In recent nights, American science-fiction film Back To The Future has flitted into my thoughts as I have lain awake worrying about Rachel Reeves’ ruinous Budget in seven days’ time.
Weird? Yes. Time to see my GP? Maybe, if I could get an appointment. But it does make sense, so hear me out.
For a start, the film is back in our cinemas following its 40th anniversary and I’m tempted to see how well – or badly – it has aged.
There’s also a big chunk of me wishing that, like the movie’s main character Marty McFly, we could all be transported back in time.
While Marty’s time-travelling journey and his accidental meddling with the past threatened his very existence, ours would have real purpose.
It would be to go back to July 4 last year and hold the general election knowing what we now know about Labour.
Flip-flopping: Rachel Reeves has ruled out a manifesto-breaking income tax hike only days earlier she had signalled to all and sundry was coming our way in the Budget
Namely that its manifesto wasn’t worth the paper it was written on, and Labour does what Labour always does. That is, spend taxpayers’ money like crazy, smother us in a cloak of taxes and push the country towards an economic precipice.
Yes, we might still have voted out the Tories after 14 underwhelming years in government. But I don’t think we would have ended up with a Labour administration as Left-wing as this one – and a Tory opposition so emasculated.
Over the past few days, my jaw has dropped watching Rachel Reeves commit a spectacular U-turn on income tax: ruling out a manifesto-breaking increase in the basic rate that only days earlier she had signalled to all and sundry was coming our way in the Budget.
It’s clear now more than ever that the incompetent Ms Reeves is a Chancellor in name only.
She is a mere puppet, a patsy, whose strings are being pulled by backbenchers more Left-wing than former Labour stalwart Jeremy Corbyn ever was.
The result is that the Budget next week will involve the Chancellor taking a sledgehammer to our household finances and wealth.
Whether it’s our hard-earned salary or retirement income, our pension or cash Isa, our investments or lovely home, Ms Reeves is set to daub them in big dollops of extra tax.
It will be a smorgasbord of increases rather than one big manifesto-breaking income tax hit.
Taxes aimed at the thrifty and hard-working who have bought their own homes and meticulously put money aside all their life.
The £30 billion-plus assault will involve stealth taxes that take ever greater chunks out of our income.
And it will comprise taxes that chip away at personal wealth: not only our ability to accumulate it but to hang on to it and pass sums on to loved ones before we die.
Here, I spell out the key tax raising measures likely to feature in the Budget – and crucially highlight steps (some last-minute) you can take to shield your wealth from Financial Doomsday (aka the Budget).
What’s coming our way
Just over two weeks ago, Ms Reeves stood in No 10 Downing Street and gave every indication she would be breaking Labour’s election manifesto (again) by increasing income tax rates in the Budget. Subsequent speeches made by the Chancellor reinforced this message.
Yet late last week, she did the U-turn I have just mentioned. The income tax rise was abruptly knocked on the head because Labour MPs (most diehard socialists) weren’t happy and threatened a mutiny (the heads of Ms Reeves and the Prime Minister) if it featured in the Budget.
Observing from the sidelines, I couldn’t believe what I was seeing and hearing. Chaos. Utter chaos, underpinned by a layer of incompetence.
The result is that next Wednesday’s Budget will be truly awful and squarely aimed at the middle classes. We are going to be taken to the proverbial cleaners.
With an income tax rise now off the agenda, you would have thought that our incomes – whether earnings or retirement money – would be safe from any Budget nasties.
Nothing could be further from the truth. As my late mother would say, there’s more than one way to skin a cat – and Ms Reeves will still skin our income next week by extending the freeze in income tax thresholds by two years to April 2030.
It means the personal allowance will remain at £12,570 (as it was in 2021), while the thresholds for higher and additional rate tax will stick at £50,270 and £125,140.
This extended freeze will drag yet more people into tax, even pensioners existing on little more than the state pension.
It will also expose bigger chunks of people’s income to higher tax rates. It’s a move that will raise the Chancellor some £8 billion of extra annual revenue.
Of course, she could go further and reduce the 40 per cent tax rate threshold to between £45,000 and £46,000 to dovetail with Labour’s (apparent) definition of the ‘working people’ that its manifesto committed to protect.
She might also cut the threshold at which 45 per cent tax kicks in. But I’m speculating, so let’s wait until Wednesday to see if that happens.
More taxes on our homes are a dead cert with middle-class families being targeted – as well as those living in £2 million-plus properties.
Savings: The Chancellor has signalled that the amount that can be squirrelled away inside a tax-friendly cash Isa will be cut from £20,000 a year to as low as £10,000
For those of you who live in ‘band F, G and H’ homes (the most expensive), higher council tax bills are likely, with some homeowners paying thousands of pounds more a year.
A 1 per cent annual mansion tax will also be imposed on homeowners living in properties worth £2million-plus. The tax will apply to the home’s value in excess of the £2 million threshold.
Yet most of the extra taxes will centre on our pensions, savings and investments. While Ms Reeves will not curtail our right to take tax-free cash from our pension, she will not leave pensions alone.
In her sights are ‘salary sacrifice’ work pensions which help cut National Insurance (NI) bills for both workers and employers.
A third of private sector employees use these schemes to fund their retirement, but Ms Reeves is keen to recoup a big slice of the £4.1 billion she loses a year in NI receipts.
She could also cut the £60,000 annual cap on the amount you can save into a pension without compromising your right to tax relief on contributions.
On investments, higher taxes on capital gains made from share sales above the annual exemption allowance of £3,000 are likely.
Currently, they stand at 18 per cent and 24 per cent for basic and higher-rate taxpayers – and could edge closer to equivalent income tax rates.
Taxes on annual share dividends could also rise. They stand at 8.75 per cent, 33.75 per cent and 39.35 per cent for basic, higher, and additional rate taxpayers respectively – and are applied on dividends received above a £500 annual tax exemption.
On savings, the Chancellor has already signalled that the amount that can be squirrelled away inside a tax-friendly cash Isa will be cut from £20,000 a year to as low as £10,000. The reduction will kick in from next April.
Finally, a clampdown on the amount of money that we can give away during our lifetime to loved ones to reduce the tax on our estate when we finally die is also on the cards. Bleak, eh?
What can I do to keep my money?
Quite a lot. In most cases (not all), any Budget tax changes are unlikely to bite until the new tax year next April.
So, time is on your side, but the quicker you act the more financially reassured you will feel.
One: If you are a keen saver, use as much of this year’s £20,000 cash Isa allowance as you possibly can before next year’s cut. But be sure to get a stellar rate of interest on the money you squirrel away. Also, check any cash Isas taken out previously are still fit for purpose. If they are earning meagre interest, transfer them to a new provider offering a better rate.
Two: Check that as much of your savings held outside of a cash Isa is protected by the annual personal savings allowance. This is worth £1,000 for basic-rate taxpayers and £500 for those paying 40 per cent income tax (additional-rate taxpayers don’t get an allowance).
If you are married and one of you pays 20 per cent income tax and the other 40 per cent or 45 per cent tax, rearrange the household savings so that the basic-rate taxpayer’s larger allowance is fully utilised.
Three: Although cash Isas and personal savings allowances should be the first and second ports of call for savers, consider NS&I Premium Bonds.
Monthly prizes are tax-free and the annual prize rate is a half-decent 3.6 per cent. Those aged 16 and over can hold up to £50,000 of bonds.
Four: For those who prefer to invest rather than save, use as much of your current £20,000 annual Isa allowance as you can to shield shaper centres and funds from tax. Outside of Isas and pensions, long-term investing will get a hell of a lot more expensive under Labour.
Five: For investors with non-Isa portfolios, consider taking some profits ahead of the Budget, utilising your annual capital gains tax exemption of £3,000.
Although any profits above £3,000 would result in a capital gains tax (CGT) bill, it would be lower than that incurred post-Budget if Ms Reeves does what she did last year and jacks up CGT straightaway.
Six: Look to rearrange your non-Isa investments so they are as tax efficient as possible. Consider ‘Bed and Isa’, which allows you to move existing shareholdings into your Isa.
You sell the shares and then buy them back straightaway inside your Isa. The amount that goes into the tax wrapper counts towards your annual £20,000 allowance while the ‘bedding’ (sale) of the shares will be tax-free if below the annual £3,000 CGT exemption.
A broker or an investing platform will facilitate this.
Seven: Transfer some investments to your spouse if they are paying a lower rate of income tax. You will then have two sets of annual tax-free dividend allowance and CGT exemption. Such interspousal transfers can be organised by your broker or investing platform.
Eight: Don’t let Budget noise stop you paying into your pension. Use as much of your £60,000 annual allowance as you can. As with Isas, consider ‘Bed and pension’ where shares held in an investment portfolio are sold and then rebought inside your tax-friendly pension.
Nine: If you are keen to pass on wealth to loved ones before you die (helping you mitigate a future inheritance tax bill), take advantage of current allowances (they could get chopped next week).
They include an annual gift allowance of £3,000 that can be made to one person or split between several people. Also, if you didn’t use the allowance in the tax year ending April 5 this year, you can utilise that, too. This means you and your spouse could pass on £12,000 to friends and relatives.
Annual ‘small’ gifts of £250 can also be made to any number of other people. Such gifting is straightforward, but keep records of when gifts were made, to whom and the amount.
Ten: I do hope some of these ideas spur you into protecting your finances from next Wednesday’s Budget. For me, it’s back to the future!
jeff.prestridge@dailymail.co.uk
