Why your tax bill could be falling as we prepare for General Election: Sarah Coles

Self-employed people will have to wait a little longer, but Class 2 National Insurance contributions will be axed altogether at the start of the new tax year in April, saving an average of £186 a year. The main rate of National Insurance contributions for self-employed people will also be cut by one percentage point, from 9% to 8%. This will cut an average of £117 in tax for basic rate taxpayers, £322 for those on the higher rate, and £358 for additional rate taxpayers.

However, this is an election year, and with the Spring Budget set for 6 March, rumours of extra potential vote-winning tax cuts are already emerging. Over Christmas it was suggested that the inheritance tax rate might be cut from 40% to 20%. This would be a popular idea among the growing number of people whose estates are set to breach the allowances.

However, because the vast majority of people will never face inheritance tax, it’s a cut that would only benefit a wealthy few. And while it would mean more money could be passed to younger generations when people die, it would do nothing to encourage people to support their families with gifts during their lifetimes, when they may need it most.

A more inclusive tax cut has already been floated – cutting income tax. This was something Rishi Sunak actually promised to deliver in 2024, during the Spring Budget of 2022. It would be an expensive option for the Treasury, but has the benefit of putting money back into the pockets of millions of voters. The government might also be keen to ensure people are enjoying the benefits of the cut before they go to the polls, which might mean it could be introduced as early as the start of the next tax year.

Another idea that has been floated relatively regularly is a stamp duty cut, specifically to help make it easier to buy a first home. However, this is complicated by the fact that we’re currently in the middle of a temporary stamp duty cut - set to end in 2025. If the government just made this change permanent, we wouldn’t feel any better off, so to be a vote-winner it would have to make it permanent and then implement a cut on top, which would be an expensive business. The government has alternative tools it could use to make life easier for first time buyers – including some kind of replacement for the Help to Buy schemes – so this feels like more of an outside possibility.

At this point, with taxes absorbing so much of our income, any tax cut would feel like a step in the right direction, but before we get too excited about the prospects for 2024, it’s worth bearing in mind that we’re starting from spectacularly high level. The Institute for Fiscal Studies forecast in the autumn that we would be spending 37% of our GDP on tax by the time of the election – the highest level since the 1940s. And alongside these potential cuts, there are some big tax rises set for the year which don’t currently appear to be on the tax-cutting table.

For most people, the most disappointing thing is that there’s no suggestion of an early end to the freezing of tax thresholds. The freeze on income tax and NI thresholds will keep pushing more people into paying tax on their income and more into paying higher rates of tax. In the current tax year there are 28.8 million basic rate taxpayers – up 8% in three years, 5.6 million higher rate taxpayers – up 41% in that time, and 862,000 additional rate taxpayers – up 99%. Meanwhile, the freeze in the inheritance tax threshold will mean more people paying inheritance tax – even if they do end up paying it at a lower rate.

There’s also no sign that the government is considering a U-turn on its plans to slash the dividend tax and capital gains tax allowances. The dividend allowance falls in April from £1,000 to £500 – after being cut from £2,000 a year earlier, and the capital gains tax allowance will halve to £3,000 – down from £12,300 two years earlier.

It means we can’t just cross our fingers, and hope for tax cuts. It’s worth taking steps to bring our own tax bills down. This can include tax-free saving and investing through ISAs. It means your investments will be protected from the horrible cuts in dividend and capital gains tax, and your savings and bond investments from income tax. You can tackle the tax on your income too, by considering pension contributions, which attract tax relief at your highest marginal rate. You may also be able to pay less tax by considering how you hold savings and investments if you’re married or in a civil partnership. Plus, if you’re worried about the risk of inheritance tax, you can consider giving money to your loved ones during your lifetime.

It may feel counter-intuitive to talk about the need to proactively cut your tax bill at a time when all the talk is about the government implementing tax cuts. However, we know that the smoke and mirrors of Budgets in the run up to a general election will always accentuate the positive. So it will be up to us to spot the downsides, and take steps to protect ourselves from them.

Divorce Day

This miserable milestone is when lawyers notice a surge of divorce enquiries at the start of the year. It’s hardly something to celebrate, especially if you’re facing the horrible prospect of a split this year. However, it’s a reasonable reminder of how important it can be to get the right professional help.

A straightforward divorce may be something you can handle alone, but if you have children, pensions, a property, significant savings or investments to consider, speaking to a lawyer and a financial adviser are the best ways to protect yourself from an expensive mistake. If your spouse has been building up a pension for years, pension specialists are particularly valuable. And if you need to talk to someone about the emotional upheaval, then make sure you’re using the right specialist for that too. Talking through your anger with your lawyer is expensive, and they’re not going to be able to help as much as a counsellor might.