A recent report published in Citywire suggests that the chancellor is reviewing Income Tax, intending to make changes in time for the 2024 election.
Rishi Sunak’s plans, according to the report, involve scrapping the top additional-rate of 45% as well as cutting the basic rate of Income Tax by 2p.
What would these plans mean for you and your finances?
Further changes to taxation could be on the way before the next general election
During the Spring Budget of March 2021, Sunak froze several thresholds and allowances. The move amounted to “stealth taxation” and you can read about how “stealth taxes” will affect your finances in 2022 and beyond in our latest blog.
Following the Spring Budget was the announcement of the Health and Social Care Levy and the suspension of the State Pension triple lock. By his October Budget speech, however, Sunak made clear his “mission” for taxes to be cut, rather than increased, for the rest of the parliament.
Latest reports suggest he will look to cut Income Tax rates gradually, cutting the basic rate of Income Tax by 1p next year, leading to a 2p cut in the run-up to the election. A reduction from 20% to 18% would be worth around £750 a year for basic-rate taxpayers.
Additional-rate taxpayers – those earning over £150,000 – currently pay 45% but this band could be scrapped altogether, amounting to a 5% reduction. The higher rate would remain unchanged at 40%.
The report also suggests that Sunak could raise the nil-rate band for Inheritance Tax (IHT). The chancellor froze this “until at least 2026” in his Spring Budget, at £325,000. The threshold, over which your estate is liable for IHT at 40%, hasn’t changed in over a decade.
The Income Tax additional-rate rate hasn’t changed since it was introduced in 2010
The amount of Income Tax paid by UK taxpayers has doubled in the last 20 years, from £93 billion at the turn of the century to £187 billion by 2018/19.
The number of additional-rate taxpayers has risen the fastest, increasing by more than 10% in the last three years. Rising incomes breaching frozen thresholds looked set to continue this trend over the next four years.
When the freeze to the Personal Allowance was announced, the Office for Budget Responsibility calculated that the freeze would see 1.3 million individuals paying Income Tax by 2025/26 and push 1 million taxpayers into the higher tax bracket.
Even if new amendments to thresholds or rates are announced, it could be a couple of years before the changes take effect.
In the meantime, there are several ways to keep your Income Tax bill as low as possible. These include:
1. Make the most of the ISAs you hold
You don’t pay tax on any interest you earn in a Cash ISA and the gains you make on a Stocks and Shares ISA are free of both Income Tax and Capital Gains Tax (CGT).
Now is a great time to make the most of these tax efficiencies before the end of the tax year.
You can pay up to £20,000 a year into an ISA or split that amount between all the ISAs you hold. This allowance can’t be carried over though, so if you don’t use it, you lose it.
2. Make the most of your pensions
If you’re still contributing to an employer’s pension, be sure you’re paying from gross pay before any tax is charged. You’ll receive tax relief on your contributions too, meaning whatever you contribute, the government will top it up for free.
When you come to withdraw from your pension, be careful with the money you take after tax-free cash. Once you withdraw your 25% tax-free cash, any other withdrawals are taxed as income. Taking a large amount in one go using Pension Freedoms options could accidentally push you into a higher tax bracket.
3. Make the most of your pensions
Donating to charity through your employer’s payroll giving scheme means that donations are taken from your wages before tax, meaning you pay less tax on your remaining income. You’ll also be helping a cause you care about.
Get in touch
Whatever changes to tax bands, rates, or allowances the next few years bring, professional financial advice can ensure that your wealth is managed in the most tax-efficient way possible.
If you’d like help managing any aspect of your finances, from pension withdrawals to tax year end, get in touch. 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.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
