It’s bad news for:
- Employers – and their employees
- Anyone getting a pay rise
- Pensioners with private pensions
- Investors with assets outside pensions and ISAs
- Home buyers
- Property investors
- Non-doms
And good news for:
- Pensioners on lower incomes
- Lower earners
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“It’s unlikely to be a happy new tax year, because far more people risk missing out as the clock ticks forward into the new year than stand to gain from any changes being introduced. The most striking squeeze is likely to come from something that’s not changing at all – as income tax thresholds remain stuck for yet another year.
It means the new tax year will usher in new challenges for all sorts of people, but while there’s nothing we can do to stop it, you can protect yourself from the impact of some of the changes.
The losers
Employers – and their employees
The employers’ National Insurance rate will rise to 15%, and the secondary threshold will fall to £5,000. It’s going to make it more expensive to employ people, and while some businesses will take a hit to the bottom line, others will let staff go. Some may wear the cost for now, but choose not to bring in pay rises as quickly as they otherwise might.
Anyone getting a pay rise
The tax rule with the biggest impact is something that won’t change with the start of the new tax year – the income tax thresholds. These have been frozen since 2021/22 and will remain so until April 2028. There has even been some speculation that they could be frozen for even longer, in an effort to make the public finances add up.
It means every pay rise will push more people over these thresholds, where they will pay higher rates of tax. It’s not just the tax on earnings that’s affected. When you start paying higher rate tax, your personal savings allowance shrinks, from £1,000 for basic rate taxpayers to £500 for higher rate taxpayers, and disappears altogether for additional rate taxpayers. You also pay a higher rate of capital gains tax when you cross into paying higher rate tax, and your dividend tax rate rises as you cross each income band.
Pensions can help bring your tax bill down significantly, because contributions receive tax relief at your highest marginal rate. It won’t leave you with more money in your pocket today, but it could reduce the tax rate you pay and will put more into your pension for later.
The best way to protect savings from income tax is to hold them in an ISA. You can pay in up to £20,000 before midnight on 5 April, so there’s a chance to take advantage in the current tax year. This is particularly valuable for higher earners who have a smaller savings allowance, and pay a higher rate on the excess.
Pensioners with private pensions
The smaller the proportion of your income that comes from the state pension, the less you’ll feel the benefit of the £9.05 per week rise in the new tax year. Meanwhile, those on higher pension incomes are hit by frozen income tax thresholds, which pushes more of them into paying more tax. There are already around 8.5 million taxpayers over state pension age – around a quarter more than before these thresholds were frozen.
Investors with assets outside pensions and ISAs
It’s the first full tax year with higher capital gains tax rates on stocks and shares – which rose from 10% to 18% for basic rate taxpayers and 20% to 24% for higher and additional rate taxpayers. To add insult to injury, this comes after the previous government took a scythe to the tax-free allowances. It means more people will pay this tax at a higher rate.
You can protect against capital gains tax and dividend tax by investing in a stocks and shares ISA. If you have existing investments outside an ISA and the available allowance, you can use share exchange (Bed and ISA) to move them into the ISA and protect them from tax. Take care not to exceed your capital gains tax annual allowance of £3,000 in the process though.
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.
Home buyers
1 April will see the end of the stamp duty holiday. At this point, the stamp duty threshold for first-time buyers will fall from £425,000 to £300,000 – and the maximum price of a property benefiting from this discount will fall from £625,000 to £500,000. Meanwhile, for second steppers and beyond, the threshold will fall from £250,000 to £125,000.
Property investors
They’ve already been hit by the rise in the stamp duty surcharge in the Autumn Budget, but those who are letting out the property to holiday-makers will also lose the chance to use the more generous furnished holiday lettings tax regime, and be subject to tax in the same way as other landlords. It underlines just how unfriendly the tax system is for property investors.
Non-doms
Non-dom status will no longer be part of the tax system in the UK. If you lived outside the UK for at least 10 years, there will be a four-year exemption period, but after that, all your earnings outside the UK will be subject to tax here. Among other things, it removes a significant inheritance tax break for those who have been in the UK for ten of the last 20 years.
Winners
Pensioners on lower incomes
The bigger the role of the state pension in your income, the more impact the £9.05 a week rise will have, and the less pain you will feel from frozen tax thresholds.
Lower earners
The minimum wage will rise from 1 April, with a 6.7% rise in the National Living Wage to £12.21 an hour. The government is also taking the first steps in moving towards a single minimum wage, so rates for younger people have risen more to close the gap, with the rate for 16-17-year-olds up 18% to £7.55.
