Six months into a record-breaking tax year and record month for IHT

Halfway through the tax year, we’re on for another record tax take. In September, we paid an incredible £936 million in inheritance tax (IHT), which is the highest ever monthly IHT bill. With the taxman reaching ever deeper into our pockets, it’s enough to focus anyone’s mind on the best ways to ensure they don’t pay more than their fair share.

Income tax

John Healey is unlikely to mention income tax in the Budget. It has remained ringfenced from tax hikes by an election promise, and yet bills have soared – up £11.2 billion in the first six months of the tax year – compared to the same period a year earlier. The cruel squeeze from frozen thresholds is extracting every last drop of potential tax. And with the freeze in income tax thresholds set to stay in place until 2031, the pain is far from over.

In this environment, it’s worth revisiting every possible method of cutting your income tax bill. If you’re worried about tax on your earnings, especially if a pay rise has pushed you into a higher tax band, you can consider extra pension contributions, which will offer tax relief at your highest marginal rate. If you risk paying tax on savings interest, it’s worth considering a Cash ISA, where your savings can grow completely free of tax. Plus, if moving tax bands means a higher tax bill on your investments, then a Stocks and shares ISA could be a sensible option.

You can consider tax planning with the wider family. You can transfer assets between spouses, so you both take advantage of your pensions, ISA allowances and other annual allowances. Plus, if you’re on the verge of seeing your income drop into a lower tax band – such as on retirement – you could consider deferring income until after the change. You could, for example, save in fixed rate bonds that pay interest on maturity – after your retirement.

Inheritance tax

Inheritance tax hit an all-time monthly record, and seems set to hit another annual one too, with frozen nil rate bands cutting deeper in the face of rising house prices and investment values.

And the pain has only just begun, because the thresholds are set to be frozen until April 2031. And to make matters worse, from April 2027, unspent defined contribution pensions will be subject to inheritance tax. This is expected to 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.

It’s why so many people are considering inheritance tax planning at the moment. You have an annual gift allowance of £3,000 a year, which comes out of your estate immediately for IHT purposes. You can carry forward this allowance for one year. You can give up to £250 to any number of people too – although not to anyone who has received money through the annual gift allowance. You can also make specific gifts for weddings – however, the amount depends on who is getting married.

On top of that, you can give away lump sums of any kind, and they’ll fall out of your estate after seven years. These are known as potentially exempt transfers (PETs). You can also give gifts from surplus income, so once you meet your usual living expenses, you can give away income that’s left over if you do it on a regular basis.

Capital gains tax

The capital gains tax (CGT) bill so far this tax year is the same as the same period a year earlier, but it doesn’t mean this tax is off the agenda, because there’s a risk some people are sitting on gains in order to avoid paying the higher rates for now.

Hoarding assets can end up horribly distorting your portfolio, so it’s worth considering steps to cut CGT – from investing within tax-efficient wrappers like ISAs and pensions, to offsetting losses, making sure you take advantage of your annual exempt amount each year and planning as a couple so you both use your allowances.