'No regrets': How to prepare for Rachel Reeves's next set of tax rises
The government has taken to answering tax questions with the same air of vagueness and irritation as teenagers being asked about whether they’ve done their homework or where they’ll be on Saturday night.
We shouldn’t read too much into every single answer, because they’re treating all questions about tax the same way. They’ve decided if they rule out one tax rise, the world will ask about another one, until the Chancellor is forced to unveil the Budget to a daytime TV presenter, two months before the official announcement. However, the downside of this tactic is that suspicion and worry has been building.
If you’ve found this approach frustrating, I have good news and bad news. The good news is that we don’t have to guess what tax rises are on the way, we can work an awful lot of it out. The bad news is that it’s not going to be pretty.
Taxes will rise
The need for tax rises is clear. A combination of defence spending promises, difficulty in making spending cuts, sluggish growth hindering tax receipts and the rocketing cost of borrowing, means shortfall in the government finances is reportedly around £30 billion. Rachel Reeves’ conference speech, emphasised the government’s commitment to economic responsibility, which removed the option of simply shrugging this off and suggesting growth further down the line would solve the problem. It all brings us back to tax.
Rises baked in
In fact, Reeves doesn’t have to announce a single tax change at the Dispatch Box in order for people to pay more tax, because it’s already baked in. Most notably, frozen income tax and National Insurance thresholds are set to stay in place until 2028. It means that every pay rise we get in the interim will mean paying more tax, and risks pushing people over a threshold into a whole new world of extra taxes.
Becoming a higher rate taxpayer, for example, doesn’t just mean paying more tax on your wages, there’s also a smaller savings allowance and a higher rate of tax on interest, a higher capital gains tax rate and a higher dividend tax rate. Since 2021/22, when thresholds were frozen, the number of basic rate taxpayers has increased by 3 million, the number of higher rate taxpayers is up 2.65 million, and the number of additional rate taxpayers has more than doubled. By 2028, those figures are going to be even higher.
But these aren’t the only rises baked in, because as the value of stocks and bonds rises – and as house prices increase – it automatically hikes how much tax we pay.
Even if all that happened was that the value of investments kept pace with inflation, there would be more tax to pay. Anyone investing outside of a pension or ISA is making capital gains that could end up attracting tax. Given that the annual capital gains tax allowance has been slashed to £3,000, it’s likely to mean more people bust the annual allowance and pay more tax. The same applies to property investors, for whom rising house prices mean larger gains when they sell up, and more capital gains tax.
It's not just capital gains tax that’s affected: inheritance tax is also hiked this way. Rising values of stocks, bonds and house prices add to the value of people’s estates, so the fact that the nil rate bands have been frozen until 2030 means more of them will face inheritance tax. It’s one major reason why this tax hit a new record in the last tax year and is set to raise even more in the current one.
Price rises sneak more tax from our pockets too. Inflation above the Bank of England target means prices are rising more quickly, so taxes based on a percentage of what we spend will automatically rise too – including VAT, fuel duty and alcohol taxes.
Extra tax rises
Of course, on top of this, we are highly likely to see taxes actually hiked in the Budget. One persistent rumour is that the freeze on income tax thresholds could be extended to 2030. It would be an appealing option to any government, because it’s not officially a tax rise. It’s also designed to take a larger proportion of any pay rise, so it doesn’t leave you any worse off than you are today. That way it can sneak a bigger slice of tax without people really noticing. All in all, this wouldn’t come as a surprise.
As for any of the other rumours, from capital gains tax to stamp duty and inheritance tax to pension tax relief and tax-free cash, the government’s approach means we’re unlikely to get a huge amount of clarity over the coming weeks.
What can you do?
It means your best bet is to assume that taxes are going to rise, and take some sensible no-regrets steps, to ensure you are in the best possible position to handle the rises we already know about, and the ones we’re dreading too.
If you plan to make more pension or SIPP contributions in the current tax year, you could consider doing so ahead of the Budget, to take advantage of the system as it stands. If you’re making income from savings interest, you can use a cash ISA to protect as much as possible from tax. If you’re planning to invest, a stocks and shares ISA will protect you from dividend tax and capital gains tax. And if you already have investments outside an ISA, you can move them inside using this year’s allowance – through the Bed & ISA process.
If you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name, so you both take advantage of your ISAs and tax allowances, and then the rest is taxed at their marginal rate rather than yours.
You may also be considering taking tax-free cash from a pension if you’re worried that this allowance could be set to change too, but you need to think very carefully if this is on your radar. If you take the cash and stick it in savings, interest could fall short of inflation, you might be tempted to dip into it, and at the very least you would miss out on the potential for investment growth. If you reinvested it outside the pension, depending how much you took, you could end up with some outside an ISA, where it could face capital gains tax or dividend tax. Given the potential for mistakes, this isn’t something anyone should rush into.
Of course, ideally, it would be good to know what’s actually going to be in the Budget, so we can take exactly the right steps to protect ourselves. But as any parent with teenagers knows, there’s no point hankering after the ideal, we just have to make the best of what we have.
Self assessment
When you work for yourself, it’s easy to resent all the additional admin you have to do on top of your day job. So it’s going to come as no comfort at all to know that if you’ve not done a tax return before, and you made untaxed income in the tax year 2024/25, you need to crack on and register for self-assessment as soon as possible, because the deadline is 5 October.
It’s not just self-employed people who register for self-assessment. Some people do so if they made a capital gain or loss on investments, received over their allowance in dividends or savings, or if they made pension contributions or charitable donations they want to reclaim the tax on. It means an awful lot of people may need to get their finger out in the next few days.