Tax increases on the horizon? – How to cut your tax bill

Rachel Reeves’ first spending review didn’t announce any tax rises, and she’s been at pains to make it clear that the next autumn budget won’t include anything like the tax rises of the last one.

The government’s pinning its plans on growth, but its working with very fine margins. Growth would boost the tax take and mean there was plenty of money to go around. If growth doesn’t materialise, and a potential funding gap emerges in the coming months, we’re going to get another round of speculation over which taxes might be in the frame.

The risk is the debate encourages knee-jerk reactions, as people panic about potential changes, which leave them worse off in the long run. So, clarity from the government as soon as possible would help these concerns.

So, what taxes could rise and what can you do to pay less income, inheritance and capital gains tax?

Related article

Rachel Reeves’ spending review – what it means for your money

Susannah Streeter

Head of Money and Markets

This article isn’t personal advice. If you're not sure if a course of action is right for you, ask for financial advice.

Remember, unlike cash all investments and any income from them can rise and fall in value, so you could get back less than you invest. ISA, pension, and tax rules can change, and benefits depend on your circumstances.

What taxes could rise?

There’s already questions around the future of salary sacrifice schemes for workplace pensions and debate around the potential reinstatement of a pension lifetime allowance. Even speculating on this topic is unhelpful, because it risks undermining confidence in the system and putting people off making pension contributions.

It’s hard to see why the lifetime allowance would be needed when there are already annual limits. It effectively becomes a limit on investment growth. There’s also the huge complexity that would come with its reintroduction.

Dividend tax has been discussed yet again, but this has already been squeezed in recent years – with higher rates and smaller allowances. The UK market is attractive for investors seeking dividends, so it’s counter-intuitive to make dividend investing less rewarding.

Capital gains tax (CGT) hasn’t yet been raised as a potential money-spinner, in part because the last few years have seen so many changes – with smaller allowances and a higher rate for gains from stocks and shares. Given the government’s pro-investment position, it’s unlikely to take steps that end up denting people’s enthusiasm for the stock market.

The Chancellor’s cuts in inheritance tax relief (IHT) in the last budget created such a backlash from farmers that she might be tempted to steer clear of the UK’s most hated tax next time round. However, the complexity of IHT means there are always tweaks and changes the government could make - each one with its own consequences.

One option that’s been popular with several Chancellors has been the freezing of income tax thresholds. Reeves could, for example, extend the freeze to 2030. It’s politically useful because it increases the tax take, without being an outright tax rise.

The government also has the option of U-turning on its election pledges, and making a small change to a big tax – like income tax, National Insurance or VAT. This would be politically challenging, but the government might decide in a world with no good options, it could be worth the backlash.

In this environment, there are some no-regrets steps that can help protect you from the risks of tax changes.

What can you do?

If IHT is a concern, you have a variety of gifting allowances available – including an annual allowance of £3,000 a year and the freedom to give regular gifts from surplus income.

You can also make larger lump sums gifts, which pass out of your estate after seven years. If you’re concerned about a potential inheritance tax bill, you might want give money away sooner rather than later, and get the clock ticking.

Each tax year you get an ISA allowance. This tax year the government is offering the chance to squirrel away up to £20,000 – allowing you to grow your money free of UK tax.

The last budget set ISA allowances through to 2029, but the sands are already shifting and the government is set to launch a consultation on the future of ISAs, which could lead to changes in the autumn budget.

There’s the potential for positive reforms, prioritising improvements to the current regime rather than removing incentives to support investing and saving.

However, it still makes sense to make the most of the system as it stands, ahead of any changes, while you can be certain of the allowances and tax treatment.

Investing through a Stocks and Shares ISA means you won’t have to pay UK tax on any gains or income from these investments. And if you save through a Cash ISA, you won’t have to pay tax on any interest.

If you make interest above your personal savings allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers and, £0 for additional-rate taxpayers), you’ll pay tax on the interest with a normal savings account.

When your money is in a pension, like the Self-Invested Personal Pension (SIPP), it can grow free from UK income and capital gains tax (CGT).

You can get tax relief from the government on what you put in too – boosting your pension pot even further.

As long as you're a UK resident under 75, you can usually pay into a pension as much as you earn, up to £60,000 a year for most people, and get basic-rate tax relief (20%).

Pensions can also be a particularly valuable tool for those paying higher rates of tax or nearing an expensive threshold.

If you pay higher-rate tax (40%), you can claim up to an additional 20% in tax relief through your tax return. If you pay additional-rate tax (45%), you can claim back up to an extra 25%.

So, basic-rate taxpayers can turn £80 into £100 with 20% tax relief.

And if you’re a higher earner, you can claim up to an additional 20% or 25% through your tax return – meaning £100 in your pension could cost as little as £55.

Just remember, different income tax rates and bands apply for Scottish taxpayers. You also usually can’t access your pension until 55 (rising to 57 from 2028).