Tax - Eight Reasons You Could Pay More in 2024

After the Autumn Statement unveiled a major tax cut for January, you’d be forgiven for thinking you’ll pay less tax in 2024. However, there’s every chance that, despite the cut, you’ll be paying more, because there are eight sneaky tax rises you could fall prey to.

And this is far from the end of it, because frozen thresholds and fiscal drag will keep pushing up your tax bill every year until the freeze ends – by which time the Institute for Fiscal Studies shows the average person will be paying £249 more a year in direct tax. It means we should do what we can to avoid paying more than our fair share.

1. More tax on pay: frozen income tax and National Insurance thresholds mean more people paying tax, and some paying more tax.

For the average person on full time earnings of £35,400, the cut is worth £450 in 2024/5. The IFS says this will offset the impact of the income tax threshold freeze tax up to that point, so some people will pay no more tax-related income next year than they are doing this year.

However, an awful lot of people will still be worse off. Those who have been dragged into paying income tax by the freeze on thresholds will be worse off – because before all of this there were no taxes on their earnings. By the time these thresholds unfreeze, there will be 4 million more people paying income tax.

A chunk of people on higher incomes will also pay more tax next year. This includes those who have had reasonably chunky pay rises that have taken them from basic-rate tax into paying higher-rate tax - where the extra tax from the 40% rate and 2% National Insurance more than offsets the tax saved on the slice of their income where they’ll pay basic rate tax and NI at 10%.

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2. More tax on profits: The dividend allowance falls in April from £1,000 to £500 – after being cut from £2,000 a year earlier. To add insult to injury, they’ll also be taxed at the higher rates introduced a year earlier – at 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers. Business owners who pay themselves with dividends out of profits will take a hit at a time when they’re facing threats to their businesses from all angles – from rising input prices to higher wage bills.

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3. More tax on investments: The dividend tax allowance will be a blow to investors who earn dividends outside of tax wrappers which exceed the new smaller allowance. There’s a capital gains tax blow lying in store too, with the annual allowance halved to £3,000 – down from £12,300 two years earlier. Having invested diligently for the long term to build their financial resilience, it’s going to feel particularly galling.

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4. More tax on property: property investors will pay more tax thanks to the slashing of the capital gains tax allowance. For property investors, higher house prices raise the question of capital gains tax. House prices have had a choppy 12 months, but are still only fractionally below their peak of £292,842 in August 2023. 

It means property investors are likely to be sitting on gains – particularly if they’ve held the property for a while. In September this year, someone who had bought in September 2019 would have made a gain of £57,849. This would have left them with a CGT bill even before the cuts, but now it’s even more painful.

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5. More inheritance tax: much higher house prices and frozen inheritance tax thresholds will mean more IHT. The inheritance tax nil rate band will remain at £325,000 and the residence nil rate band at £175,000 in the next tax year. Meanwhile, the IHT annual tax gift allowance is spending its fourth decade at £3,000. It means more estates will have more inheritance tax (IHT) to pay.

IHT used to be seen as a wealthy person’s tax, but a mix of booming house prices and threshold freezes mean this may not be the case for much longer. It means we’re spending much more in tax – and are likely to continue to do so. The IHT we’ve forked out so far in this tax year is around 11% more the same period a year earlier.

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6. More council tax: bills will rise up to five per cent.

Council tax will rise again in April. This wasn’t spelled out in the Autumn Statement, but reports since have claimed councils will have the right to raise bills by 5% – without holding a referendum – for the second consecutive year. Given that the government isn’t planning to give local government any more money to keep up with inflation – it’s likely that a huge number will opt for the biggest possible increase.

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7. More tax on spending: inflation could mean paying more VAT

Higher prices don’t always automatically feed through into us paying more VAT, because it depends on the balance of spending – and how much is taxed at the higher rate of VAT. However, even assuming we spend a bigger proportion of our budgets on things like food, there’s still every chance we’ll pay more in VAT in 2024. 

This year, for example, food inflation has been roughly twice overall inflation, but so far in the current tax year, we’ve still paid 8% more VAT than we did in the same period a year earlier.

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8. More sin taxes: inflation pushes up duty

Alcohol duty has been frozen until August next year, but tobacco duty will rise. Of course, as the price of alcoholic drinks and cigarettes rises, this will automatically boost the amount we spend on these things without the tax rate itself changing at all.

The big unknown in 2024 is fuel duty. The Autumn Statement based its calculations on an end to the temporary 5p cut – and for fuel duty to rise on top of that. That would be a horrible extra expense for motorists, who are already paying a fortune for fuel. In reality, the government will be hoping that its finances will improve before either of these changes kick in, so it can halt the pain. Unfortunately, there are no guarantees. Even if duty is frozen, if petrol prices rise, it could push up the amount we spend on fuel duty anyway.

And here are five great ways to cut your tax in 2024.

1. ISAs - The government offers the chance to squirrel away £20,000 in this tax year – completely free of tax. It doesn’t just protect you from the tax grab on savings and investments right now, it also protects you from any further tightening that may lie in store in the years to come.

A stocks and shares ISA will protect you from the horrible cuts in dividend and capital gains tax, while a cash ISA will protect you from income tax.

If you’re saving to buy a first property, are aged 18-39, and have at least a year until you expect to buy, you should consider a LISA, because in addition to tax free growth, you get a 25% bonus on contributions. You can save or invest £4,000 this tax year.

Don’t forget Junior ISAs too. In the current tax year, you can save or invest £9,000 in a JISA for any qualifying child, and all interest, dividends or capital gains are tax free.

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2. Pensions - You can pay up to £60,000 into a pension in the current tax year. Contributions to pensions attract tax relief at your highest marginal rate, and the first 25% taken from the pension is usually tax-free. There’s tax relief on pensions, including SIPPS, even for non-taxpayers – on the first £3,600 a year. 

It means you can contribute tax-efficiently to a pension on behalf of a child or a non-working partner. If you can afford to put more money away for the long term, it’s a great way to cut your tax bill – as well as securing the income you need in retirement.

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3. Salary sacrifice - In some cases, the government will let you give up a portion of your salary, and spend it on certain things free of tax (and in some cases National Insurance). This includes pensions, childcare vouchers, bike-to-work schemes, and technology schemes.  This won’t boost your take-home pay, but will cut your tax bill. It’s always worth checking with your employer whether they offer this.

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4. Spouse exemptions - If you’re already used your ISA allowance and you have assets that produce an income – like shares paying dividends or a property – married people should think about how they hold them. They can be passed between spouses (or civil partners) without triggering a tax bill. 

They can therefore be shared between a couple, so that both take advantage of their ISA allowances, and can both take an income up to the threshold. The balance can be held by the spouse paying the lower rate of tax, to reduce the tax payable.

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5. Marriage allowance - If one spouse is a non-taxpayer and the other is a basic rate taxpayer, the marriage allowance lets the non-taxpayer give £1,260 of their personal allowance to their spouse in the current tax year.”

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* Sarah Coles is head of finance at Hargreaves Lansdown *

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