READY YOURSELF FOR RISHI’S TAX RAISES
ROSIE MURRAY-WEST ASKS THE EXPERTS HOW THE CHANCELLOR IS EXPECTED TO SQUARE OFF COVID-19 SPENDING IN NEXT MARCH’S BUDGET
BETWEEN the furlough scheme, the self-employed grants and the eyewatering cost of NHS Test And Trace, it cannot escape anyone’s notice by now that chancellor Rishi Sunak has spent a huge amount of money on measures to handle the coronavirus pandemic.
Now the question on everyone’s lips is, how is he going to pay for it?
Many experts are expecting tax rises in March’s budget that could leave some of us worse off, while Rishi might also remove some valuable tax breaks that help many to build a fund for retirement.
‘It’s a big unknown,’ says Zoe Bailey, financial planning director at investment managers Tilney. ‘There might be huge changes, but there might not. But it is certainly a good idea to think about what might be coming and plan accordingly.’
Here are some of the things you can do now to ensure that you’re less likely to feel the pinch at budget time, whatever decisions Rishi makes.
Stuff your tax wrappers
With a £20,000 a year ISA allowance and, for most people, a £40,000-a-year pension allowance as well, there is £60,000 you can squirrel away from the taxman before next April if you haven’t done so already.
Laith Khalaf, at investment platform AJ Bell, describes ISAs and pensions as ‘the main tool investors have against tax rises’.
Money in an ISA can grow free of Capital Gains Tax, while in a pension you also have the benefit that the government adds back the basic rate tax you have spent into your nest egg, and you can reclaim any additional or higher rate tax you have also paid on top.
‘The higher those [capital gains and income] taxes go, the more precious these tax shelters become. So, make sure you use your annual pension and ISA allowances wisely and, if you’re a couple, don’t forget you’ve got an allowance each,’ says Laith.
The ISA and pension allowances reset on April 5, 2021, so make sure you use whatever you can before this date.
Consider Capital Gains
When we’re thinking about the taxes we pay, most of us don’t consider Capital Gains Tax.
This tax, known as CGT, is triggered when you sell an asset for more than you pay for it, and the amount you pay depends on whether you are a Basic, Higher or Additional Rate taxpayer, as well as the type of asset you’re selling. The type of asset that attracts this tax includes residential property that isn’t your own home, as well as stocks and shares and business assets.
Everyone has an annual allowance and can make £12,300 of capital gains without attracting tax, but there are suggestions that the chancellor will raise CGT rates and possibly cut the £12,300 to between £2,000 and £4,000.
To prepare for this, if you hold investments such as shares outside an ISA, Laith at AJ Bell suggests a move known as a Bed & ISA if you’ve got any of your allowance left this year. This involves selling your shares, and putting the profit against your annual exemption, and then buying them back again in an ISA where any further growth will be free from CGT.
‘If you’re married or in a civil partnership, you can also spread gains between you to make use of both partners’ annual CGT free allowance,’ he adds. This means you can make £24,000 of tax-free gains in the current tax year.
Pack your pension pot
As mentioned above, your workplace pension is a powerful tool for minimising your income tax bill. There are whispers that the chancellor might remove the high-rate tax relief on pension contributions in March 2021’s upcoming budget, which makes it even more important to pay as much as you can into your pension now.
‘Your first port of call is your workplace pension, because by increasing your regular contributions you might be able to get additional contributions from your employer, too,’ says Laith.
‘You can put additional lump sum investments into your workplace pension, or into a Self Invested Personal Pension (SIPP) if you’d like a bit more investment choice and online functionality.’
Don’t forget about IHT
Inheritance Tax (IHT), paid out of the estate of those who die, is currently levied at 40 per cent on the portion of an estate worth over £325,000.
There are exemptions for passing assets to a spouse and an extra allowance to those who pass a main residence onto a direct descendant, but there are still many families who end up paying this tax.
Although Laith, at AJ Bell, says there is no hint yet that IHT is ‘in the cross hairs of the Treasury’, it is also the case that ‘nothing can be totally ruled out’.
He suggests taking advantage of the gifting rules, which allow you to make gifts of £3,000 to children or grandchildren each financial year without the tax applying in the event of your death.
‘That £3,000 is a total for all gifts that you make, not per person that you gift to, but it does allow you to pass some money onto the next generation year in, year out without the taxman taking a slice,’ Laith says.
Beware of a wealth tax
Last week, the concept of a wealth tax hit the headlines. A report from The Wealth Tax Commission suggested we levy a one-off tax of one per cent on anyone with assets over £500,000 or £1million. That sounds like a lot, but experts say it may particularly affect older middle-class people who own their own homes but do not have a great deal of cash.
‘The introduction of a wealth tax would have to be sensitive to the inability to pay of many “asset rich, cash poor”, who may be older and unable to work or actually access any of their wealth,’ says Becky O’Connor, head of pensions and savings at interactive investor.
‘There are concerns that such a tax would still not be paid on the ultrawealthy, but would be shouldered by “mass affluent” older people, with family sized homes and their mortgages paid off, as well as large pension pots accumulated through working life.’
While there isn’t a great deal you can do to prepare for the possibility of a wealth tax, short of giving away your wealth, other experts suggest that the prospect of this tax is merely being raised as ‘cover’ for the increase of the other taxes mentioned above.
Rachael Griffin, tax and financial planning expert at Quilter, says a wealth tax would generate ‘significant opposition’.
‘In practice, what this report may do is soften the path for tax increases in the existing system. Were the chancellor inclined to raise more revenue from existing taxes on capital, such as CGT and IHT, he now has some political cover since he can point to the alternative being a £260billion raid on personal wealth,’ she says.
Taking the steps above now will help ensure that, whatever Rishi pulls out of the hat in March next year, you have readied your finances as much as possible for tax rises and changes.
‘There might be huge changes, there might not – think ahead and plan accordingly’