The tricks you can use to beat the tax rises
The Chancellor has frozen certain tax allowances in a stealth-like manner but though these hidden taxes are subtle, there are still ways for taxpayers to get around them. Telegraph Money takes you through the tricks
Tax raid 1: Income tax Solution: Use schemes such as salary sacrifice to lower taxable income
Workers do not pay income tax until they earn more than £12,500. This limit was supposed to rise with inflation every year until the end of this parliament.
However, Mr Sunak has decided that, after raising it to £12,570 in April, it will stay at this level until 2026.
The threshold at which someone becomes a higher-rate tax payer, and hands over 40pc of marginal income to HM Revenue & Customs, will also rise, from £50,000 to £50,270 in April, and then be frozen.
While allowances are frozen, wages will rise. Hargreaves Lansdown, a fund shop, believes that because of the frozen allowances, some 800,000 more people will pay income tax by 2026 and an additional 800,000 will become higher-rate taxpayers.
The bigger your pay rise over the next five years, the harder you will be hit. However, there are ways to keep pay rises and not hand over more to the Government.
People close to or at the edge of the thresholds should reduce their incomes using salary sacrifice, an entirely legal way of reducing your income, via your employer.
You can funnel money into pensions, childcare vouchers, bike-to-work programmes or private health or dental schemes. Employers take the cost straight from your salary, therefore reducing the figure that is submitted to HMRC for tax purposes.
Savers can also use investment schemes such as venture capital trusts and enterprise investment schemes. While these do not reduce your income for tax purposes, any money held in such schemes attracts tax relief.
You can invest £200,000 in VCTS and receive a maximum of £60,000, a 30pc income tax relief, as long as you hold the investment for five years. Dividends and capital gains are also tax free.
EISS offer the same 30 per cent relief, if held for three years, but savers can invest £1million, or £2million into “knowledge-intensive” companies. The added benefit is that investments become exempt from inheritance tax if held for two years.
Tax raid 2: Pensions lifetime allowance
Solution: Put money into lowerearning partner or children’s pensions and use ISAS
The Chancellor has frozen the amount savers can put into a pension without incurring tax at £1,073,100 until 2026. This will raise an additional £1 billion.
The threshold may seem lofty but plenty of savers will be at risk of breaching the limit, particularly those with gold-plated final salary pensions. Tom Selby of fund shop AJ Bell said: “Large swathes of middle Britain are now at risk of being dragged into its net.”
If you breach the allowance, you will have to pay 55 per cent on the value above the threshold if you take it as a lump sum. If you take it as income, it will be 25 per cent.
But there are ways around this. First, savers should divert any more money destined for pension pots into Isas. Yes, this means it will not attract pensions tax relief, but it will save the headache of breaching the lifetime allowance.
If your pension is made up of multiple pots, and some are worth less than £10,000, you can withdraw these without incurring tax under the “small pots” rule. This will help reduce your total pensions wealth. Each individual has a lifetime allowance so you can pass money to your partner or children who may have smaller pension pots. Even non-earners can benefit from tax relief at the basic, 20 per cent, rate of tax.
However, experts suggest that breaching the allowance is not the end of the world. Richard Harwood of Brewin Dolphin, a financial planner, pointed out that it was only money in excess of the threshold that was subject to the extra tax.
This means that if you draw it down as income, the surcharge is only 25 per cent, so you still receive 75 per cent of investment growth, minus any other income tax charges.
Tax raid 3: Death duty limit frozen
Solution: Make use of “gifting” rules and invest in Iht-ready portfolios
The limit at which an estate qualifies for death duty will stay at £325,000 until 2026. The number of families paying IHT has risen dramatically in the past decade with rising house prices forcing more over the threshold.
However, there are plenty of ways to reduce estates. First, private pensions can be passed down outside of your estate tax free if you die before the age of 75. If older, your heir will pay tax at their marginal rate of income tax.
You can also pass down investments, cash or property (subject to any capital gains tax bills) to your heirs free of IHT as long as you survive for seven years.
A little-known rule allows people to pass down money to family members as long as it is from “excess income”, which has to be proved to HMRC. There are no seven-year rules for this, so money can be drip-fed regularly.
Investors can also buy stocks traded on the Alternative Investment Market that qualify for business property relief. A Bpr-qualifying company owned for more than two years will fall out of your estate and can be passed down without any tax bills.
Tax raid 4: Capital gains allowance
Solution: Pass assets to your spouse, use “bed and Isa” and make sure to use the £12,300 limit while you can Given Mr Sunak commissioned a review into CGT, many were expecting a radical overhaul of the tax but the rate was simply frozen – will that be all? Extra consultation papers are due to be published in the coming weeks so if you think you might lose out further down the line, consider using your allowance sooner rather than later.
Remember, you can pass assets into a spouse’s name to use their allowance, too. Losses can also be used to offset gains, reducing your bill, and paying into a pension can also mean you pay the basic rate of CGT, 10 per cent, rather than 20 per cent.
Most stockbrokers offer “bed and Isa” services, so you can move your portfolio inside a wrapper that is free of all tax, apart from inheritance tax.