How to save tax after the Chancellor’s Autumn Budget

Sarah Coles, personal finance analyst at Hargreaves Lansdown, comments on the impact on individuals and gives advice on How to save tax after the Chancellor’s Autumn Budget.

Key points:

The Budget included tax rises of £16.7 billion a year by 2026-27 (OBR).
By 2026/27 we’ll pay 36.2% of GDP in tax, the highest percentage since the early 1950s (OBR).
Taxes will have increased by £3,000 per person since Boris Johnson became PM (Resolution Foundation).
The Chancellor has raised taxes by more this year than in any year since 1993 (OBR).

Sarah Coles said:

“Brace yourself, because a tax raid is on the way: on average we’re set to pay £3,000 more than when Boris Johnson first became prime minister. With our household budgets already stretched to breaking point, few of us can afford that kind of a tax hit. So while we all want to pay our fair share, it’s worth considering how to avoid paying over the odds.

“Tax on pay will be responsible for the lion’s share of the increases, after income tax thresholds were frozen, and the Chancellor announced that 1.25 percentage points will be added to national insurance in April (which will then become the health and social care levy a year later). In 2025/26, the Office for Budget Responsibility forecasts that the health and social care levy will cost us around £19.3 billion a year. When the freezing of the tax thresholds was announced, it also calculated that by 2025/26 we’ll be paying £8.2 billion more a year in income tax as a result.

“Tax on investments is also on the up. If you make more than £2,000 in dividends outside an ISA, you’ll face tax, and the Chancellor will hike the rate by 1.25 percentage points from April. By 2025/26 this is set to cost us £815 million a year. And at the same time, the capital gains tax threshold has been frozen, so if you realise more than £12,300 in capital gains in a single year, you will pay tax. By 2025/26 this will cost us an extra £30 million a year.

“Inheritance tax is also set to rise, thanks to the freezing of the thresholds in the March Budget. By 2025/26 the OBR says the freeze will cost us an extra £445 million a year. But we don’t need to sit back and let the taxman fill his boots, because there are plenty of ways we can avoid paying more than our fair share of tax.”

10 ways to cut these taxes:

If you’re employed, check to see if your employer offers a salary sacrifice scheme, to cut income tax and NI. These involve you and your employer agreeing to cut your salary and pay the equivalent into benefits with tax and national insurance breaks. This includes pensions, pension advice and cycle to work schemes. It means you get the full value of your pay – without any tax or NI taken off – paid directly into your benefits.
If you make charity donations, higher rate taxpayers can claim back the additional tax relief through self-assessment.
If you’re self-employed, make sure you claim for everything you’re entitled to that will bring your tax bill down, including all allowable expenses, pension contributions and charity donations.
The most effective way to cut tax on investments is to make use of your ISAs. The Budget didn’t include any changes to the allowances, so you can shelter up to £20,000 a year in an ISA, and all income and growth is completely tax free.
Assets can be passed between spouses without triggering a tax bill, so between you, you can shelter £40,000 a year in ISAs.
If you don’t have enough allowance to hold your entire portfolio in ISAs, income-producing assets can be shared between a married couple, so that both take advantage of their allowances. The balance can be held by the spouse paying the lower rate of tax, to reduce the tax payable.
You can also prioritise income-producing investments within your ISAs, and growth investments outside them. This means you can take advantage of the lower rate of tax on growth, and the availability of annual capital gains tax allowances to help you manage the tax bill on gains.
If inheritance tax worries you, you can avoid paying more than your fair share by giving your family gifts during your lifetime rather than leaving it all in your will. Not only does it have tax benefits, it also means you get to see them enjoy their gifts while you’re still around.
You get a gift allowance of £3,000 each year that falls out of your estate immediately for inheritance tax purposes. You can also give small gifts of up to £250, specific gifts for family weddings and unlimited regular gifts from income.
Outside the gifting allowances, you can make gifts of any size (known as potentially exempt transfers) and as long as you live for at least seven years after handing it over, it falls outside of your estate for inheritance tax purposes. If you die before the seven years are up, and your estate is subject to IHT, you will have to pay tax on some of this.