set to rise
Here’s what you can do about it
Important - Tax rules change and their benefits depend on your individual circumstances. The value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. The information shown is not personal advice, if you are unsure of the suitability of an investment for your circumstances please seek advice. Tax is notoriously complex and we cannot replicate every rule, nuance or exemption here. Therefore you should not make, or refrain from making, any decisions based on this information alone.
How can we be sure taxes will rise?
In a clear policy development, the government said that taxes will definitely rise.
It’s not just the politicians who think that we’ll be paying more in future. At the end of last year, the International Monetary Fund (IMF) said UK taxes might have to go up if our government wants to balance the books. The Institute of Fiscal Studies (IFS), meanwhile, has suggested we face 20 years of tax rises to help fund public spending (particularly the NHS) – and if the increased cost was met by tax increases alone, households would have to pay £2,000 more each year by 2033.
Total tax receipts (£bn)
A better health service benefits all of us, and we should all pay our share towards public services. However, as Lord Clyde said in 1929, “No man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.”
While taxes might rise to look after us in the present, the government offers generous tax incentives that encourage us to save, so we can look after ourselves in the future. We should be mindful of Lord Clyde’s message, and make the most of incentives to save.
Which taxes could rise?
Which taxes could rise?
Since 2011, tax rises have steered clear of the ‘big three’ - income tax, National Insurance and VAT, and focused on less obvious taxes like duties on petrol and alcohol.
But the IFS has warned that raising the kind of money needed by the NHS would mean hiking one or more of the big three.
The government has ruled out rises in VAT before 2022.
So any increases in tax on spending are likely to be stealthier, we suspect focusing on things like air passenger duty and insurance premium tax.
After the success of the sugar tax on drinks, there’s more opportunity to align these taxes with broader issues, such as a tax on single-use plastic.
Vat receipts (£bn)
Source: HMRC | *Estimated
Capital gains tax
Another potential target is capital gains tax, which was cut significantly in April 2016.
The aim at the time was to encourage people to invest in the stock market rather than property, so capital gains tax for basic rate taxpayers was cut to 10% and higher rate taxpayers to 20% - while the sale of second and subsequent properties continues to be taxed at 18% and 28% respectively.
A government looking to raise additional funds could simply reverse the cuts. Alternatively, it could opt for a more radical money-raising strategy, such as aligning capital gains tax with income tax rates, or lowering the capital gains tax allowance.
During the 2017 election campaign, the government notably didn’t rule out income tax rises. But during the campaign it did say that higher earners wouldn’t be targeted with tax rises.
Number of higher rate taxpayers (thousands)
Source: HMRC | *Data not available
The government now says taxes will rise in a ‘fair and balanced way’, which we think puts National Insurance in the frame. The idea of fairness should mean it’s unlikely to specifically target any age group – despite recommendations for a Social Care tax on the over 40s.
The IMF has suggested higher National Insurance (NI) for the self-employed. This idea was famously part of Philip Hammond’s first Budget in 2017, but was dropped a week later because it went against the election pledge not to raise NI.
But that pledge was dropped in last year’s election, leaving the door open. It’s also possible rates could be raised across the board, or that people over state pension age could be forced to pay National Insurance for the first time.
Property and IHT
The IMF also suggested some changes to tax on property.
This could mean changes to stamp duty, or a version of the mansion tax – introducing an annual charge on properties over a particular value.
But we think the most likely option is to wrap this up in some changes to inheritance tax (IHT). MPs looking into closing the social care gap, for example, called for an IHT levy on large estates – in practice probably over £2 million.
Estimated number of deaths subject to inheritance tax
You might think IHT rises are unlikely given the recent introduction of the main residence nil rate band. But the government might decide to target second homes and investment properties, for example. Our guide to IHT has more information.
What can you do?
What can you do to pay less tax?
In an environment of rising taxes, it’s all the more important to make sure you’re not paying more than you need to.
In many cases this comes down to making sure you take advantage of all the tax allowances available.
The advantages of marriage
We suspect (and hope) few people marry purely for the tax advantages! But there’s no doubt they’re handy when minimising the tax you pay as a couple.
You can give assets to your spouse without triggering a tax bill. This means you can share any income-producing investments between you, so you can both make use of your income tax allowances and bands.
Each year, you can realise some gains before being subject to capital gains tax - this year it's £11,700. So it’s worth planning when you sell your investments in order to stay below the allowance in any one year. Your spouse also has an allowance, so you can share assets to make the most of this.
When you die, you can leave everything to your spouse, and no inheritance tax will be payable. You can also leave your spouse any of your inheritance tax allowance which you haven’t used – so they can have up to double the allowance when they pass away.
Don’t forget the Marriage Allowance, too. If one spouse is a non-tax payer, and the other is a basic rate taxpayer, the marriage allowance lets the non-taxpayer give £1,190 of their personal allowance to their spouse, which will save £238 this year, and can be backdated to 2015 – saving £900.
Wrap it up
You could also consider taking advantage of tax-free investment wrappers like ISAs and pensions.
Just remember all tax rules can change and their benefits depend on your personal situation. All investments can fall as well as rise in value and you could get back less than you invest.
Each year you have an ISA allowance you should consider making the most of. This year it’s £20,000. Investments in an ISA are free from UK income tax and capital gains tax.
If you have existing investments outside an ISA, you can pay them into your ISA (subject to the ISA allowance) by doing what’s known as a Bed and ISA. This involves selling the investments, at which point capital gains tax might be due, and then buying them back within your ISA.
Anyone aged 18-49 can put up to £4,000 of their annual ISA allowance into a Lifetime ISA, although you have to be under 40 to open one. Not only does this shelter your investments from tax, but the government will also add a 25% bonus on contributions. This comes with restrictions; the LISA either needs to be used for the purchase of your first home, or withdrawn after you reach the age of 60 – otherwise you’ll usually pay a penalty for withdrawals.
If this suits your needs, it can be a great way to boost your investments.
It’s also worth considering ISAs for family members, including your spouse, and any children under the age of 18. In the current tax year, you can save or invest £4,260 in a Junior ISA (JISA) for any qualifying child, and all interest, dividends or capital gains are free of UK tax. The children will then receive their nest egg at the age of 18.
Pensions – a helping hand for retirement
For longer-term investments, pensions offer unrivalled tax benefits. However, you won’t be able to access it until you’re 55 (57 from 2028).
To encourage us to invest for our own retirement, the government offers generous tax breaks. You get tax relief when you put money into a pension, provided you’re within your contribution limits. Once it’s in there your investments can grow free from UK income and capital gains tax.
When you decide to take your pension there’s usually the option to take up to 25% as a tax free lump sum, with the rest used to provide a taxable income.
A riskier option for more experienced investors
Aside from these mainstream options, some sophisticated investors might also want to consider Venture Capital Trusts (VCTs).
The government offers a number of tax benefits to encourage investment in smaller, higher-risk companies. There’s 30% income tax relief on newly issued VCTs (up to a maximum of £200,000 a year) – as long as you hold them for at least five years – no tax on dividends and no capital gains tax on profits.
There are a number of restrictions and extra risks to be aware of, so VCTs aren’t for everyone. You’ll find full details in our VCT section.
Juggling your assets for maximum efficiency
Once you’ve made use of suitable tax shelters, you might want to look at what else you can do. It can pay to think about how you hold different types of assets.
If you have bonds, or funds that invest in them, for example, the income is taxed as savings interest. Basic rate taxpayers have an annual allowance of £1,000 and higher rate taxpayers an allowance of £500, so you can hold bonds or funds that invest in them outside an ISA or pension, and as long as your total savings income isn’t more than the allowance, it’ll be tax free.
If you hold income-producing shares, or funds that invest in them, the dividend tax allowance means any income up to £2,000 is also tax free. So consider which types of investment you should hold in an ISA.
You can focus on growth investments outside your ISAs or pensions, and plan when you take gains in order to stay in the £11,700 capital gains tax allowance where possible.
Give it away now
Tax planning is key throughout life, but it can be just as important to consider what’ll happen when you’re gone.
Unless you give your estate to your spouse, anything over the threshold is subject to 40% IHT. The threshold, or ‘nil-rate band’, is £325,000 at the moment, plus up to an extra £125,000 if you’re giving all or part of your main residence to your children or grandchildren.
The earlier you start planning to reduce IHT, the more chance your planning will be effective. You can give away as much money as you like to individuals. And provided you live for seven years, these ‘potentially exempt transfers’ are outside your estate and not subject to IHT. It’s important to make sure you have enough to live on before making gifts – remember to factor in any change of circumstances you might have. Our guide to IHT has more information.
You also have various allowances, including a £3,000 annual gift exemption, some wedding gifts, and all gifts of up to £250 per person per year (as long as they haven’t received a gift from you which benefitted from any of the other exemptions in the same year). You can also make regular gifts from surplus income. All these are outside your estate from day one.
And finally, if you need more help…
If all this sounds a bit too taxing (we couldn’t resist…), or your situation’s a little more complicated, we can always give you some advice.
Our advisers can help you pay less tax and get your money working harder for you. Just give us a call on 0117 317 1690 to get started and arrange a free initial consultation.