- Chancellor John Healey doesn’t have to mention the word ‘tax’ in the Budget for your tax bill to be higher next year
- Some tax changes are already baked in – including higher tax rates on savings interest and property income and inheritance tax on pensions
- Some thresholds are officially frozen – including income tax and inheritance tax
- Some thresholds aren’t officially frozen, but haven’t changed for years – or even decades
- What you can do to protect yourself
Sarah Coles, head of personal finance at AJ Bell, comments:
“At the Budget, we don’t just need to focus on what John Healey announces to weigh up the tax hit coming our way – we also need to consider what he’s not saying.
“Some changes are already in the pipeline, so if there are no announcements, we’ll be hit by things like higher savings tax and inheritance tax on pensions. No news is probably not good news on this front.
“In other cases tax thresholds have been frozen, so unless they’re specifically defrosted in the Budget, more people will drift over those thresholds and be hit with higher taxes. In other cases, the thresholds haven’t been frozen, they just haven’t moved for a very long time. In one notable case they haven’t moved for 45 years. If Healey doesn’t mention them this time, we’re set for another year rooted to the spot.
“The only positive is that knowing we’re highly likely to pay more of these taxes gives us an opportunity to plan ahead effectively, so we don’t pay more than we have to. So it’s worth understanding the 13 ways we’ll pay more tax.”
- Frozen income tax thresholds mean more income tax on earnings
“The personal allowance and income tax thresholds have been frozen since 2021/22 and are expected to remain that way until at least 2031. It means that if Healey says nothing about the thresholds, pay rises will drag more people into paying income tax and more into paying bigger bills. This year there’s expected to be 40.8 million income taxpayers – up from 33 million in the year of the freeze. Since the freeze, the number of higher rate taxpayers has risen 74% to 7.7 million.”
- Moving tax bands means more dividend tax
“When you cross a tax threshold, it’s not just income tax you have to worry about. You may also pay more tax on investments outside ISAs or other tax wrappers. The dividend tax rate rises from 10.75% for basic rate taxpayers to 35.75% for higher rate taxpayers and then 39.35% for additional rate taxpayers.
“In addition, the lower dividend tax threshold of £500 is likely to stay put, so inflation will make dividends rise too – the pound value of the allowance is shrinking so if dividends keep pace with inflation they’ll face more chance of busting the annual allowance.”
- Moving tax bands also affects capital gains tax
“Crossing an income tax threshold can also mean you pay a higher rate of CGT. It rises from 18% for gains within the basic rate tax band to 24% for gains above that.”
- Moving tax bands means more income tax on savings
“When you cross into paying higher rate tax, your personal savings allowance protecting you from tax on savings interest outside of a tax wrapper drops from £1,000 to £500, and when you cross into paying additional rate tax you lose it altogether. At the same time, the rate you pay on the excess rises.”
- Changes from April mean more income tax on savings
“From next April, rules announced at the last Budget mean you’ll pay an extra two percentage points on savings interest and income from property. To add insult to injury, for those under the age of 65, the Cash ISA allowance will also drop from £20,000 to £12,000 in April. This will mean those who are building their savings, or receive a windfall and need to keep it in cash, will be able to protect less of it from the taxman, and are likely to face bigger tax bills.”
- The unmoving £100,000 cliff-edge pushes more people off it
“Once you earn above £100,000, your personal allowance for income tax drops by £1 for every £2 you earn above the threshold, until it’s all gone by the time you earn £125,140. Within this earnings band you’re effectively being taxed at 62%.
“This cliff-edge hasn’t officially been frozen, but it hasn’t moved since it was introduced in April 2010, so pay rises keep pushing more people over it. It doesn’t merit a mention in any Budget and yet in the current tax year, more than two million people are expected to cross it according to reports – up more than 1.5 million since it was first set.”
- The childcare cliff-edge at £100,000 hasn’t moved either
“The cut-off at £100,000 was introduced with the tax-free childcare scheme in 2017. Where one parent earns over this amount, they miss out on the chance to get a bonus of 20% on childcare spending up to £2,000 per child. It hasn’t come up at any Budget since, and is unlikely to surface at this one, but it still hasn’t moved.
“Meanwhile, state support with childcare has been expanded significantly over the years, but was introduced for three and four-year-olds in September 2017 and the £100,000 threshold for losing this support hasn’t changed since. Pay rises in the interim will have pushed more parents over the threshold, because average wages have risen almost 50% since then. If there’s no mention of the threshold in the Budget, we will see even more people pushed into losing this valuable support.”
- The high-income child benefit charge hasn’t kept pace with wages
“Once one parent earns over £60,000, the family starts to lose its child benefit – at a rate of 1% for every £200 you earn over the threshold. Once they earn £80,000, they lose all of it. This threshold rose in 2024, however, given it was first introduced in January 2013 at £50,000, overall it still hasn’t kept pace with inflation. Adjusting it for inflation from the start means by now it should be £72,239.”
- Inheritance tax will rise with pension changes
“From next April, pensions will be drawn into the inheritance tax net, and unspent defined contribution pension pots will be added to the value of the estate, when IHT is being calculated. The Treasury estimates that this will drag another 10,500 estates into the inheritance tax net that year, hike the amount of tax paid by 38,500 estates and increase the tax due by £34,000 each on average.”
- Frozen IHT nil rate bands will also mean more tax
“The residence nil rate band was introduced gradually, and reached its current level of £175,000 in April 2020. The nil rate band reached £325,000 in April 2009 and has been frozen ever since – the freeze is in place until 2031. It means every rise in house prices or stock markets pushes more estates into the realms of paying inheritance tax.
“In 2023/24, 4.72% of all estates were liable for inheritance tax – the highest percentage since 2006/07, and the amount of tax paid was up 5%. It has risen every year since 2018/19. If it isn’t uprated in the Budget or thereafter we will see this trend continue. Andy Burnham has spoken about reforming this tax in the longer term rather than making any changes this year, so it seems a distant hope that it’ll feature.”
- Frozen IHT gifting allowances means more tax
“It’s not just the inheritance tax nil rate bands that will remain frozen if they don’t get a shout-out during the Budget. The gifting allowances haven’t officially been frozen, but they haven’t budged for a phenomenal length of time either. You can give away £3,000 a year to any one person and it will fall out of your estate immediately for inheritance tax purposes, but this hasn’t changed since 1981. If it had kept up with inflation, it would be almost £12,000. It means it’s harder to move significant chunks out of your estate for inheritance tax planning, which will mean more people are landed with a bill.”
- Even small rises in house prices mean more stamp duty
“The stamp duty thresholds have moved around in recent years, but the threshold is currently £125,000 – except for first-time buyers – which is where we were in March 2006. Since then, the average house price has increased by more than £120,000.
“Stamp duty thresholds haven’t been frozen, but if they don’t move, even small rises in house prices will mean more tax. The chances of a move are very low given that Andy Burnham has been talking about reforming this tax over the longer term rather than tweaking it this year.”
- Inflation means more VAT
“The VAT rate is highly unlikely to rise from 20%, given that Andy Burnham has promised to stick by Labour’s manifesto pledge. However, it doesn’t need to rise in order to take more of our money. VAT is a proportion of what we spend on non-exempt items. As a result, as soon as prices rise, VAT will automatically rise. Ongoing inflation means Healey can remain silent on VAT and yet still rake in more tax.”
What can you do?
“For investments, it pays to take advantage of your ISA allowances, to protect yourself from dividend tax and capital gains tax. If you’re just making a start, they should be your first port of call and if you already have investments outside an ISA you can move up to £20,000 a year into them using the Bed and ISA process. If you need to hold investments outside an ISA, you can take advantage of your £3,000 capital gains tax allowance each year to realise gains.
“For savings, you can use a Cash ISA to protect you from income tax on savings interest. You have the full £20,000 allowance in the current tax year so you may want to consider taking advantage before it drops to £12,000 for those under the age of 65 in April next year.
“If you’re married or in a civil partnership you should also consider how you hold assets between you. You can share the wealth, so you both take advantage of your allowances. You can also make the most of your annual allowances, and then if one of you is a basic rate taxpayer, they can hold the balance so at least some of the dividends and gains are taxed at a lower rate. You can also consider giving assets to children, using Junior ISAs or Junior SIPPs.
“If you’re worried about income tax, pensions are a brilliant and tax-efficient option. The money is tied up to the age of 55 (rising to 57 in 2028), but if that suits you, you can get tax relief at your highest marginal rate. Not only does it mean you pay less tax on your income, but it could also help bring you back below cliff-edges like the £100,000 threshold and the high-income child benefit charge.
“Those concerned about inheritance tax may wish to consider gifting during your lifetime. You have a few available allowances, including a £3,000 annual gift allowance – which can be carried forward for one year. You can also give smaller gifts of up to £250 to a number of people, and specific gifts for weddings. You can give larger gifts, and they will fall out of your estate after seven years, and there’s a separate rule that means you can give gifts from surplus income which leave your estate immediately for tax purposes.”
