How much more can we be taxed? That’s been a common conversation I’ve had with friends, family and colleagues not just since Labour have been in power, but since the pandemic.
I’d hazard a guess it’s been a hot topic in your circles too – ranging from stories of people uprooting to move to more tax-friendly countries, like Dubai and Portugal, to bemoaning the rising cost of everything in Britain.
The tax rot began in my view, when the previous Tory government froze income tax thresholds, creating fiscal drag of epic proportions.
Millions more will be dragged into the higher tax rate net in the rest of the decade for earning more than £50,720 – if it went up by inflation, the 40 per cent tax band should be more like £75,500.
It’s no longer an outlier to be a higher-rate taxpayer, but feels like its shifting more towards the norm, and it’s hard for the Government to wean itself off the money it brings in.
Add to that rising council tax, water bill hikes that have been eye-watering, increasing train prices… the list goes on and on, and I feel more than ever, hard-working Britons are fed-up.
Bold moves: The Chancellor stamped her mark with the Autumn Budget
Many are at boiling point once they calculate how much of their monthly salary is hoovered up by tax and these rising, unavoidable, bills.
And the Chancellor has added her own special ingredients into the mix, such as NI hikes for employers, farm inheritance tax changes, culling the winter fuel allowance and sticking with those frozen tax bands, with plenty of other examples below.
For the middle-classes, it has resulted in changes to their financial behaviour in the past year, as they look to shield themselves from a larger and larger tax grab, from Isas to sidestepping a future inheritance tax burden…
1. Stuffing cash into Isas
A few months ago, when it was rumoured Rachel Reeves was considering chopping the £20,000 annual allowance for cash Isas to £4,000, the first thing that sprang to mind was… if she didn’t say this wasn’t happening, more Britons would see the 2025/26 tax year as a last chance to stuff their tax-free accounts with cash.
Last month, she said she wouldn’t cut the £20,000 overall Isa limit, but didn’t say the cash element was off limits.
This lack of commitment has essentially resulted in far more money heading into cash Isas, as people see it is as a last chance opportunity to stick £20,000 into tax-free savings, rather than invest it.
If the cash allowance was cut to £4,000, it would take five years to be able to fill the same amount. Isas are crucial to higher and additional-rate taxpayers, as they keep their savings interest tax-free.
Lo-and-behold, a humongous £14billion was placed in cash Isas in April, the highest figure for any month since Isas were introduced in 1999, according to the Bank of England.
It’s likely a big chunk of that has been diverted away from stocks and shares – the very product Reeves is looking for Britons to turn to.
Bloated piggy: The amount of money headed for cash Isas rocketed in April
2. Sidestepping future inheritance tax
One of the big Budget moves was to announce pensions would no longer be exempt from inheritance tax calculations.
It is likely that roughly 10 per cent of estates will be hit with IHT when the move takes place in 2027 – up from 4 per cent today. I’d expect that figure to grow higher still in the 2030s.
The Treasury is now predicted to rake in a total of £66.9billion between 2024 and the end of the decade, when the annual inheritance tax take will hit £14.3billion.
What this has done has put IHT into even sharper focus and it’s likely many more savvy Britons are already planning to avoid a future tax sting for their descendants.
We’re not talking ultra-wealthy here. We’re talking hard working people who own a home and have saved diligently for their retirement.
The IHT plans include using the maximum tax-free gifting of £3,000 a year to children, grandchildren and relatives, and then going above that to try to benefit from the seven-year rule for giving more away.
It is also clear that interest around gifting surplus income has gained plenty of traction this year, if our traffic statistics are anything to go by.
This week, we had a story on a 59-year-old who is gifting his two daughters a monthly income from his self-invested personal pension – and you can read how to successfully do it without penalty (AKA, keep good records).
3. Moving pensions into Isas
When This is Money senior reporter Angharad Carrick wrote an article titled: Could you fall into the pension inheritance tax trap? We reveal how four families could face huge bills, there was a flurry of reader comments below stating they were busy emptying their pensions into Isas.
It’s a good bellwether to see what’s happening in the world of personal finance.
Trust me when I say… us journalists and editors take note of what you’re saying in those comment sections.
The jury is out whether this is a good move – indeed Ian Cook, chartered financial planner at Quilter Cheviot, warns emptying a pension into an Isa to dodge inheritance tax could backfire.
Nevertheless, it’s clear that some people are choosing to take this road, all thanks to a changing of goalposts when it comes to IHT and pensions.
Some people unfortunately feel the need to act and potentially rush into quick decisions.
4. Earning £100,000 is a burden
There is a feeling among those working their way up the earnings ladder that tipping above an annual salary above £100,000 is a financial own goal.
Some reader comments on our recent stories on six-figure earners state earning £100,000 doesn’t make you wealthy.
A large reason for this is the fact a 60 per cent income tax rate effectively comes in for those earning between £100,000 and £125,140.
This is thanks to a move in April 2009. Against a backdrop of emergency financial crisis measures, Chancellor Alistair Darling announced the personal allowance would start to be removed at a rate of £1 for every £2 earned above £100,000.
It wasn’t fixed by the Conservatives, it hasn’t been fixed by the current Chancellor and hard-working people are starting to wonder if it is worth tipping over this salary level, hitting productivity and willingness to push careers to the limit.
With an enhanced childcare programme now available to those who earn under £100,000 with savings of potentially £8,000 per year, you can see the dilemma.
Sure, a nice dilemma – but a dilemma for being successful in a chosen career path nonetheless.
What would you add to the list? Let us know in the comments section below or email: editor@thisismoney.co.uk
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