This is the amount of profit you can make without becoming liable for CGT when you sell (or “dispose” of) certain disposable assets.
MoneyAge recently reported Brits paid 15% more in CGT during 2021/22 than the previous year.
Since then, Jeremy Hunt has set about reducing the CGT exemption. He used his 2022 Autumn Statement to more than half the Annual Exempt Amount to £6,000 – down from £12,300 – and is set to reduce it again from April 2024. It will then stand at just £3,000.
The Office for Budget Responsibility (OBR) predicts that CGT receipts will reach £17.8 billion this year, and are likely to rise again in 2024/25.
What to do about the falling CGT exemption
Remember that the Annual Exempt Amount is annual so carefully consider the timing of your disposals. Selling an asset over two tax years effectively halves the gain and could keep you under the Annual Exempt Amount.
Also, be sure to make use of your partner’s exemption if they haven’t used theirs. You might be able to do this by transferring assets to your partner before the disposal. Speak to us if you are unsure about how this works in practice.
1. Income Tax threshold freezes amount to a stealth tax on rising earnings
You pay Income Tax on the money you earn – and on the taxable portion of your pension payments – that exceed a certain amount.
This amount is known as the “Personal Allowance” and it is currently frozen at £12,570 until 2028. This marks an extension from the original freeze (instigated by Rishi Sunak as chancellor) from 2026. Jeremy Hunt has also extended the freeze on the £50,270 higher-rate threshold.
While this isn’t a tax rise, the BBC recently confirmed that the freeze will see an additional 2.6 million people move into a higher tax bracket by 2027/28.
MoneyAge, meanwhile, reports that the freeze is already affecting over-65s, with 10% more paying Income Tax in 2022/23 compared to the previous tax year. The number of Income Tax payers is projected to reach 35.9 million in 2023/24, a 1.3 million increase on last year.
Inflation is also affecting the Income Tax payable on pension withdrawals. The Consumer Prices Index (CPI) peaked in October 2022 at 11.1% and has since been falling.
The Bank of England (BoE) has used the meetings of its Monetary Policy Committee (MPC) to raise the base rate – from 0.5% in December 2021 to 5.25% currently – in a bid to tame inflation. In the minutes from its latest report, though, the MPC confirms that it doesn’t expect inflation to return to the BoE’s own 2% target until the end of 2025 (pushed back from Q2 2025 at its last meeting).
Inflation raises the cost of the goods you buy and means that you might need to take more income to meet rising costs. Increased taxable income could push you into a higher Income Tax bracket.
How to manage a rising Income Tax bill
Read 3 helpful ways to manage your increasing Income Tax bill in retirement and be sure to speak to us if you have any further questions.
3. Inheritance Tax threshold freeze extensions have increased the number of estates getting caught out
Inheritance Tax is payable on the value of an estate that exceeds the nil-rate band. This currently stands at £325,000, as it has done since 2009. The government is committed to keeping this freeze in place until at least 2028.
The fact that property prices have risen substantially over this time is a huge contributing factor to rising IHT receipts for the Treasury.
You might also be able to make use of the residence nil-rate band if you intend to pass your main residence to your direct descendants. The residence nil-rate band was introduced in 2017 and has been frozen at £175,000 since 2020.
The Financial Times recently found that IHT raised a record £7.1 billion for HMRC in 2022/23. Money Week, meanwhile, found that the Treasury collected £3.2 billion from IHT in the three months between April and August 2023. This marked a £300 million rise from the same period the previous year.
What to do to mitigate the impact of IHT on your estate
We recently looked at 5 ways to pay less Inheritance Tax and leave more to your loved ones, so if you are worried about IHT, be sure to read this now if you haven’t already.
Then speak to us.
Get in touch
With IHT receipts increasing – and expected to keep rising – estate planning is more vital than ever. Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you manage your estate tax-efficiently and avoid a large IHT bill.
Please note
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
