The Autumn Budget of 2024, Labour’s first budget in 14 years, is just three days away. Prime Minister Sir Keir Starmer has warned the public that the budget decisions will be painful and tough. So, taxpayers are anticipating tax hikes in various areas. This speculation about potential tax hikes can lead people to make rash decisions.
Chancellor Rachel Reeves has previously stated that the UK faces a £22 billion gap in public finances. Since that speech, people believe that Reeves is planning to raise about £40 billion to fill that gap and raise revenue for government funding. This could be through a rise in tax rates and spending cuts in various areas.
Due to Labour’s previous announcements to not raise Income Tax VAT, and National Insurance Contribution (NIC), many believe Capital Gains Tax (CGT) and Inheritance Tax (IHT) rate hikes could be the main target of the upcoming budget. However, the personal allowance threshold, which is the tax-free amount of £12,570, remains frozen until 2028. This threshold freeze could be extended, leading more people to pay taxes as their wages increase over the years. This phenomenon is known as fiscal drag.
Reeves could be using strategies such as fiscal drag or raising tax hikes to generate revenue for the public. So, we have compiled the big three tax-saving tips three days before the budget amid the speculation of possible tax rate hikes.
1. Save on Inheritance Tax Bill
Inheritance Tax (IHT) has been one of the major areas of focus among speculative taxpayers for the upcoming budget. Tax experts believe a potential hike in the IHT rate is unlikely since it is already high, sitting at a whopping 40%. However, Reeves could look into something called a double death tax, where CGT rates will apply on top of IHT rates. Or there could be a potential decrease in the exemption threshold.
Currently, properties up to £325,000 are exempt from Inheritance Tax, which is the regular nil-rate band. Additionally, an allowance of £175,000 can be applied to people leaving their family home to their children or grandchildren.
One strategy taxpayers can use to save on their IHT bill is to combine their tax-free allowance as a married couple or civil partner. So, their tax-free allowance can be £325,000 + £175,000 + £325,000 + £175,000 i.e., £1 million. So, a married couple or civil partner does not have to pay IHT for properties up to £1 million for family homes passed down to them.
Another strategy to avoid paying IHT is to give away property to a family member if the property owner dies after seven years of transferring ownership. If the property owner dies before seven years of the transfer, the IHT bill will be liable to the current property owner.
2. Do Not Rush the Pension Decision
Taxpayers are worried about a potential rule change on the tax-free withdrawal threshold for pensions in the upcoming budget. Currently, the tax-free withdrawal threshold for pension contributions is 25%, which is £268,275, also known as the lump-sum allowance.
A potential decrease in this withdrawal allowance has created anxiety among taxpayers. This has led to many people rushing to take their tax-free cash from their pensions before the budget. However, investment experts advise against this decision unless people have specific plans for their money. Taking out tax-free cash now may lead to people having to pay CGT or Income Tax bills later.
3. Strategies for Capital Gains Tax (CGT)
Property tax experts believe in a potential increase in Capital Gains Tax (CGT) rates. Given the history of CGT increases, this prediction may be spot-on. Currently, the CGT rates are:
Tax Brackets | Income Range | CGT rate on property | CGT rate on assets |
|---|---|---|---|
Basic Rate | £12,571 to £50,270 | 18% | 10% |
Higher Rate | £50,271 to £125,140 | 24% | 20% |
Additional Rate | Above £125,140 | 24% | 20% |
Also, the CGT allowance threshold is £3,000, which changes almost every tax year. One strategy people can use to make effective use of this allowance is splitting their sales. For instance, if you decide to sell your shares worth £5,000, you can split the sale by selling half on 5 April (the last day of the current tax year) and the other half on 6 April (the start of the new tax year), allowing you to use both years’ allowances and avoid CGT entirely.
Other strategies include offsetting gains with losses, deducting past unused losses, and transferring assets to a spouse or civil partner, all of which can help reduce your CGT liability.
Conclusion
As we approach the 2024 Autumn Budget, taxpayers are preparing for potential tax hikes, particularly in areas like Inheritance Tax and Capital Gains Tax. The anticipation of these changes has led to heightened interest in tax-saving strategies. However, it is crucial to avoid making a rash decision that can affect your investment returns in the future.
So, seeking professional help can be a wise step before making any decisions to maximise your investment.
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