The Government has indicated that tax increases are likely to be part of this month’s budget, with a focus on those with the “broadest shoulders.”
We examine where these changes might impact you and how you can prepare.
Capital Gains Tax: Capital Gains Tax (CGT) is levied on profits made from selling assets such as shares and property. The rate varies from 10% to 28%, depending on your income tax bracket and the asset type. Currently, there is an annual tax-free allowance of £3,000. The government could potentially increase CGT rates or align them with income tax rates of 20%, 40%, and 45%.
Likelihood of an Increase: High. Those likely to own assets subject to CGT are often wealthier individuals, making this a probable target for revenue generation.
What You Can Do: Consider selling listed shares that have appreciated in value before the budget to utilise any unused CGT allowance, and then repurchase them.
Inheritance Tax: Inheritance Tax (IHT) applies up to 40% on assets passed on after death, including cash, shares, and property worth more than £325,000. This threshold increases to £500,000 if your estate includes a main home passed on to direct descendants.
Likelihood of an Increase Medium. IHT generates relatively low revenue, and there may be opportunities to increase it. Changes could include lowering allowances or modifying the “seven-year rule” for gifts made during one’s lifetime.
What You Can Do: If planning to make a gift to a child or grandchild, consider doing so before October 30.
Pension Tax Relief: Pension contributions currently receive tax relief at your income tax rate. This rebate costs the government £45 billion annually. A flat rate of 20% could be introduced to save costs.
Likelihood of a Change Medium. While reducing pension tax relief could raise funds, the government also aims to encourage pension funds to invest in UK infrastructure.
What You Can Do: Higher rate taxpayers should consider making additional pension contributions before October 30 and utilising any unused allowances from the past three tax years.
Stamp Duty: Stamp Duty Land Tax is applied when purchasing properties over £250,000, or £425,000 for first-time buyers, with rates between 5% and 12%. A 3% surcharge applies to additional properties.
Likelihood of an Increase Low. Further increases could negatively impact the housing market.
What You Can Do: There may be no immediate actions needed. There could be unexpected changes favouring first-time buyers, but current policies are already quite supportive.
Dividend Tax: This tax is levied on income from shares or businesses above a £500 annual allowance. Rates are 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers. Rates might be aligned with income tax rates, and the allowance could be removed.
Likelihood of an Increase Medium. Raising dividend tax could be a straightforward method for the government to increase revenue.
What You Can Do: Maximise ISA contributions across your family to spread out dividend income. The ISA limit is £20,000 for adults and £9,000 for children under 18.
Income Tax: Income tax is applied to income from employment, savings, and rental income.
Likelihood of an Increase Low, but possible. Although an increase was ruled out for “ordinary working people,” higher earners could see rate increases.
What You Can Do: Maximise contributions to your pension and ISA, and consider transferring income-producing assets to a lower-earning spouse.
Fuel Duty: Fuel duty has been frozen since 2011, with a temporary 5p cut since 2022.
Likelihood of an Increase High. Reversing the 5p cut could provide a quick revenue boost.
What You Can Do: Fill up your tank before October 30 and consider switching to an electric vehicle if you’re buying a new car.
If you would like more information or any advice on this article, then please contact us by emailing solutions@ellacotts.co.uk or call us on 01295 250401.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
