Maxing out tax breaks
GUIDE TO... MAKING THE MOST OF ALLOWANCES
AS THE UK’S tax burden soars to a 70-year high, maximising every tax allowance at your disposal is more important than ever.
Britons have faced a string of tax increases in recent years, and there is little sign that this is going to stop.
Last week, the Government unleashed a new 1.25 per cent National Insurance levy and hiked dividend tax on shares.
In March, Chancellor Rishi Sunak froze income tax, capital gains tax and inheritance allowances for five years, which will steadily drag more taxpayers into the net.
From next April, basic-rate payers will pay 8.75 per cent tax on dividends, up from 7.5 per cent, while higher-rate payers will pay 33.75 per cent, up from 32.5 per cent, in a measure expected to raise £600million.
This is charged on dividends above £2,000 a year; anything below that figure will continue to be free of income tax.
Most ordinary investors will not be affected but they can make doubly sure by investing inside their tax-free £20,000 Stocks and Shares Isa allowance.
You can shift existing shares or funds inside your tax-free allowance by using something called “bed and Isa”, effectively selling them and buying them again inside an Isa, said Darius
Mcdermott, managing director of Chelsea Financial Services: “You can use your annual £12,300 capital gains tax allowance to take your gains free of tax, so long as you don’t exceed it in any given year.”
The Chancellor could hike taxes further in his upcoming Spending Review and Autumn Budget, which will take place on October 27.
Inheritance tax, capital gains tax and pensions tax relief could all be in the firing line as he looks for ways to plug the UK’S massive spending shortfall.
Alan Harvey, financial planner at wealth manager Brewin Dolphin, said a major
CGT increase could be on the cards. You risk a CGT bill when you sell assets at a profit, including shares and other investments held outside of a tax-free Isa, as well as paintings, antiques and jewellery, and property other than your main home. Currently, basic rate taxpayers pay CGT at 10 per cent, rising to 20 per cent for higher-rate taxpayers. These increase to 10 per cent and 28 per cent when selling an investment property or second home.
Harvey said Sunak could bring these rates into line with income tax, which could double the charges in some cases.
Inheritance tax could be another target, as it is a highly complicated system that has long been due an overhaul.
Julia Rosenbloom, tax partner at Smith & Williamson, warned that some already face selling family homes to pay their IHT bills, and more could follow as house prices and shares rise, boosting assets. “Make the most of your current gifting allowances before any new reforms are introduced, to pass more assets on to your loved ones,” she said.
Every Budget, there is speculation that the Chancellor will reduce tax relief on pension contributions, which could save the Treasury billions.
Steven Cameron, pensions director at Aegon, said you can invest up to £40,000 a year into a pension and claim tax relief, and now could be a particularly good time to do so. “Higher rate taxpayers should take advantage while they can, just in case this is the Government’s next target,” he added.
As we saw last week, everything is up for grabs. If worried, consider taking tax advice to cut your exposure.