How to Reduce the Impact of Tax Rises in Rachel Reeves’ First Budget

Nick Pensions & Benefits, Saving Money, Investing events, property, pensions, benefits, Tax 0 Comments

The first budget under new Labour Chancellor Rachel Reeves is scheduled for Wednesday 30 October 2024.

Speculation is rife about potential tax rises aimed at addressing the country’s economic challenges. But while tax increases appear inevitable, there is still time to take proactive steps to minimize their impact on your finances.

Here are some tips for how to prepare for and reduce the burden of potential tax hikes.

1. Maximize Tax-Efficient Savings and Investments

One of the most effective ways to shield your income from higher taxes is by taking full advantage of tax-efficient savings and investment vehicles.

• ISA Allowances: The annual ISA (Individual Savings Account) allowance is currently £20,000. Money saved in an ISA grows tax-free, meaning you won’t pay any income tax, dividend tax, or capital gains tax (CGT) on your investments.
• Pensions: Contributions to a pension scheme are tax-deductible, reducing your taxable income. Higher-rate taxpayers especially benefit from pension contributions, as the tax relief is more substantial. Consider increasing your pension contributions to mitigate the impact of income tax rises.
• Premium Bonds: These offer a chance to win tax-free prizes each month. While the odds of a big win may be slim, any winnings are tax-free. Some other National Savings and Investments products, like certain Savings Certificates, also offer tax-free interest.
• Venture Capital Schemes: For those willing to take on more risk, schemes like the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) offer significant tax reliefs, including income tax relief and capital gains tax exemption on profits.

2. Plan for Capital Gains Tax Changes

Capital Gains Tax is another area where changes could occur, with Ms Reeves potentially increasing the rates and/or reducing the annual exemption. Here’s how to manage potential CGT hikes.

• Utilize Your CGT Allowance: The annual CGT exemption is currently £3,000 (reduced from £6,000 in 2023/24). In case this tax-free allowance is further reduced, it might be wise to realize gains now to make the most of the current threshold.
• Gift Assets to Family: If you’re planning to pass on wealth, gifting assets to family members before any CGT increase could be beneficial. Gifts between spouses are exempt from CGT, allowing you to transfer assets and take advantage of both partners’ allowances.
• Consider Tax-Loss Harvesting: Offset capital gains with capital losses. If you have investments that have performed poorly, selling them to realize a loss can help offset gains elsewhere in your portfolio.

3. Review Your Income Structure

Reeves may target income tax thresholds and reliefs, particularly for higher earners. Reviewing how your income is structured could help mitigate the impact.

• Salary Sacrifice Schemes: Consider participating in salary sacrifice schemes, where you give up part of your salary in exchange for benefits like pension contributions, childcare vouchers, or cycle-to-work schemes. This will reduce your taxable income.
• Dividend Income: If you run a business or own shares, taking income as dividends can be more tax-efficient than a salary, particularly if the dividend tax rates remain lower than income tax rates.
• Spousal Income Splitting: If your spouse is in a lower tax bracket, transferring income-generating assets to them can reduce your overall tax burden. This is particularly useful for rental income or dividends from jointly held investments.

4. Prepare for Potential Property Tax Changes

Property taxes, including stamp duty and council tax, could see reforms or increases. Here’s how to plan.

• Advance Property Transactions: If you’re considering buying property, it may be wise to do so before any potential stamp duty increases are announced. Locking in current rates could save you significant costs.
• Consider Downsizing: If you anticipate increased council tax rates or other property-related taxes, downsizing to a smaller home could reduce your future tax liabilities and lower your overall living costs. And, of course, doing this should release some of the equity in your property, which you can then use to help maintain your standard of living.

5. Enhance Charitable Giving

If Reeves increases income tax or reduces the thresholds for higher tax rates, charitable giving can become a more attractive option.

• Gift Aid: Donations made under Gift Aid are tax-efficient, as charities can claim an additional 25% from the government. Higher-rate taxpayers can claim back the difference between the basic rate and higher rate of tax on their donations.
• Donor-Advised Funds: These funds allow you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. It’s a strategic way to manage charitable giving while benefiting from tax relief.

6. Stay Informed and Seek Professional Advice

Tax planning can be complex, especially in an uncertain economic environment. Staying informed about potential changes in the budget and seeking professional financial advice can help you adapt your strategy to minimize your tax liabilities effectively.

• Monitor Budget Announcements: Keep an eye on the budget and any subsequent economic statements to understand how proposed changes might affect you. Quick responses can sometimes yield significant tax savings.
• Consult a Tax Adviser: A qualified tax adviser can help tailor a tax-efficient strategy to your individual circumstances, taking into account your income, assets, and long-term financial goals.

Closing Thoughts

While tax rises under Rachel Reeves’ first budget may be inevitable, UK residents have various strategies at their disposal to mitigate the impact.

By taking advantage of tax-efficient investments, restructuring income and staying informed, you can protect your wealth and ensure that any tax increases have a minimal effect on your financial well-being. As always, professional advice tailored to your specific situation is invaluable in navigating these changes effectively.

If you have any comments or questions about this post, please do leave them below. But bear in mind that I am not a qualified tax adviser and cannot provide personal financial advice. All investing carries a risk of loss.