In a major U-turn, Chancellor Rachel Reeves’ is understood to have ripped up plans to hike income tax in the looming Autumn Budget.
Reeves was poised to hitch up income tax by 2p at the end of the month, whilst cutting national insurance – for lower earners – by the same amount.
While the decision saves Labour from the drama and backlash that would come with breaking the manifesto pledge not to raise taxes on ‘working people’, the decision has once more yanked the Treasury back to the drawing board.
After failed attempts to raise revenue through scrapping winter fuel payments and reforming the welfare system, the Treasury is scrambling to fill public coffers with only two weeks left until Budget day.
Charlotte Kennedy, chartered financial planner at Rathbones, said: “The government still has a multi-billion-pound fiscal black hole to plug, and the reported move could put other unsavoury tax changes back on the table.”
Extending the freeze
Reeves is already expected to extend a freeze on income tax thresholds, with the stealth option proven to be an effective ‘cash cow’ for the Treasury.
The fiscal drag has hauled 6m more people into paying income tax, and 3.36m more into paying higher or additional rate tax since its introduction.
Prolonging this freeze by another two years would raise £8bn to £10bn per annum, depending on the OBR’s forecasts.
Meanwhile, Hargreaves Lansdown calculations show that freezing thresholds would mean someone earning £60,000 might pay an additional £1,529 by the end of the 2030 financial year.
However, crossing the threshold won’t just leave earners paying a higher rate of income tax; both dividend and capital gains tax will also be exposed.
Cutting thresholds
Cutting the income tax thresholds would raise billions in additional revenue by dragging more people into higher tax bands.
A reduction to the tax-free standard personal allowance, standing at £12,570, is unlikely due to the impact this would have on lower earners and the likelihood that it would push some people living just off the flat state pension into paying tax.
Instead, higher earners are expected to pay the price, with the higher rate threshold of £50,270 and additional rate threshold of £125,140 more likely to be lowered, exposing more earners to higher income tax bills.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “This would bring more tax pain, but wouldn’t be enough to close the gap for the government, so would be likely to come alongside a host of other changes.”
Mansion tax
Rumours of a potential ‘mansion tax’ have also gathered speed in recent weeks, with the Treasury allegedly mulling raising or creating new council tax bands for the UK’s most expensive properties.
The Institute for Public Policy Research has recommended doubling the tax for homes in band H and bringing in a 50% rise for bands F and G, while the Institute for Fiscal Studies suggested doubling the tax on bands G and H.
But Coles warned the changes would not be easy to implement, noting that “this approach would mean revaluing the priciest properties in the UK, which would come at a cost.”
But, as City AM has reported previously, there are ways to lessen the blow.
Coles said:”It’s more important than ever that you take advantage of all the tax-efficient options that make sense for your circumstances.”
Not all ISAs wear capes
Cash ISAs, the UK’s most popular saving product, grants a £20,000 tax free ceiling per annum, allowing savers to swerve tax.
But, the Chancellor is also rumoured to be considering a slash to the allowance to £10,000 in a bid to stop Brits hoarding cash and jumpstart economic growth.
However, stocks and shares ISAs will not be subjected to the slash, and this tax-free wrapper can also help protect people against dividend taxes which are also under consideration for a hike.
Under the rules, basic rate taxpayers are charged 8.75 per cent, while higher rate taxpayers are slapped with 33.75 per cent, while additional rate payers are charged 39.35 per cent on any exposed dividends.
However, take care not to exceed the capital gains tax annual allowance of £3,000.
Pension sacrifice
Making extra pension contributions through salary sacrifice can also help bring earners back under thresholds, including the dreaded £100,000 tax trap, which can pull free childcare hours away from families.
While it won’t put more money into people’s pockets today, it will help in building a retirement pot and with the cost of a comfortable retirement getting more expensive, it is something to consider.
But be warned, these tax advantages may also be stripped away in the Autumn Budget, with the Treasury looking to cap the amount that can be sacrificed in a tax efficient way at just £2,000 per employee per year.
This will subject any further contributions to the standard tax rate of eight per cent for salaries under £50,270 and two per cent on any income above that.
Head to the altar
Married couples and those in civil partnerships can also transfer some of their income allowance to their partner through any tax-efficient account at their disposal, including ISAs and pensions.
People earning under the £12,570 personal allowance who have a spouse that is a basic rate taxpayer can gift £1,260 of their allowance.
This could relieve Brits of the 20 per cent tax on the sum, amounting to a potential saving of up to £252.
Personal allowances can also be used to earn interest tax-free if not already used on wages, pensions or other incomes.