Income tax and National Insurance thresholds will be frozen yet again, driving more into higher tax brackets as wages rise. The capital gains tax (CGT) exemption and dividend allowance will be cut for the second year in a row, while inheritance tax bands will be frozen yet again.
Laura Suter, director of personal finance at investment platform AJ Bell, suggests ways to fight back.
Use your Isa. Every adult can invest up to £20,000 a year via their Isa allowance, and take all returns free of income tax, CGT and dividend tax for life. “Those aged from 18 to 39 can open a Lifetime Isa, and get a 25 percent government bonus on investments up to £4,000, worth a maximum £1,000 a year.”
Protect cash. Under the personal savings allowance (PSA), basic rate taxpayers can earn £1,000 of savings interest free of income tax, while higher rate taxpayers can earn £500.
As savings rates rise, 2.75 million are set to breach the PSA, and incur a shock tax bill. If affected, Suter suggested shifting savings into a cash Isa. “Rates may be slightly lower but if you pay tax it may be worth it.”
Alternatively, if your partner pays tax at a lower rate or has unused PSA or Isa, consider shifting savings into their name.
Save for kids. Children also get a tax-free allowance, known as the junior Isa. Parents and grandparents can invest up to £9,000 a year, putting the money beyond the reach of HMRC.
Families can also save up to £2,880 a year in a children’s pension, with government tax relief boosting that to £3,600. However, they won’t be able to touch this money for years.
Beat the CGT cut. The amount of capital gains you can take before paying CGT falls again from April, from £6,000 to £3,000.
If sitting on gains above this, use this year’s higher limit if you can. “You can use something called ‘Bed and Isa’ to realise share gains then funnel them into a tax-free Isa,” Suter said.
Thwart dividend tax raid. The amount you can earn before paying dividend tax falls from £1,000 to just £500 from April 6. This will hit more than a million people and net an extra £2billion for HMRC.
Again, Bed and Isa will help. “If you have too many investments to move in one go prioritise the ones paying the highest dividends,” Suter said.
Claim marriage allowance. This applies where one partner pays basic rate income tax, while the other earns less than the £12,570 personal allowance and pays no tax.
It allows the lower earner to transfer £1,260 of their personal allowance to their spouse or civil partner, saving up to £252 this tax year. Couples can backdate claims for four years, if eligible in that time.
Suter said: “Check you are claiming other government tax breaks such as child benefit or tax-free childcare.”
READ MORE: Bank of England adviser urges Jeremy Hunt to slash taxes in Spring Budget
Dodge tax freeze. If your income has increased, Hunt’s threshold freeze could push you into a higher tax bracket.
This could hit you in a number of ways. Parents who are tipped over the £50,000 child benefit high income charge pay tax at a 60 percent marginal rate as their benefit is withdrawn.
Those who breach £100,000 limit will start to lose their personal allowance, and can no longer claim tax-free childcare.
You could reduce your exposure by paying more income into a pension, taking you back below the threshold. “A small contribution could save you a lot of money,” Suter said.
Make IHT-free gifts. You can reduce exposure to inheritance tax by using annual gifting allowances before the April deadline.
Everyone can give away up to £3,000 a year with instant exemption, and carry forward last year’s allowance if they didn’t use it. You can also make smaller gifts of up to £250 to others.
Gifts on marriage are also IHT-free up to £5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for anyone else.
These gifts can be cash, investments, jewellery, property or other assets.
Suter said explore the “gifts from regular income” exemption, where you gift money from your earnings rather than capital. “If worried about IHT, lock in some of these gifts before the allowances are reset in the new tax year.”
Don’t stop trying to save tax once the financial year ends. You also automatically get a new set of allowances on April 6, and should take advantage of these, too. Fight back with everything you’ve got, because taxes could rise even higher if Labour wins this year’s election.
