UK tax payers could be looking at an extended period of higher tax burdens, making efficient tax planning more essential than ever, says AJ Bell head of personal finance, Laura Suter.
Astoundingly, it is only a little over year since the former Chancellor Kwasi Kwarteng proposed reining in taxes by removing the 45% top rate of income tax and cutting the basic rate to just 19%. That kind of tax giveaway now feels like a relic from a different time and place altogether, even though Downing Street’s current inhabitants have indicated they eventually hope to offer some respite to taxpayers.
The Chancellor’s deepfreeze on income tax thresholds means households are paying far more tax – even if the headline rate remains the same – and will continue to do so until 2027-28 when tax thresholds could finally begin to rise. With little sign of that freeze ending early, workers are staring squarely down the barrel of yet more payslip pain in the years to come as wages rise but the Treasury takes a bigger cut too.
Stealth taxes are everywhere, from frozen income tax thresholds, to a doubling in the tax take on cash savings interest, and an IHT haul on-track for a record year.
This week’s sobering report from the CPP suggests taxes may need to increase further in the coming years for public services to keep pace with the cost of an ageing population.
Making predictions like this is a difficult business, because government finances are so heavily influenced by interest rates, inflation and the economy, all of which are difficult to forecast. Small changes can make a big difference to public finances, so any crystal ball gazing should be treated with caution.
Nonetheless, it points to the challenges faced in the years to come, with taxpayers highly unlikely to see much generosity from the Treasury for the foreseeable future.
All of this makes it increasingly important for households to look at whether they’re giving away more than they need to the taxman.
Few people take advantage of tax breaks like the marriage allowance, or up to £2,000 toward childcare that amounts to a basic rate tax rebate on up to £10,000 of childcare fees.
Similarly, for those that want to curb their income tax bill, sacrificing more money into a pension can be extremely advantageous from a tax perspective, boost your retirement savings and allow you to enjoy matched employer contributions if your employer offers them.
