The pain in question turned out to be that a number of tax thresholds will be frozen until 2026: after next year the income tax personal allowance and higher rate tax threshold will be frozen for five years. The Government will also freeze the inheritance tax nil rate band, the capital gains tax annual exempt amount and the pensions lifetime allowance until 2026.
On the face of this, it doesn’t sound particularly dramatic, particularly given that in the run-up to the Budget all kinds of tax hikes had been bandied about. It’s why they call this kind of tax rise a ‘stealth tax’. No taxes have risen, and you won’t pay any more tax until further down the line, so it feels distant enough not to worry about.
There’s nothing new about the technique. In every Budget there are reams of frozen thresholds that never get a mention. The additional rate tax threshold has been stuck at £150,000 since 2010, the inheritance tax nil rate band at £325,000 since 2009, and the £3,000-a-year gifting allowance for inheritance tax hasn’t moved for an impressive 40 years.
However, these stealth taxes are going to cost us dear. When it comes to income tax, each time we get a pay rise to keep up with inflation, we’ll be pushed further towards a tax threshold, and millions of people will cross one.
In the small print of the Budget Big Red Book, the Office for Budget Responsibility calculated 1.3 million more people will start paying income tax by 2026, and 1 million more will start paying higher rate tax. Collectively, we’ll pay £19.2bn more in income tax by 2026. It’s a progressive change, so the more you earn and the bigger your pay rises, the more additional tax you’ll pay.
Some of the other tax thresholds will predominantly affect those with more wealth too. Currently only around 4 per cent of estates pay inheritance tax, and while freezing the threshold will mean more people drift over the threshold, it’s still only a small minority who will end up paying.
It’s why in total the Government expects to make just over half a billion from the measure by 2026. Capital gains tax, meanwhile, is payable once you have made annual profits on investments of over £12,300. This is a major concern for committed share investors who invest outside an ISA and those with a portfolio of properties, but again this isn’t the majority.
Freezing the pensions lifetime allowance feels like an equally progressive move. The fact the lifetime allowance is a little over £1m makes it seem like something only very wealthy people need to worry about. However, plenty of ordinary savers will fall foul of it too. Consistent and regular contributions throughout your career mean 1.2 million people expect to build at least this in their pension by retirement. In fact, if you bought an index-linked annuity with a £1m pension at the age of 65, you’d end up with an annual income of around £26,000 a year. It’s hardly the income of the super-rich.
If you run the risk of falling foul of any of these frozen thresholds, there are things you can do.
If you get a pay rise that pushes you into a new tax bracket, you can see if your employer operates a salary sacrifice scheme, which effectively reduces your salary back down and pays the difference into one of a number of benefits. If you choose to pay the money into your pension, you won’t pay national insurance on this slice of your salary either.
If you get income from somewhere other than work – such as savings or investments – it’s well worth taking advantage of your ISA allowance, because not only is income tax-free, but growth is too, which will protect you from potential capital gains tax when you sell up.
If you have more investments than you can hold in an ISA, then married people can share them with their spouse so they both take advantage of their allowances, and the balance can be held by the spouse in the lowest tax band.
If you’re planning to leave money to your family and are worried about inheritance tax, you can consider giving them gifts while you’re still around. You have an annual gift allowance of £3,000 plus specific gifts for things like weddings, which leave your estate immediately for inheritance tax purposes.