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Budget 2020: how to protect yourself from tax hikes

Nadeem Umar tells us why we could be right to worry about tax hikes and how to shelter our wealth.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The government has committed to an awful lot of new spending. But the money has to come from somewhere.

The unwritten rule of electioneering is to announce the spending increases during campaigning, and wait for the first post-election Budget to reveal the bad news about tax.

Over the past few weeks we’ve seen suggestions of everything from some form of ‘mansion tax’ on more expensive homes, to changes in capital gains tax and tweaks in pension tax relief.

Sajid Javid’s resignation as chancellor – the person in charge of the Budget – might have derailed some of the plans in progress, but commentators are divided on what’s likely to happen next.

Some think fiscal (tax) rules will be relaxed, so there’s less pressure to balance the books and spending can rise alongside tax cuts. Others point to the manifesto pledge to get rid of ‘arbitrary tax advantages’ for the wealthy.

Read Fiscal and monetary policy – what (not) to expect in the budget

Unfortunately we don’t have a crystal ball to know what tax changes if any will come to fruition. We think the best way to shelter yourself from any potential tax changes is to take as much advantage as you can with the appropriate current breaks, while they still last.

Please note this article is not personal advice. If you are unsure of the course of action for you please seek advice. Unlike cash, all investments and income can fall as well as rise in value so you could make a loss. Tax rules can change and benefits depend on personal circumstances.

How to avoid paying too much tax

1. Take advantage of ISAs

In this tax year, you can save or invest up to £20,000 in ISAs – and shelter this money from tax. If you don’t use the allowance this tax year you’ll lose it, so it’s usually worth putting away whatever you can afford before 5 April.

Learn more about ISAs

Longer-term investments (like funds and individual shares) are likely to offer better returns than cash deposits over the long term, but they come at a higher risk. Investments fluctuate in value so you could get back less than you put in. If this worries you then a Stocks and Shares ISA may not be for you, and you may have to accept the lower, but guaranteed, returns from cash.

2. Consider a Lifetime ISA

If you’re saving to buy a first property, are aged 18-39, and have at least a year until you plan to buy, you should consider a Lifetime ISA.

You can save up to £4,000 every tax year towards a first home or later life, with the government adding a 25% bonus on top of what you pay in. As it's an ISA, any growth or income is also free of UK tax.

You can withdraw money from a Lifetime ISA to buy your first home (worth up to £450,000), or from age 60. However, other withdrawals will usually incur a 25% government withdrawal charge, so you could get back less than you put in.

Learn more about Lifetime ISAs

3. Don’t forget Junior ISAs

You can save or invest in a Junior ISA for any qualifying child, and all interest, dividends or capital gains are tax free. The money can’t be taken out until they reach 18 – at which point they will have a nest egg to give them a great start in their adult life.

As a parent, you can open and contribute up to £4,368 this tax year (2019/20) to a Junior ISA. Unlike adult ISAs, a child can only hold one of each type of Junior ISA (Junior Cash ISA and Junior Stocks and Shares ISA).

Learn more about Junior ISAs

4. Top up your pension

Each year most people have a pension allowance of either £40,000 or their total earnings – whichever is lower. Even non-earners have an allowance of £3,600, so you can contribute tax-efficiently to a pension on behalf of a non-working spouse or a child.

Learn more about SIPPS and how much you can put in this tax year

At the moment contributions to pensions attract tax relief at your marginal rate. With pension tax relief under discussion around the Budget, it’s worth taking advantage of this tax break while you can. Remember you can’t take money out of your SIPP until 55, rising to 57 from 2028.

Learn more about tax relief on pensions

5. Consider salary sacrifice

In some cases, the government will let you give up a portion of your salary, and spend it on certain things free of tax (and sometimes national insurance). This includes pensions, childcare vouchers, cycle-to-work schemes, and technology schemes. It can be a great way to cut your tax bill, though as it also cuts your salary be aware this could affect other benefits like maternity pay or life cover offered through your employer.

Speak to your employer to find out if they offer any schemes you could benefit from.

6. Take advantage of your spousal exemptions

Assets that produce an income – like shares, bonds, funds and buy-to-let property – can be passed between spouses without triggering a tax bill. This means they can be shared between a couple, so both can take full advantage of their income tax, savings and dividend allowances.

The balance can be held by the spouse paying the lower rate of income tax, to help reduce the tax payable.

7. Claim the marriage allowance

If one spouse is a non-taxpayer, and the other is a basic rate taxpayer, the marriage allowance lets the non-taxpayer give £1,250 of their personal allowance to their spouse in the current tax year – saving them £250 in tax. There are other scenarios where you could benefit but this is the most common. If you qualify, you can backdate your claim for four years (assuming you’ve been married that long) so you could save up to £1,150 in your first claim.

Find out if you could benefit from the marriage allowance

Budget 2020 – Impact on investors

Register now to find out the changes announced in the budget and how they will impact investments and pensions

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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