Taxes might be going up. Here’s how to cut your tax bill
Savers are preparing for the possibility of income tax increases, with Chancellor of the Exchequer Rachel Reeves expected to announce some changes to the tax regime in March.
Labour pledged not to increase income tax during its election campaign.
However, the Treasury has discussed freezing income tax thresholds and has refused to rule out income tax increases, according to reports from the Financial Times.
The government’s tax policies have already been blamed for driving millionaires from the UK. Labour has cracked down on non-dom residents and expanded the scope of inheritance tax.
Financial advisers are fielding questions from clients about what to do in the event of heftier income taxes.
“It does come up, naturally,” says Frederick McCarthy, chartered financial planner at Augustine Financial Planning.
Sacrifice salary in favour of pension contributions
The uncertainty over future tax liabilities is making it more challenging for savers to conduct their financial planning, according to one financial adviser.
“There’s constantly nervousness, unfortunately with the change of government, about what the tax rates are going to look like, and it’s difficult to predict and make firm plans for clients when they’re not sure what their liabilities are going to be each year,” says Arthur Hill, chartered financial planner at Citygate Financial Planning.
Making greater use of the tax advantages conferred upon pensions is a great option for savers looking to respond to income tax rises.
“Pension contributions are going to be the most straightforward way of mitigating income tax,” says Hill.
Pension contributions receive top-up payments from the government, with the income tax that an employee would normally pay on receiving money from their employer being granted tax relief should it go into their pension.
Usually, the best way for a saver to do this if they are employed is to secure a salary sacrifice agreement with their employer, Hill says. Through this arrangement, employees can lower their salaries in exchange for increased pension contributions.
“Some employers are quite generous as well, in that they’ll hand back a portion of the employer National Insurance contributions saved on paying a reduced salary, as an additional pension contribution,” Hill adds.
Employees should check, however, whether a reduction in their headline salary rate impacts on any other benefits they receive from their employer, such as on income protection policies.
How to maximise your tax allowances before April 5
As the tax year draws to a close, high earners should review their tax-free allowances to avoid missing out on potential savings. Many forget to utilise key allowances, such as:
- ISA contributions – up to £20,000 can be sheltered from tax.
- Private Pension allowances – contributions up to £60,000 (or 100 per cent of earnings) may receive tax relief.
- Capital Gains Tax (CGT) exemptions – the annual tax-free allowance is £6,000 for 2023/24 but will drop to £3,000 in 2024/25 and expected to remain the same for the 25/26 tax year.
Failing to act before April 5 means losing these allowances forever, potentially increasing your tax bill unnecessarily.
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