Earning more doesn’t make your finances bulletproof. In fact, running a household with higher income, spending and debt, can make you more vulnerable when things change. And changes are likely to come thick and fast in the coming months.
Last month Keir Starmer warned that the upcoming 2024 Autumn Budget will be ‘painful’. But, it’s not just the rumoured tax hikes that could take a toll on higher earners. There’s a major risk flying under the radar that is still likely hit higher earners hard.
This isn’t personal advice. ISA, pension and tax rules can change, and their benefits depend on your circumstances. Scottish tax rates and bands are also different.
And remember, unlike the security offered by cash, all investments and any income they produce can rise and fall in value, so you could get back less than you invest. If you’re not sure what’s right for you, ask for advice.
What is the almost certain higher-earner hit?
In the 2022 Autumn Statement, then Chancellor Jeremy Hunt committed to freezing tax thresholds, like the personal allowance and higher-rate threshold, until 2028.
And with wages rising, but tax thresholds staying the same, more taxpayers have been quietly pushed into higher tax brackets over the past few years.
This ‘stealth’ tax is called ‘fiscal drag’.
Frozen tax thresholds don’t look to be part of the agenda in the upcoming Autumn Budget. It means that by 2028/29, there will be 3.7 million more basic-rate taxpayers, 2.7 million more higher-rate taxpayers, and 600,000 more additional-rate taxpayers than if allowances and thresholds had been linked to inflation, and the additional rate threshold kept at £150,000.
And it’s not just the tax on earnings that’s affected.
When you start paying higher rates of tax, it also affects tax on savings, dividends and capital gains.
3 Autumn Budget rumours that could impact higher earners
Budget changes to pension tax rules
There have been rumours of a potential change to tax relief to make it less rewarding for higher earners to pay into a pension. But also around restricting the amount of tax-free cash you can take.
Higher capital gains tax
Rachel Reeves has refused to rule out changes to CGT. If it was hiked to match income tax, higher-rate taxpayers investing in stocks and shares would see a rise of 100% – and a hike of 125% for additional-rate taxpayers.
Inheritance tax
There’s also been speculation that inheritance tax could be in the firing line, so the government could do anything from cutting specific reliefs and nil-rate bands to hiking the rate altogether.
What can you do?
ISAs
One essential way to shelter savings from income tax and investments from both income tax and capital gains tax is to hold them in an ISA, like a Stocks and Shares ISA.
By investing through a Stocks and Shares ISA, you can avoid UK taxes on your investments, like capital gains and dividend tax, completely.
You can put up to £20,000 into ISAs this tax year.
Pensions
Your pension is key. The fact you get tax relief at your highest marginal rate, at the moment, means higher earners in particular should take as much advantage as makes sense for your finances.
Money paid into a pension, like a Self-Invested Personal Pension (SIPP), will grow without having to pay UK income or capital gains tax on it – plus you get tax relief from the government on what you pay in.
The amount you can pay in, and the amount you can get tax relief on, depends on your circumstances.
If you pay tax at a higher rate, you can benefit from higher rates of tax relief.
It means, adding money to a pension can push people out of paying a higher rate of tax altogether.
Remember, you can only usually take money out of a pension from age 55 (rising to 57 from 2028).
Help from a partner
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, and they might pay a lower rate of tax on the balance.
Gifting
Questions around the future of inheritance tax could encourage people to consider giving gifts during their lifetime.
This also gives you more control over how the money is given.
You could, for example, put it into a Junior Stocks and Shares ISA (JISA) for a child under 18 if they’re eligible.
Once opened by a parent or legal guardian, friends and family can put in up to £9,000 every tax year. And when they turn 18, they can withdraw the money, without having to pay UK income or capital gains tax.
Remember though, even though the money within the JISA belongs to the child, they can’t make any withdrawals from it until they hit 18.
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Tax-free cash
Don’t take tax-free cash just because you can.
You’re removing it from a tax-efficient account, which means you could pay tax on it down the line.
At the same time, if you’re putting it into cash savings, you may miss out on the potential growth within a pension.
If you’ve already taken your tax-free cash and stashed it as savings, like with your high street bank, it could be worth thinking about putting some of it into a tax-efficient account, like a Cash ISA.
If you’ve used your ISA allowance for this tax year, it’s worth at least trying to get the best savings rate possible.
Most high street banks are still offering rates below inflation, meaning you’re losing spending power.
Finding better rates is a no-brainer.
Lots of us just don’t want the hassle of searching rates tables, opening new accounts and juggling logins.
With Active Savings you don’t have to.
You can find great rates from multiple banking partners, all through one easy-to-use online account.
Plus, if you act by 26 September, you could get cashback. Terms apply.
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