Here, we take a look at ways to protect against the impending raid.
1. As safe as Issa
The threshold for paying the top 45% rate of income tax will drop from £150,000 to £125,140 in April, pushing hundreds of thousands into the highest tax bracket. It comes alongside an extended freeze on income tax and National Insurance thresholds until April 2028. One of the most effective ways to mitigate the tax onslaught remains saving in Isas, which have an annual tax-free allowance of £20,000. Tom Evennett, of accountancy firm EY, said: “Getting the most out of Isas requires consistent deposits over the long term, as annual dividends from stocks and shares will become more important over time and remain tax-free.” He added: “However, if you are thinking of liquidating a stocks and shares portfolio, be aware that you may trigger capital gains tax on the sudden disposal of these assets if the gain is above the annual exemption amount of £12,300.” Brokers use a system called “Bed and Isa” which helps to mitigate this.
2. Back start-ups
Those stung by Mr Hunt’s income tax raid and lifetime pension freeze, which will remain in place until 2026, could also find safe haven in venture capital trusts. VCTs invest in UK start-ups and pay part of their returns to investors through dividends which are tax-free and also come with a 30% tax break if held for five years. Capital gains from VCTs are also tax free and there is an investment limit of £200,000.
3. Share it with your spouse
Marriage Allowance is a tax relief that can save married couples or people in a civil partnership up to £252 a year. But the relief is little used, with fewer than half of eligible couples claiming it. It allows a spouse, partner or partner to transfer up to £1,260 of their personal tax allowance to their higher-earning other half. The personal allowance is the amount someone can earn before they start paying income tax and is currently £12,570. The claim can be backdated for up to four years, including if your partner died after 2016. The recipient partner must have income below their personal allowance and the higher-earning partner must be a basic rate taxpayer who earns less from £50,270.
4. Check your council tax zone
Local authorities have the power to increase council tax by 5% a year from April without requiring a referendum. But levies are based on property valuations made in 1991, so it’s worth checking if you’re paying too much. Almost 50,000 people in England and Wales have asked for their council tax bills by formally challenging the Valuation Office, the department that oversees local tax, in 2021-2022. Almost one in three of them last year earned a discount. Be careful though: some challenges fail and may result in placing properties in a higher zone. It can also result in homes on the same street paying higher council tax.
5. Pay into your pension
Pension contributions boost your retirement savings and are an effective means of tax relief. A taxpayer can contribute up to £40,000 a year to their pension and be entitled to tax relief. However, any contributions, including those from your employer, that exceed this limit are not eligible for relief and may incur additional charges. If you want to contribute more than the annual allowance, you can reroute contributions using unused tax credits up to three tax years earlier. However, they cannot exceed your income in the current tax year.
6. Donate to charity
All charitable donations benefit from a 100% exemption from inheritance tax, including cash. Donating more than a tenth of your worldly possessions to good causes after your death also gives you additional tax relief, reducing the rate at which any tax due is charged from 40% to 36%. Higher and additional rate taxpayers can claim tax relief for donations to charities or amateur sports clubs in their tax return each year.
7. Know inheritance tax
The nil-rated inheritance tax bands will remain frozen until 2028. You can make gifts of unlimited size tax-free as long as you survive the gift for seven years. if you die within the period the money will be included in your estate. Gifts from your ‘ordinary income’ can be unlimited and tax-free as long as you can show they have had no impact on your lifestyle. You can give tax-free gifts of up to £3,000 each year, or £6,000 between a couple, and you can carry your allowance over to the next tax year if you haven’t used it, but only for one year. After this the gift allowance is reinstated. Parents can also give up to £5,000 to their children as a wedding gift, or £2,500 for grandchildren and great-grandchildren tying the knot.
8. Pay into a trust
Wealthier parents can pay into a discretionary trust every seven years, up to the nil rate limit of £650,000 per married couple. Nimesh Shah, of accountancy firm Blick Rothenberg, said: “You can create significant value in a trust, which sits outside of estates and is exempt from IHT. But trusts are not for everyone and can come with costs and periodic tax charges.”
9. Win the Capital Gains Raid
The Chancellor has dramatically reduced the annual capital gains allowance, which will fall in 2023-24 from £12,300 to £6,000 and fall again to £3,000 in 2024-25. It will cost anyone selling a second home, buy-to-let property or inherited property, and experts have advised anyone looking to sell these assets to do so before the tax rules change in April. Married couples or those in a civil partnership can combine their CGT allowance. Currently, it means a couple can have a combined allowance of £24,600, but this will drop to £12,000 from April 2023 and £6,000 from April 2024.
