Brace yourself for a summer of doom and gloom as Chancellor Rachel Reeves works out how to fill a gaping £40billion hole in the public finances left by Labour’s U-turn on cuts to winter fuel payments and disability benefits.
Whatever she decides, and there will be twists and turns along the way, the Autumn Budget will make last year’s seem like a walk in the park.
Although the tax grab this time will be on a similar humongous scale, it will feel more painful. Unlike last year, when Ms Reeves primarily targeted employers with £25billion of extra National Insurance costs, she will focus on our household finances, savings and investments. The financial assault will hurt.
The refusal this week to rule out a wealth tax on the country’s richest people has led to fears of a raid on people’s assets.
With evidence from around the world showing wealth taxes rarely work, we could see the Chancellor respond by hiking the taxes on wealth that already exists in the UK, hitting those with modest savings, pensions and investments.
The opening salvo will be fired in six days when Ms Reeves uses her Mansion House speech in the City of London to confirm restrictions on the ability of savers to put cash in a tax-friendly Isa. Many will end up paying more tax on the interest they earn on their cash.
Grab: Chancellor Rachel Reeves’s refusal to rule out a wealth tax on the country’s richest people has led to fears of a raid on people’s assets
It will culminate in a final assault three and a half months later when Ms Reeves spells out in gory detail the rest of her tax-raising measures.
Here, Money Mail considers what the Chancellor could do to fill the black hole she has created. We also look at what you can do to head off the financial pain coming your way.
Targeting Cash Isas
Next Tuesday, we will find out from the Chancellor the changes she intends to make to Isas.
It now seems a dead cert Reeves will confirm the cash allowance will be pared back to £4,000 or £5,000 – while those who use an Isa to invest will still be allowed to contribute up to £20,000.
Opposition to such a move is widespread among savers who value the shield a cash Isa provides against tax on interest.
Outside of cash Isas, savers are charged income tax on annual interest once it exceeds £1,000 in the case of basic-rate taxpayers – and £500 for higher-rate taxpayers.
Curbs on cash Isas have also drawn criticism from the financial services industry. Tomorrow, the organisation representing the country’s building societies and major credit unions will send an open letter to Ms Reeves urging her to relent.
The Building Societies Association (BSA) will repeat the arguments it made five months ago when it warned restrictions imposed on cash Isas could have unintended consequences on the housing market.
Namely, reducing funding for lending, driving up mortgage prices and triggering a housing market downturn.
‘This,’ it says, ‘would undermine efforts to stimulate economic growth, including the Government’s commitment to delivering 1.5million new homes’.
It also argues that restricting cash Isas will not encourage risk averse people to invest.
Instead, it calls for a campaign to educate people about the benefits of investing – ‘alongside maintaining strong support for saving’.
By forcing risk-averse savers away from cash Isas and into accounts where interest earned is liable to income tax, the Chancellor would significantly push up the annual savings tax take from its current £6billion.
Tax shelter: It now seems a dead cert Reeves will cut the cash allowance on Isas to £4,000 or £5,000 – while those who use an Isa to invest will still be allowed to contribute up to £20,000
Reducing pension tax breaks
Although Ms Reeves is also expected to use her Mansion House speech to launch a review into the adequacy of workplace pensions amid concerns that we are not saving enough, the ‘horrible’ pensions stuff will be kept back for the Budget.
Already, there are whispers that Ms Reeves will do what she stepped back from in last year’s Budget – and cut tax breaks on pensions.
This could result in a lower cap on the amount of tax-free pension cash you can withdraw from 55 or at retirement.
Currently, most people can take 25 per cent as a tax-free lump sum, subject to a maximum of £268,275.
But some leading financial think-tanks believe the cap should be set lower – at £100,000. This would expose more of someone’s pension to income tax and raise some £2billion of annual tax receipts.
An alternative would be to pare back tax relief on all pension contributions to 20 per cent. Currently, higher and additional rate taxpayers enjoy respective tax relief of 40 per cent and 45 per cent on payments.
The Institute for Fiscal Studies says such a stripping back of tax relief would raise £15billion a year for the Chancellor – but it adds that there is ‘no coherent logic’ why it should be introduced.
Squeezed: Recent figures indicate we will collectively pay £300bn of income tax in the current year, compared to £209bn five years ago
Extending freeze on thresholds
Recent figures indicate we will collectively pay £300billion of income tax in the current year, compared with £209billion five years ago when the freeze on income tax thresholds started.
This tax grab is a result of six million people being dragged into paying income tax – and 3.4million being hauled into paying higher or additional rate tax. Given such a rich vein of revenue, it seems a dead cert the freeze, scheduled to stay until 2028, will be extended.
‘Governments love this kind of stealth tax,’ says Sarah Coles, head of personal finance at Hargreaves Lansdown. ‘It rakes in billions of pounds every year without being classed as a tax rise.’
Attack on wealth
In recent days, Labour grandee Lord Kinnock has called for a wealth tax on the country’s highest earners.
He says a 2 per cent tax on those with more than £10million would raise £10billion annually.
Although such a tax has not been ruled out by Government officials, Ms Reeves did reject such an idea when in opposition.
It is more likely the Chancellor will attack ‘wealth’ more subtly down the proverbial food chain – for example, by increasing the capital gains tax we pay on gains from the sale of assets such as second homes and shares.
Currently, a higher-rate taxpayer pays 24 per cent tax on profits from selling a second home above their nil-rate capital gains tax allowance of £3,000. But if that ‘gain’ was income, it would be taxed at 40 per cent.
What you can do
Isas: Changes are unlikely to come in until next April. So if you want to protect cash savings from tax, use as much of your £20,000 cash Isa allowance as possible.
Pensions: If you are a higher-rate taxpayer and still work, contribute as much as you can into your company pension while 40 pc tax relief is still around. If you are on the cusp of retiring – or intend to use your tax-free pension cash to clear a debt – it might make sense to access it sooner rather than later. Any changes are unlikely to come in before April.
Wealth: Use your £3,000 capital gains tax allowance to bank tax-free profits from the sale of shares. To protect wealth from inheritance tax, use your various gift allowances.
jeff.prestridge@dailymail.co.uk
