The UK’s most feared Budget tax changes
- The Budget tax hike people are most worried about is higher income tax (15%). The second most common worry is that council tax could increase (11%).
- Among higher earners, one in ten are most worried about higher income tax (12%), and a similar number about the changes to tax relief on pension contributions (10%).
- More higher earners are also worried about inheritance tax (8% are concerned about losing allowances or exemptions) and capital gains tax (7% are concerned about rates being increased).
- We are already seeing investors take action ahead of expected changes to capital gains tax, with double the numbers of clients using Bed and ISA than usual for this time of year.
Figures from a survey of 2,000 by Opinium for HL in September 2024 unless otherwise stated
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“Your biggest tax fear is about to come true. Statistically the tax you’re most likely to be worried about rising in the Budget is income tax, and thanks to frozen thresholds, this is nailed on. Other major worries have already been ruled out, but some of the others remain firmly on the table.
The five biggest fears
- Income tax
Income tax is rightly a concern, because the government is expected to leave allowances and thresholds untouched. It means that every inflation-linked pay rise will push more people into paying more tax, and more into paying higher rates. Thresholds have been frozen since April 2022, and by the time the freeze ends in 2028/29, there will be 3.7 million more taxpayers, 2.7 million more higher-rate taxpayers, and 600,000 more additional-rate taxpayers than if allowances and thresholds had been indexed to inflation and the additional rate threshold kept at £150,000.
There are some ways to manage your income tax bill. The best way to protect savings from income tax is to hold them in an ISA. You can protect up to £20,000 in the current tax year. If you have the money available now, it may make sense to open an ISA sooner rather than later, so you know where you stand.
You can also pay into a pension or a SIPP. The annual pension allowance is now £60,000, and the fact you get tax relief at your highest marginal rate at the moment means higher earners in particular should look to take as much advantage as makes sense for their finances.
Meanwhile, if you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name. It means you can both take advantage of your tax allowances. You can also use all the tax-efficient vehicles at your disposal, including your ISAs and pensions, as well as the Junior ISAs and Junior SIPPs of any qualifying children.
- Council tax
More than one in ten people are most worried about council tax. This has been the subject of an awful lot of speculation over the past few months, so the Treasury has ruled some specific changes out – notably changing the tax bands or removing the single person discount. It doesn’t mean council tax will remain the same, because it rises every year. However, it at least means it’s unlikely we see a major revamp that lands you with an enormous bill.
- VAT
Almost one in ten are worried about a potential rise in VAT, so it will come as a relief that back in May, during the election campaign, Rachel Reeves pledged not to raise VAT. It wouldn’t stop the government making tweaks, but as we saw with the fiasco of the pasty tax in 2012, meddling with details on VAT can be a dangerous business.
- Car and fuel tax
Taxes on drivers – like car tax and fuel duty – are another worry. Car tax usually rises, but fuel duty has been held for a while, and we’re still enjoying the 5p cut after it was extended. Given the expense, and the fact the oil price has backed off from some of the most alarming highs, the Treasury might see this as a potential way to fill the coffers. This would be miserable news for drivers who have had to contend with all sorts of challenges in recent years, from sky high petrol prices to a horrible acceleration in second hand car prices.
Higher rate taxpayers
Higher earners are more worried about taxes on their savings and investments. Income tax still came top of the list, and VAT and tax on drivers are both a concern, but they have additional worries.”
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:
- Pensions tax relief
“The government encourages people to pay into their pensions with tax relief at the highest rate of income tax they pay – 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.
Reports that this may now be off the table will ease some of these concerns. However, this hasn’t been officially confirmed, so if this is a worry, you can still use the time between now and the Budget to pay into your pension, so you can get higher relief while you know where you stand. You may be preparing for something that never happens, however, at the same time, you’ll set yourself up for a more comfortable retirement, which is no bad thing.
Inheritance tax
Almost one in ten are concerned about losing inheritance tax allowances or exemptions. This includes things that keep millions of estates from facing tax – 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 they can leave £1 million free of tax. These allowances and exemptions make a difference to so many people that changes would spark a backlash, which could push them down the list. However, these rules aren’t written in stone, so cannot be completely ruled out.
Inheritance exemptions also include the fact that pensions can be left free of inheritance tax. Changing the inheritance tax treatment of pensions would bring it into line with other products, such as ISAs. The government may consider this to be low-hanging fruit, and there have been reports that this is being seriously considered by the Chancellor. However, it would be a blow to anyone planning to pass on their pension wealth to other family members. It would spur people to spend their pension while they are still alive, whether that be through more gifts to loved ones or through extra spending.
If you’re worried, you can give up to £3,000 away before the Budget, which will fall within your annual gift allowance. 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.”
Sarah Coles
Capital gains tax
“Some 7% of higher-rate taxpayers are worried about higher rates of capital gains tax, which is payable on profits from investments. We’re already seeing investors take action ahead of expected changes to capital gains tax. The concern is that rates could rise from 10% for basic rate taxpayers (18% on property) and 20% for higher and additional rate taxpayers (24% on property) to match their income tax rates of 20%. 40% and 45%.
If you invest in stocks and shares, there are some things you can do to protect against a hike in the rate. You can use your annual capital gains tax 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 worry about either dividend tax or CGT on these investments at any point. You can also offset any losses against your gains, give assets to a spouse or civil partner so they can use their annual allowance too, or defer income to next year so any capital gains tax you do pay is at a lower rate. You can also hold assets for life, and the tax will reset to zero on death. It just remains to be seen whether this will remain the case after the Budget.”
Top 5 biggest tax fears in the Budget
Making people pay more income tax 15%
Boosting council tax 11%
Rise in VAT 8%
Higher duty affecting drivers 8%
Losing inheritance tax allowances or exemptions 5%
Top concerns among higher-rate taxpayers
Higher income tax 12%
Removal of tax breaks on pension contributions 10%
Losing inheritance tax allowances or exemptions – 8%
Higher rates of capital gains tax 7%
Higher VAT 7%
Higher NI 7%
Higher duty affecting drivers 7%
Top concerns among basic-rate taxpayers
Higher income tax 19%
Higher council tax 12%
Higher duty affecting drivers 9%
Rise in VAT 8%
Increasing National Insurance 5%
Losing inheritance tax allowances or exemptions 5%
