The Autumn budget could cost you a fortune in new taxes: here’s how to prepare no matter what happens
With the Autumn Budget looming, speculation about potential tax changes is rife. Sarah Coles, head of personal finance at Hargreaves Lansdown, says while it’s easy to dismiss these rumours as just “hot air,” some of the proposed changes could have a serious impact on your finances.
We’re talking about potential tax hikes that could run into the tens of thousands, and in some cases, even hundreds of thousands of pounds. So, what can you do to protect yourself? Coles offers some suggestions for you to consider.
“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,” says Sarah Coles.
“Inheritance tax rumours could prove some of the most expensive for those with really large amounts of assets. However, even if you focus on those that affect people on good earnings with decent chunks of savings and investments, the figures add up. Fortunately, there are steps you can take to protect yourself,” she says.
The little-known tip to protect yourself
If you’re a high-earning freelancer, there’s a rumour that a change to the pension tax relief system could hit you hard. As it stands, the government gives you tax relief on your pension contributions at your highest marginal rate. This means higher-rate taxpayers get a generous 40% relief, and additional-rate taxpayers get a massive 45%.
However, according to Coles, whispers suggest the government might introduce a flat rate of pension tax relief, perhaps around 30%. This would be a welcome boost for basic-rate taxpayers, but it would be a huge blow to high earners. For every £1,000 you contribute to your pension, it would cost you £700 instead of the current £600 or £550.
If you’re a high-rate taxpayer and you’re worried about this change, Coles suggests you act now. The best thing you can do is to make a significant contribution to your pension in the coming weeks, before the Autumn Budget. By doing so, you can make the most of the current system and get the higher rates of tax relief on offer, boosting your pension pot before any potential changes come into play. This is a crucial step to take before the Budget, as it’s a benefit you can’t get back once the rules change.
Other tax hikes to watch out for
While the pension tax relief rumour is a big one, there are several other potential changes that could affect you.
Capital Gains Tax (CGT)
Rumours suggest two potential changes to CGT. The first is a new tax on the sale of more expensive properties (over £1.5 million), which could cost a higher-rate taxpayer up to £54,000 on a 15% property increase. The second is a change to the rules so that capital gains no longer reset on death, potentially adding an extra £6,480 to your estate’s tax bill.
What you can do: For investments, use your annual £3,000 tax-free allowance. Consider “Bed & ISA” to move assets into an ISA, where they’re protected from CGT. You can also offset losses against gains.
Inheritance Tax (IHT)
This could be the most expensive change for those with large estates. Two rumoured changes could add hundreds of thousands to your tax bill. The first is a potential cap on lifetime gifts, which could cost a family with a £1.5 million estate up to £180,000. The second is the removal of “taper relief,” which could hike the tax on a large gift from £40,000 to £200,000.
What you can do: Consider making gifts now to take advantage of the current rules. You can give up to £3,000 a year tax-free. Larger gifts are exempt after seven years. You can also give away surplus income. It’s vital, however, not to give away too much and leave yourself short. A financial adviser can help you figure out how much you can afford to give away.
Income tax
The government is likely to extend the freeze on tax thresholds, pushing more people into higher tax brackets. If the freeze continues for two more years, someone earning £51,000 could pay an extra £1,530 in tax.
What you can do: Use tax-efficient vehicles like ISAs and pensions. If you’re married or in a civil partnership, you can transfer income-producing assets to your partner if they are a lower tax bracket to take advantage of both of your tax allowances.
Other property taxes
Rumoured changes include a new tax on downsizing to replace stamp duty and the introduction of National Insurance on rental income. Downsizing could cost you an extra £15,000, and a landlord with a £12,000 rental profit could face an additional £960 in NI.
What you can do: While there’s not much you can do about these specific rumoured changes, staying informed and planning ahead is key.
A note of caution
Coles says while these rumours are alarming, remember that not all of them will come to fruition. However, it’s always a good idea to be prepared. Take stock of your finances now and consider these potential changes. A little bit of planning can save you a lot of money in the long run.
