Keep calm despite ‘noise’ around Budget tax hikes: Sarah Coles

The bad news is that they’re right to be worried, because even if the government says nothing about this tax in the Budget speech, the thresholds will remain frozen until 2028, so every inflation-linked pay rise will push more people into paying more tax, and more into paying higher rates. There have also been rumours that the freeze on tax thresholds could be extended. This wouldn’t be a surprise, because as the previous government discovered, it’s a valuable money-spinner and yet because it just means taking a bigger chunk of people’s pay rises, they don’t feel the pain quite as acutely as a tax hike.

The question over whether income tax rates themselves will rise has also entered the debate. The Resolution Foundation has suggested the government could raise at least £6 billion by raising income tax and cutting employees’ National Insurance by the same amount. The idea is that employed people wouldn’t be any better or worse off, but those who receive income that’s not subject to National Insurance would be worse off – which includes people with taxable savings, working people over state pension age, and self-employed people. It’s important to keep in mind that the government hasn’t commented at all on this, so it’s just a suggestion from a think tank.

The other rumour doing the rounds is that the government might be considering a U-turn on its manifesto promise not to raise income tax. This would be incredibly difficult politically, but, given the scale of the financial shortfall the government is facing, there aren’t going to be any popular choices, and it may decide it’s a more effective approach than changing a myriad of smaller taxes. HMRC models this possibility every year, and its most recent figures suggest adding 1p on basic rate income tax could raise £6.9 billion more in 2026/7, £8.25 billion in 2027/8 and £8.2 billion in 2028/9. Adding 1p on higher rate income tax could raise £1.6 billion more in 2026/7, £2.15 billion in 2027/28 and £2.1 billion in 2028/9.

This is just speculation, so it’s vital not to feel forced into making any major moves you wouldn’t otherwise consider. However, if income tax is a worry, you could take this opportunity to revisit whether there are any tax-saving steps that would work for your finances. This could include anything from moving savings into a cash ISA, to increasing pension contributions, and sharing income producing assets with a spouse so you can both take advantage of your tax allowances.

The next biggest concern is VAT, chosen by 9% of people. There’s good news and bad news here. On the plus side, the government won’t be keen to hike the tax rate. It pledged not to in its election manifesto, so it would be politically difficult. It would also raise prices, which would automatically boost inflation and could halt potential rate cuts. It won’t be keen to adopt a policy that could put another brake on growth.

On the downside, the government doesn’t need to change the rate for you to pay more VAT. It’s paid as a percentage of your spending, so as prices rise, VAT automatically increases too. With inflation at 3.8%, your VAT bill will be going up.

Third on the list is council tax, which was also chosen by 9% of people. This has been up for debate, with two think tanks talking about for some sort of reform of the system. They vary on the details, but both would essentially mean that those in larger houses face higher bills. The government hasn’t shown any signs of considering council tax, so this is firmly in the realms of speculation. It’s also worth emphasising that no government is going to want to rush any reform of council tax, because it has proved so thorny in the past, so if change did come, it wouldn’t be overnight. Of course, that doesn’t mean council tax will remain static, because it rises every year, and given how councils are wrestling with their finances, we may well see another 5% rise.

The next most pressing worry was that inheritance tax allowances or exemptions could be cut. These save millions of estates from tax. It includes things like the nil rate bands that mean 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). It also includes the rule that anything left to a spouse or civil partner is tax free, and that if you leave everything to them, you also leave them your nil rate bands, so the surviving member of a married couple can leave £1 million free of inheritance tax. These allowances and exemptions are so important to people that cuts would be incredibly unpopular. The backlash from changes to rules affecting farms will be fresh in their minds, so the Treasury may not be keen to face an even bigger reaction. However, these rules aren’t written in stone, so can’t be completely ruled out.

If you’re alarmed about a potential inheritance tax change, you can consider making gifts during your lifetime. You can give up to £3,000 away before the Budget, which will fall within your annual gift allowance. If you didn’t make any gifts in the 2024/5 tax year, you can carry last year’s allowance forward and give £6,000. 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. However, the key here is not to rush into it – and not to give away money you may need later in your retirement.

Within Yorkshire, the same things top the list as the rest of the nation. The variation comes when you break the replies down by income bracket. For higher rate taxpayers, income tax is an even bigger concern (for 25% of people). After that, it’s pensions – 9% are worried about cuts in tax relief on pension contributions and 8% about possible changes to the rules around tax-free cash.

Tax relief on money paid into your pension is given at the same rate as the highest rate of income tax you pay – your highest marginal rate – so higher rate taxpayers get 40% relief on their contributions and additional rate taxpayers 45%. Ever since the election campaign, there has been speculation this could be swapped for a flat rate, and whatever rate was chosen would be likely to be less than either, so the government would be paying less into the pensions of higher or additional rate taxpayers, who would have far less of an incentive to save.

When a rumour has been shared for so long, it’s easy to fall into the trap of believing it’s more likely to come to pass, but this is simply not the case. There’s no need to rush into anything you weren’t already planning to do. However, if you’re a higher or additional rate taxpayer, you were planning contributions in the current tax year, and you can afford it, you may want to make them now, while you know where you stand. Even if this change doesn’t happen, you’ve taken the no-regret move of boosting your long-term financial resilience.

The speculation around tax-free cash has been equally sticky, and is clearly upsetting people. There’s a real risk they panic and take their cash before they need it. The decision to take tax-free cash should be made as part of your long-term plan: for instance, you may be using it to pay off your mortgage. Otherwise, taking the money out now will remove it from a really tax efficient environment and could leave it open to taxes that it may otherwise have avoided. You also run the risk of parking it in a cash savings account where its purchasing power can be eroded over time by inflation. It’s vital to think this through, so you don’t rush into a decision you come to regret.

Among higher earners, fourth on the list was a rise in capital gains tax. The level of concern reflects the number of changes we’ve seen to this tax over recent years – with dramatic cuts to the tax-free allowance, and a hike of the rate on stocks and shares. There have also been questions over whether the rules could change around how gains are treated when someone dies. At the moment, the gain is reset on death, so there’s no CGT to pay. This isn’t guaranteed to remain the case.

To protect against CGT, can use your annual 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 think about either dividend tax or CGT on these investments at any point. You can also give assets to a spouse or civil partner so they can use their annual allowance too.

The final finding within the data is also worth bearing in mind: one in four people said they were so confused by endless Budget stories they that they didn’t know what to be worried about. This makes it the most common response – particularly among people completing the survey in Yorkshire. If you’re in this position, there is really no reason to stress yourself out. However, don’t let that stop you from putting plans in place. Sensible no-regrets moves mean that even if the Budget is something of a horror show, it won’t wreak havoc on your finances.

Savings boost

Figures out this week from the Bank of England showed that the savings market picked up in September, with savers putting aside another £7.9 billion. For a traditionally sluggish time of year, the bump in new Cash ISA savings was particularly notable – with another £2.4 billion saved into them. This could be the beginning of another surge of enthusiasm for tax-free savings, too, because rumours around potential changes to the Cash ISA in the Budget have been encouraging more people to take advantage while they can.

Average easy access rates fell during the month, but average fixed term savings rates rose. Sadly, this is likely to be a relatively short-lived phenomenon, after inflation came in lower than expected, and the market priced in more cuts. However, average fixed rates are still substantially higher than average easy access rates, so savers need to get moving. At the very least, don’t settle for something average, track down better rates from online banks and savings platforms. If it makes sense to tie up some of your savings for a period, it’s worth doing so sooner rather than later, while there are still good rates around.