Tax terror fears are about to come true in Rachel Reeves's Halloween Budget: Sarah Coles
Your biggest tax fear is about to come true.
Statistically the thing you’re most likely to be worried about in the Budget is higher income tax, and thanks to frozen thresholds, this is pretty much nailed on. Other common concerns have already been ruled out, including rising VAT, tweaking council tax bands and getting rid of the single person discount. However, it still leaves us in the dark over some of the taxes people are most terrified might be lurking in the Budget this Halloween.
We carried out a piece of research a couple of weeks ago, to find people’s biggest worries. In Yorkshire and The Humber, rising income tax is by far most unsettling – mentioned by 15% of people. Unfortunately, this is also the one tax we can be almost certain will rise over the coming years, because the government is expected to leave allowances and thresholds untouched. It means that every inflation-linked pay rise will push more people into paying more tax, and more into paying higher rates.
Thresholds have been frozen since April 2022, and by the time the freeze ends in 2028/29, there will be 3.7 million more taxpayers, 2.7 million more higher-rate taxpayers, and 600,000 more additional-rate taxpayers than if allowances and thresholds had been indexed to inflation and the additional rate threshold kept at £150,000.
There a few things you can do to bring this tax bill down, but fundamentally there’s no way of stopping the Treasury eating into your pay packet each month. You can pay more into a pension or a SIPP, and because you get tax relief on contributions, you’ll have the tax refunded. This will keep money out of the taxman’s pockets, and can make a massive difference to your retirement, but isn’t going to leave you better off today.
You might also face tax on savings. If you’re a basic rate taxpayer, with savings rates as high as 4.5%, as soon as you have £22,000 in savings you’ll bust your savings allowance and face a tax bill. For higher-rate taxpayers, it kicks in just under £11,000, and for additional rate taxpayers, every penny of interest is taxable. If you’re worried about tax on savings, it’s well worth considering a cash ISA, where your savings are completely tax free.
Income tax isn’t the only concern. One in ten are laser focused on council tax, and the same proportion are troubled by VAT. The good news is that during the election campaign, VAT rises were ruled out, as were changing council tax bands or removing the single person discount. It doesn’t mean you won’t pay more council tax: it rises every year, and has tended to go up by around 5% annually. However, it at least means we’re unlikely to see a revamp of the tax that lands you with an enormous bill.
Next on the list were two more taxes which are at a much higher risk of tweaks –inheritance tax and taxes affecting drivers – like car tax and fuel duty. In both cases 7% of people said they were their biggest worry.
Car tax usually rises each year with inflation, and is likely to do so as usual. The government could also fiddle with tax bands to raise more cash. Fuel duty, meanwhile, has been held for years, and we’re still enjoying the benefits of a temporary 5p cut. Given the cost, and the fact the oil price has backed off from previous highs, the Treasury might see this as a potential way to fill the coffers.
Inheritance tax is ludicrously complicated, so there are hundreds of rules the government could fiddle with in order to raise more tax. This includes exemptions that keep millions of estates from facing tax. There are the nil rate bands that ensure the first £325,000 of your estate, and £175,000 of property, can be left tax free (if the home is being left to a child or grandchild). Then there’s the fact that anything left to a spouse or civil partner is tax free, and if you leave everything to them, you can transfer your nil rate bands, so they can leave £1 million free of tax. Changes to these would affect millions of people and could spark a backlash, but they aren’t written in stone, so can’t be completely ruled out.
Another exemption in the spotlight is the fact that pensions can be left free of inheritance tax. Changing this rule would bring pensions into line with other products, like ISAs, so it might be considered low hanging fruit, but it would be a blow to anyone planning to pass on their pension wealth to other family members.
If you’re worried about inheritance tax, you can give up to £3,000 away before the Budget, which will fall within your annual gift allowance. You can give away larger sums and they will be outside of your estate after seven years. There’s a separate rule that means you can give away surplus income inheritance-tax free too. If you were always planning on giving some money away, and you can afford to live without it, it may make sense to do it sooner rather than later.
This wasn’t the only pension worry playing on people’s minds. Fortunately, the next major concern, a change in tax relief on pension contributions, is reportedly off the table. However, this hasn’t been officially confirmed, so if this is a worry, you can still use the time between now and the Budget to pay into your pension.
Unsurprisingly, how much you earn and what you own will drive a lot of your tax concerns. Higher earners are also worried about capital gains tax rising, which is payable on profits from investments. The concern is that rates could double, so they match income tax rates. If you invest in stocks and shares, you can take steps to protect yourself. You can use your annual capital gains tax allowance of £3,000 to realise gains gradually over the years. At the same time, you can use the Share Exchange (Bed & ISA) process to move the assets into a stocks and shares ISA, so you don’t have to worry about either dividend tax or CGT on these investments at any point.
Of course, there is a flip side to all of this. Within the research, there was also a sizeable minority – one in 20 people in Yorkshire and The Humber - who say they aren’t worried about any of these things, because they’d be happy to pay more tax. There are those who feel it’s a price worth paying for strengthening public services, because while tax rises may be worrying, they might not be quite as terrifying as relying on public services that don’t have the resources to help you.
House prices close to the 2022 peak
The property market continues its climb back to the summit it scaled at the peak of the post-pandemic boom in June 2022. One last push could take it to new heights next month, but it’s carrying the increasingly heavy baggage of pricier properties – which hit an average of £293,399 – up £859 in a month
The market is also likely to be increasingly held back by a flood of active sellers. Zoopla figures have shown that fears over potential capital gains tax rises in the Budget have persuaded more people to put rental and holiday homes on the market. Despite booming buyer demand, it will hold house price rises back eventually.
This will be music to the ears of first-time buyers, but it’s a bright note in an increasingly depressing dirge, because first-time buyer property prices are up 4.2% in a year – or £9,409.
SARAH COLES Head of Personal Finance and Podcast Host for Switch Your Money On Headline Money Press Team of the Year Hargreaves Lansdown