A study by Opinium for Hargreaves Lansdown has identified the top five biggest fears ahead of November’s budget, with income tax and VAT at the top of the list.
The UK government is refusing to rule out tax increases in the upcoming budget and has manufactured widespread fear among businesses and consumers, which is being felt in the economy, particularly in the housing and jobs markets.
“Your biggest tax fear is about to come true,” said Sarah Coles, head of personal finance, Hargreaves Lansdown.
“Statistically, the tax you’re most likely to be worried about rising in the Budget is income tax, and thanks to frozen thresholds, this is nailed on. Unfortunately, the second biggest worry is VAT, and thanks to inflation, there’s every chance you’ll automatically be handing over more money to the taxman in VAT too. Other concerns also remain on the table, and worries around pensions have risen up the ranks for higher earners. So, it’s worth understanding what you can do about it.”
Here are the top five biggest fears around the upcoming budget and what you can do to protect yourself, by Hargreaves Lansdown:
- Income tax
Income tax is rightly a concern, because the government is expected to leave allowances and thresholds untouched. It means every inflation-linked pay rise will push more people into paying more tax, and more into paying higher rates. Fears go further than this though, because the most common worry is that income tax itself will rise. This was ruled out in the election manifesto, so it’s an indication of how concerned people are about the shortfall in the nation’s finances, and how worried they are that there might need to be a big solution to a serious problem.
What you can do to protect yourself
The best way to protect savings from income tax is to hold them in a cash ISA, and your allowance is £20,000 in the current tax year. If you have the money available now, it may make sense to open an ISA sooner rather than later, so you know where you stand.
You can also pay into a pension or a SIPP. The annual pension allowance is £60,000, and 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.
Meanwhile, if you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name, and both take advantage of your tax allowances. You can also use all the tax-efficient vehicles at your disposal, including your ISAs and pensions, as well as the Junior ISAs and Junior SIPPs of any qualifying children.
- VAT
Almost one in ten are worried about a potential rise in VAT. On the one hand, they’re right to be worried, because VAT is a percentage of spending, so inflation will automatically mean handing more cash over in VAT. However, the good news is that the VAT rate itself is highly unlikely to change after being ruled out during the election campaign. It wouldn’t stop the government making tweaks, but as we saw with the fiasco of the pasty tax in 2012, this can be tricky.
- Council tax
Around one in ten people are most worried about council tax. There have been suggestions from think tanks that there could be an extra charge on pricier homes, a national surcharge, or even wholesale reform. However, this remains very firmly in the realms of speculation. Sadly, it doesn’t mean council tax will remain the same, because it rises every year, and given how councils are wrestling with their finances, we may well see another 5% rise.
- Inheritance tax
Some 7% of people are worried about losing inheritance tax allowances or exemptions that save millions of estates from tax. It includes things like the nil rate bands that mean the first £325,000 of your estate, and £175,000 of property, can be left tax free (if the home is being left to a child or grandchild). It also includes the rule that anything left to a spouse or civil partner is tax free, and that if you leave everything to them, you also leave them your nil rate bands, so they can leave £1 million free of tax. These allowances and exemptions are so important to people that changes would be incredibly unpopular. However, these rules aren’t written in stone, so can’t be completely ruled out.
What you can do to protect yourself
If you’re worried about a potential inheritance tax change, you can give up to £3,000 away before the Budget, 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. If you were always planning on giving some money away, and you can afford to live without it, it may make sense to do it sooner rather than later.
- Extension of the freeze in income tax thresholds
This has been a common rumour, given that it has been such an effective stealth tax already and is seen as an opportunity to boost the tax take without falling foul of promises not to increase the rate of income tax.
Higher rate taxpayer worries
Capital gains tax
There have been questions over whether the rate could rise again, and there’s always the risk of a change to the rule that means CGT resets on death. Given that higher rate taxpayers are more likely to invest, it’s unsurprising that capital gains tax rises are more of a concern for this group of people.
It would add insult to injury for investors, who have already had to deal with the dramatic cuts to the tax-free allowance, and a hike to the rate on stocks and shares. This isn’t just a tax for the mega wealthy. The lower allowance now means someone on an average income who has invested carefully throughout their life can easily face a tax bill when they rebalance their portfolio or sell up to cover their costs later in life. In fact, cutting the allowance has hit smaller investors harder, because it used to cover a much larger proportion of their gains.
What you can do to protect yourself
To protect against CGT can use your annual allowance of £3,000 to realise gains gradually over the years. At the same time, you can use the Share Exchange (Bed & ISA) process to move the assets into a stocks and shares ISA, so you don’t have to worry about either dividend tax or CGT on these investments at any point.
You can also offset any losses against your gains and give assets to a spouse or civil partner so they can use their annual allowance too. You can also hold assets for life, and the tax will reset to zero on death. It just remains to be seen whether this will remain the case after the Budget.”