Hunting for tax certainty – here’s how to build your own

Jeremy Hunt stamped out most of the last smouldering embers of the mini-budget on Monday. Income tax and dividend tax cuts were among the casualties. This came just days after the reversal of plans to scrap the corporation tax rise, and a fortnight on from the first U-turn on scrapping additional-rate tax.

You’d be forgiven for thinking at the moment, tax pledges aren’t worth the tele-prompter they’re written on. But if you want a bit more certainty over the taxes you pay, there are ways to build it yourself.

This article isn’t personal advice. ISA, pension, and tax rules can change, and any benefits depend on your circumstances. If you’re not sure what’s right for your circumstances, ask for financial advice. If you choose to invest, remember the value of investments goes up and down, so you could get back less than you invest.

Tax reversals – what they mean for you

The most recent announcement confirmed that the income tax cut from 20p to 19p will be postponed indefinitely. The tax break would’ve been welcome for anyone whose budget is stretched to breaking point. But as this is the absence of a cut rather than a hike, it won’t leave people struggling to find any extra cash.

There will be a halt on cuts to the dividend tax rate. Again this is a cut that’s not going to materialise, rather than a hike. But for many, it feels distinctly unfair, particularly entrepreneurs who pay themselves in dividends.

The cut in dividend tax was announced together with a matching cut to National Insurance. But as one of them has started its path into legislation, and the other one hasn’t, those who receive dividends will end up worse off.

This group already suffered from less support during the pandemic, as schemes didn’t recognise this income as needing to be replaced when times were tough. They could well feel aggrieved that despite receiving less help, they’re expected to pick up more of the bill.

It’s also going to come as a nasty blow to anyone with investments outside ISAs and pensions whose dividends breach the annual allowance. This particular tax allowance was only introduced in 2016, and has changed dramatically since.

It’s not just that rates have been hiked, but the allowance was also slashed from £5,000 to £2,000 in 2018. It shows how difficult it is to rely on any allowances like this at a time when tax policy is being erased almost as quickly as it’s written.

This makes it incredibly difficult for us to build robust financial plans tailored around current taxation, and reveals the strength in being able to build your own tax certainty. This way, you don’t have to keep changing your plans every time successive Chancellors change their minds.

4 opportunities currently offering tax certainty

1. Consider a Cash ISA

For a long time, the vast majority of people didn’t have to worry about tax on savings. A combination of low rates and the introduction of the personal savings allowance in April 2016 allowed people to earn a big chunk of interest before paying tax. Basic-rate taxpayers have an allowance of £1,000 and higher-rate taxpayers have an allowance of £500.

The personal savings allowance for Scottish taxpayers is determined using the rest of UK tax bands.

Rising rates were already persuading more people to consider a Cash ISA, and a lack of certainty over tax policy could convince more that they might not be able to rely on the personal savings allowance being around forever. By choosing a Cash ISA now, you can protect this money from UK income tax no matter what happens.

More on the Cash ISA

2. Take advantage of a Stocks and Shares ISA

The government offers the chance to squirrel away up to £20,000 in ISAs this tax year – money held in ISAs is free of UK income and capital gains tax. It means no UK tax on any dividends over your allowance, no UK tax on income beyond your personal savings allowance, and no UK tax on capital gains.

We’ve already seen that dividend tax isn’t immune to hikes. And while the previously announced rate cuts have been reversed, sheltering your investments within an ISA gives you certainty that these investments won’t be subject to tax hikes in future.

Explore the Stocks and Shares ISA

If you’re saving to buy a first property, are aged 18-39, and have at least a year until you expect to buy, you should consider a Lifetime ISA (LISA). In addition to UK tax-free growth, you get a 25% bonus on contributions. You can save or invest up to £4,000 this tax year, although any contributions will count towards your overall ISA allowance of £20,000.

Remember though, if you make a withdrawal before age 60, which isn’t for a qualifying house purchase, a government withdrawal charge of 25% will usually apply. So, you could get back less than you put in.

Learn more about the LISA

Then there is the Junior ISA (JISA) too. In the current tax year, you can save or invest up to £9,000 in a JISA for any eligible child, and any money held in a JISA is free from UK income and capital gains tax.

More on the Junior ISA

3. Pensions

If you’re under 75, personal contributions to pensions attract tax relief at your highest marginal rate, although you’ll only get tax relief on personal contributions up to 100% of your UK earnings, or £3,600 if this is greater. This means that non-earners can benefit from tax relief on the first £3,600 that’s paid into a pension – it means you can contribute tax-efficiently to a pension on behalf of a child or a non-earning spouse.

There’s also an annual allowance on pension contributions, which is currently £40,000 for most people.

Up to 25% taken from a pension is usually tax-free. Not only that, but investment income and gains in the pension are free from UK income and capital gains tax too.

Remember, you also can’t normally access your pension until at least 55 (rising to 57 by 2028). Scottish tax rates and bands are different, and so different rates of tax relief apply.

More on pensions

4. Salary sacrifice

In some cases, the government will let you give up a portion of your salary, before tax and National Insurance are deducted, in exchange for a non-cash benefit. The benefits in question include things like pension contributions, childcare vouchers (scheme closed to new applicants in October 2018) and bike-to-work schemes.

This won’t necessarily boost your take-home pay, but it will cut your tax bill – and offers the certainty that for this portion of your salary at least, there’ll be no tax to pay.

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