Your tax bill could go up too

THERE is a surprise fall-out from rising inflation: you may face a higher tax bill.

In his Budget earlier this month, Chancellor Rishi Sunak announced that all allowances and tax thresholds would be frozen for the next five years.

That means that millions more people will have to start paying income tax or be drawn into a higher tax bracket.

Allowances for inheritance tax, lifetime pension values and capital gains will also remain static. Should inflation start to rise, the impact will be even more dramatic as these allowances become stingier in real terms.

Becky O’Connor, head of pensions and savings at wealth manager Interactive Investor, has advice on how households can counter this.

Pay more into your pension to reduce your income tax bill. If you can tighten your belt and put more into your pension, this can be a good way of staying below certain thresholds that would trigger higher income tax charges.

Use Isas as well as pensions for retirement saving – especially if you are on your way to exceeding the pension lifetime allowance limit of just over £1 million.

Use ‘Bed & Isa’ facilities. These allow you to move investment holdings that could potentially be liable to capital gains tax in the future into an Isa wrapper where future gains are free of this tax.

Pass on your pension. Rising house prices, while never a given, will increase inheritance tax liabilities on estates over time.

Investments in your pension are not considered part of your estate when it comes to inheritance tax and so can be a good way to leave money to family.