How to limit your tax bill in the tough year ahead

MANY were surprised that Chancellor Rishi Sunak did not unleash yet more tax increases in last Wednesday’s Budget, but the truth is he did not need to as they are already on their way.

From next March, Britons face a dirty half-dozen of tax hikes, with income tax, National Insurance (NI), capital gains tax (CGT), inheritance tax (IHT), dividend tax and the pensions lifetime allowance all getting more punitive.

There may be others.that is the problem with stealth taxes, they pass under the radar until you see the impact on your spending power.

Which is, of course, the intention.

HIGHS AND LOWS

Sunak has hiked taxes to a 70-year high, which the Resolution Foundation calculates will cost the average taxpayer an extra £3,000 as a result.the last time we paid this much tax on our earnings, Labour Prime Minister Clement Attlee was still in power.

As if that was not bad enough, we are on course for the biggest wage squeeze in British economic history, which will leave the average worker almost £13,000 worse off by the middle of this decade, the Institute for Fiscal Studies said.

Hargreaves Lansdown senior personal finance analyst Sarah Coles, said with household budgets stretched to breaking point, people should plan their finances carefully to avoid paying more tax than necessary.

Some tax hikes you cannot do much about.the extra 1.25 per cent NI levy, which comes into force next April (and is extended to pensioner earnings in April 2023), will cost us around £19.3billion a year by 2025/26, the Office For Budget Responsibility (OBR) says.

Freezing the income tax threshold for five years will cost us another £8.2billion a year by 2025/26.

Freezing the CGT threshold at £12,300 will cost £30million a year, freezing IHT nil-rate thresholds will cost £445million, and the dividend tax hike will cost £815million.

If that makes you angry then act now. Coles said: “Don’t sit back and let the taxman fill his boots.there are plenty of ways we can avoid paying more than our fair share.”

TAX TIPS

If employed, check if your employer offers a salary sacrifice scheme.these involve you and your employer agreeing to cut your salary and pay the equivalent into benefits such as pensions and cycle-to-work schemes. “It means you get the full value of your pay, without any tax or NI taken off,” Coles said.

Higher-rate taxpayers who make charity donations can claim back the additional tax relief through their self-assessment tax return.

The self-employed should claim for every eligible expense, including pension contributions and charity donations. Make maximum use of your tax-free Isa allowance, which Sunak has left untouched, allowing you to shelter £20,000 a year from income tax, dividend tax and CGT.

Remember that spouses and civil partners can pass assets between each other without triggering a tax bill.

If IHT tax worries you, reduce your exposure by giving your family gifts during your lifetime, rather than leaving it all in your will. Coles said: “Not only does it have tax benefits, it also means you see loved ones enjoy their gifts while you’re still around.”

Everyone gets a gift allowance of £3,000 each year that falls out of their estate immediately for IHT purposes. “You can also give small gifts of up to £250, specific gifts for family weddings and unlimited regular gifts from income.”

Larger gifts will be completely free of IHT, provided you live for seven years after making them. “If you die sooner and your estate is subject to IHT, you may have to pay tax but on a sliding scale,” Coles said.

Making pension contributions is another good way to reduce your tax bill, said Tom Selby, head of retirement policy at AJ Bell: “For each £800 you put in, the Government adds £200 to your pension. Higher rate taxpayers can then also knock a further £200 off their tax bill, through their tax return.”

‘Don’t let the taxman fill his boots. There

are ways to avoid paying more than our

fair share’

BAD STATE

The bad news does not stop there.

The state pension will actually fall in real terms next year, due to the scrapping of the triple lock.

Pensioners will get an extra 3.1 per cent from April, but Sunak reckons inflation will top 4 per cent next year.

In that case, the state pension

“rise” will feel like a 0.9 per cent cut.

“It translates to around £1.20 per week less in real terms for those on the basic state pension, or £62.40 a year,” warned Selby.

“Those on the full flat-rate state pension will see their spending power fall by £1.60 a week, or

£83.20 a year.”

If inflation tops 5 per cent next year, as the OBR is warning, pensioners could lose as much as £177 in 2022.

Worse, pensioners spend a higher proportion of their income on basics such as food and fuel, which are rising fastest.

Selby said: “For pensioners, a drop in the real value of their state pension will feel like being kicked while they are down.”

That is a feeling we are all going to have to get used to over the next few years.