Chancellor Rachel Reeves will deliver her first Spring Statement on Wednesday 26 March and we’re expecting several billion pounds in spending cuts to be announced.
We’re also expecting an update on the state of the public finances. This has sparked rumours that if there’s a risk of breaking Rachel Reeves’ fiscal rules, more bad news could be on the cards.
The government has said that with the Spending Review expected in June and a big Budget just passed, the Spring Statement shouldn’t usher in any major changes. However, as the Chancellor plans to write to the Office for Budget Responsibility today, it has been reported that she could bring forward some key spending decisions.
The focus on spending changes should help ease concerns of anyone fearing a repeat of the tax hikes in the Autumn Budget. But with the chancellor not having the fiscal headroom she needs, the rumour mill has been churning.
And one of the biggest rumours has been around what Reeves will do to income tax, if anything at all.
This article isn’t personal advice. If you’re not sure an action is right for you, ask for financial advice. Remember, ISA, pension and tax rules can change, and benefits depend on individual circumstances. Unlike the security offered by cash all investments and any income they provide can fall as well as rise in value so you could make a loss.
With the Spring Statement just around the corner, make sure you don’t miss out on what Rachel Reeves announces and potentially changes, and what it means for your money.
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Will Rachel Reeves extend frozen income tax thresholds?
One of the most persistent rumours has been a possible extension to the freeze on income tax thresholds to help make the maths stack up.
At this stage, it’s only speculation, and would rely on this change not being classed as ‘major’, which is highly debatable.
But we’ve felt a stealthy squeeze on our wallets ever since the tax thresholds were frozen in 2021/22, so speculation that we might have to endure it for even longer is highly unwelcome.
The freeze has already hit taxpayers hard.
In 2024/25 there are an estimated 37.4 million income taxpayers, up 4.4 million from when thresholds were frozen in 2021/22. There are 2.1 million more basic-rate taxpayers, 1.88 million more higher-rate taxpayers and 610,000 more additional-rate taxpayers – more than double the number before the freeze.
There are also around 8.5m taxpayers over State Pension age – around a quarter more than before thresholds were frozen.
A longer freeze could mean dragging even more people into paying more income tax.
But 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.
A longer freeze on thresholds might appeal to the government, because focusing on thresholds rather than the headline tax rate means it’s not technically a ‘tax rise’.
It also guarantees you won’t be left with less money than today – just that more of any pay rise will be taken by the government.
What can you do? – 3 tax saving tips
Whether we get this change or not, it’s a great reminder of how valuable it can be to help shelter your savings and investments from tax changes that any government might bring in.
Harness the power of pensions
You can pay up to £60,000 into a pension, like the Self-Invested Personal Pension (SIPP), in the current tax year. You can get tax relief at your highest marginal rate when you pay into a pension, and the first 25% taken from the pension is usually tax-free and the rest taxed as income.
If you’re a non-taxpayer, you can get tax relief on the first £3,600 a year.
It means you can contribute tax-efficiently to a pension on behalf of a child or a non-working partner. If you can afford to put more money away for the long term, it’s a great way to cut your tax bill – as well as securing the income you need in retirement.
Remember you can only normally access money in a pension from age 55 (rising to 57 by 2028).
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Make the most of your ISA allowances
Each tax year you get an ISA allowance. This tax year the government is offering the chance to squirrel away up to £20,000 – completely free of UK tax. So, there’s a chance to take advantage before the end of the tax year.
This is particularly valuable for higher earners who have a smaller savings allowance, and pay a higher rate on the excess.
Investing through a Stocks and Shares ISA means you won’t have to pay capital gains or dividend tax, while saving through a Cash ISA will shelter you from income tax.
If you’re saving to buy a first property, are aged between 18-39, and have at least a year until you expect to buy, you could consider putting up to £4,000 a year into a Lifetime ISA.
That’s because in addition to tax-free growth, you get a 25% bonus on what you put in, up to a maximum of £1,000.
Just remember, any withdrawals that aren’t a qualifying first home purchase or after age 60, are usually subject to a 25% penalty, meaning you could get back less than you put in.
Don’t forget Junior ISAs (JISAs) too. In the current tax year, you can save or invest £9,000 in a JISA for any qualifying child, and all interest, dividends or capital gains are UK tax free. It means more of what you pay in will benefit the child when they can take the money out at 18.
Don’t forget about Share Exchange
If you have investments outside a Stocks and Shares ISA, you can use the Share Exchange (Bed & ISA) process to move them into an ISA.
How to do Share Exchange
If you have shares in an HL Fund and Share account, you can use the Share Exchange (Bed & ISA) process to sell them outside an ISA, move the cash into the ISA wrapper and buy back the shares again, all in one instruction. You have to stick to your overall £20,000 ISA allowance though.
When your investments are in an ISA, you won’t have to worry about future UK dividend tax or CGT.
But don’t forget about your £3,000 CGT allowance when you’re selling investments to move into an ISA. It could help you but any proceeds raised over the £3,000 allowance could trigger a charge.
Use your spouse exemptions and marriage allowance
If you’ve already used your ISA allowance and have assets that produce an income – like shares paying dividends or a property – married people should think about how they hold them.
They can be passed between spouses (or civil partners) without triggering a tax bill. They can therefore be shared between a couple, so that both can take advantage of their ISA allowances, and both take an income up to the threshold. The balance can be held by the spouse paying the lower rate of tax, to help reduce how much tax you have to pay.
Married couples and civil partners can also transfer some of their income tax personal allowance to their spouse.
If you earn less than the £12,570 personal allowance and your spouse is a basic-rate taxpayer, you can gift £1,260 of your allowance. This could save them 20% tax on that £1,260 – a potential saving of up to £252.
Better still, you can backdate this saving four tax years, so they could keep even more in their pocket.
(Photo by Jonathan Brady - Pool/Getty Images)