Speculation continues apace over the likely measures in next month’s Budget, especially after what is seen by political analysts as a bruising week for the government.
However, scope for manoeuvre by Chancellor Jeremy Hunt appears limited and business consultancy Hargreaves Lansdown says there’s no suggestion that effective tax hikes (the frozen tax thresholds and the halving of the dividend tax and capital gains tax thresholds) will be reversed. Indeed, she warns that there’s a risk the government will tinker with tax rules to generate more income.
Here the consultancy gives landlords and the wider community some ideas on how to prepare for what may be a less generous Budget than some had anticipated.
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Like Christmas, Budget speculation seems to start earlier each year. And like Christmas, there’s always a reasonable chance that an awful lot of it is over-hyped and not as good as it initially seems. There is, however, still a chance to protect ourselves from what is – and isn’t – in the Budget.
We’ve already had a wide range of potential tax breaks floated, none of which will protect investors, and all of which were followed swiftly by statements that there’s not much room for a big tax giveaway. At the same time, there’s no hint of change on some of the tax policies that are hurting millions of people – including the freeze in the income tax thresholds, and the plans to slash dividend tax and capital gains tax allowances in April. It means there remains a risk you’ll actually end up paying more tax.
However, there’s an opportunity to protect ourselves in advance – just in case this Budget bites.
- Make use of this year’s capital gains tax allowance: We need to be prepared for the Chancellor to do nothing to protect us from paying more tax on investments. The cut to the capital gains tax allowance leaves us with just £3,000 a year from April 6, which takes us back to miserly levels we haven’t seen since 1981/82 – more than 40 years ago. Inflation since then means £3,000 in 1981 had the buying power of more than £15,000 today. It means it’s worth considering your capital gains tax allowance, which this year is £6,000, and whether it makes sense to use it. If you’re building up a gain, and you can realise it over a period of years, it’s worth considering how you plan to do it, and when to start.
- Protect your investments in an ISA: The cut to the capital gains tax allowance in April would be painful enough on its own, but it comes alongside the dividend tax allowance dropping to just £500. This allowance is now just a tenth of the size it was when it was first introduced in 2016. There’s every chance there’s nothing in the budget to reverse this plan.The best way to protect investments from both dividend tax and capital gains tax is to hold them in an ISA. You can move existing investments into ISAs through share exchange (also known as bed and ISA), so you can protect up to £20,000 in the current tax year. If you have too many investments to shelter them all, the fact you have more control over when you take capital gains than when you earn dividends means when you’re using this year’s ISA allowance it may make sense to prioritise income-producing assets.
- Consider your pension: The annual pension allowance was raised this year to £60,000. The fact you get tax relief at your highest marginal rate means higher earners in particular should look to take as much advantage as makes sense for their finances. There’s no suggestion that the government plans to attack pension tax relief in this Budget, but neither the annual allowances or the principle of tax relief are ever set in stone, so it makes sense to take advantage while you can.
- Don’t forget the rest of your family: The Junior ISA allowance has been £9,000 a year since April 2020 – the highest this allowance has ever been. It means there’s a real opportunity to put aside a nest egg for qualifying children, and protect this money from tax at the same time.
- Consider your savings: Frozen thresholds mean more people paying higher rates of tax, at which point their personal savings allowance shrinks significantly (from £1,000 for basic rate taxpayers to £500 for higher rate taxpayers or £0 for additional rate taxpayers). If the Budget does nothing to protect your savings from higher rates of tax, you can do it yourself by saving in a cash ISA. This has the added benefit that if the government were to decide the personal savings allowance is the next candidate for cuts, your cash would be protected.
* Sarah Coles is head of personal finance at Hargreaves Lansdown *
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Of more concern is preparing for the next government.
Not much of the article is applicable to landlords.
Can't divide a house into nice CGT friendly slices.
Can't put a house in an ISA.
Can't pay rental profits into a pension. Not your own pension but there is plenty of scope to contribute to other people's pensions.
I currently have a ZHC job mainly for exercise and pay all of the income into my SIPP. I also have a directors salary which ensures I get a NI credit. This also goes into my SIPP.
Then I contribute £100 a month into SIPPs for 5 grandchildren plus I've recently started making regular payments into my eldest son's SIPP to help protect his Child Benefit. I was horrified to discover he was facing an 87% tax take on a slice of his earnings.
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