Prime Minister Keir Starmer has warned a ‘painful’ set of policies could be in place, a position that has since softened from the PM and his deputy during the Labour Party Conference in Liverpool.
Last year, Jeremy Hunt named a wave of tax cuts that featured a drop in National Insurance contributions for both self-employed and those on the PAYE tax code.
But with the new residents of 10 Downing Street claiming a £22bn black hole of funding was left by their predecessors, some of those tax cuts may be undone.
The potential rises and threshold changes on the likes of capital gains tax, pension tax and inheritance tax “are enough to fill anyone with dread”, according to Sarah Coles, head of personal finance at Hargreaves Lansdown.
Coles said: “When you delve deeper into the rumours, they don’t get any less alarming because some of them come with an eye-watering level of additional tax.
“Inheritance tax rumours could prove some of the most expensive, but others will add up over time, and could cost tens of thousands of pounds over the years.”
Based on the top rumours of what will be in the red box next month, Hargreaves Lansdown has explored how each potential change could impact your finances.
The cost of the rumoured changes:
Capital Gains Tax
Rises:
If you have made a £30,000 capital gain on stocks and shares, right now, after the £3,000 annual allowance, a basic rate taxpayer will pay 10% on gains (£2,700) and a higher or additional-rate taxpayer 20% (£5,400). If the rate was changed to match capital gains tax (CGT) to income tax, and the allowance remained the same, a basic rate taxpayer would pay £5,400, a higher rate taxpayer £10,800 and additional rate taxpayer £12,150.
It predicts a possible cost to higher rate taxpayers of £5,400
If there are rule changes or tax hikes
It makes sense to crystalise gains each tax year, as you go along. You can either sell, wait for 30 days, and buy the same assets, sell and buy different assets immediately, or use the share exchange (Bed & ISA) process to sell and buy the same assets immediately in an ISA – which protects them from capital gains tax in future too. You should also look at offsetting losses.
Income tax freeze?
With expected tax allowances and thresholds remaining as they are, every inflation-linked pay rise will mean more people paying more tax, and more tipping over into paying higher rates.
If the personal allowance had risen with inflation, it might be £15,541 by next April. If the higher rate threshold had risen with inflation each year, it might rise to £62,150 in April 2025.
So, if you were earning £50,270 in April 2021 and your earnings rose with inflation, you might be making £62,150 in the year from next April. Under current rules, in the year after 6 April 2025, you’ll pay £12,292 in income tax. If it had risen with inflation, you could pay £9,322, or £2,970 less.
For higher-rate taxpayers that could mean paying £2,970 in extra contributions.
What you can do about income tax
If you have savings, it’s worth considering a cash ISA, where you pay no income tax on interest. You should also consider your pension. The annual pension allowance is now £60,000. The fact you get tax relief at your highest marginal rate means higher earners in particular should look to take as much advantage as makes sense for their finances.
Inheritance tax
If the nil rate band is cut:
As it stands, the first £325,000 of your estate can be left completely tax-free. If you’re leaving the home you live into children or grandchildren, you also get a £175,000 residence nil rate band – so you can leave £500,000 altogether before inheritance tax becomes an issue. Having this allowance brings people an awful lot of comfort, so they are worried about the risk it could shrink. This would mean spreading a tax that affects fewer than one in 20 estates to a far larger population, which would be incredibly unpopular, and so makes it less likely.
If you’re single with no children and have an estate worth £325,000 you currently pay no inheritance tax. If the nil rate band fell to £250,000, and there were no other exemptions to take advantage of, you would pay 40% on £75,000 – or £30,000.
What you can do about inheritance tax
If you’re worried the Government might cut the nil rate band, you can give up to £3,000 away before the change, which will fall within your annual gift allowance. You can give away larger sums and they will be outside of your estate after seven years. There’s a separate rule that means you can give away surplus income inheritance-tax free too.
You need to pay it from your regular monthly income and have to be able to afford the payments after meeting your usual living costs. If you have children in your life who are under the age of 18, you could consider paying into a Junior ISA for them each year. This is counted as being given away immediately for inheritance tax purposes but is tied up until they reach the age of 18.
If pensions are taxed
Rumours persist that the Government may look to change the policy which shields your pension or SIPP from taxes, which would mean many more people need to prepare to pay a tax bill that could run into tens of thousands of pounds.
If someone had a pension worth £250,000, on top of an estate that was already worth more than the IHT nil rate band, they could face a 40% tax on the pension. In this case, it would leave their loved ones needing to pay £100,000 in tax.
Pension tax relief
If you are worried about changes to the tax relief regime then it is a good idea to make the most of the system as it currently stands by making a contribution to your pension in the coming weeks. This means you can benefit from the higher rates of relief on offer to boost your pension.
