The Budget brought a short-term reprieve for investors

The Budget spared investors for now – so make sure you use up all your your allowances.

For all the fanfare about cheaper draught beer and sparkling wine, few will be raising a toast to last week’s Budget. Tax rises and personal-allowance freezes will leave the average household £3,000 a year worse off next year than they were at the time of the last general election, according to calculations by Hargreaves Lansdown. The already-announced health and social care levy, a 1.25% rise in national insurance that takes effect next April, plus an associated dividend-tax rise, will net the Treasury £13bn a year. 

More insidious are frozen personal allowances. In April, the chancellor froze the basic-rate tax band at £12,570 and the higher-rate band at £50,270 until 2026. At a time of high inflation and strong wage growth, many earners will be sucked into higher bands over the coming years: the Office for Budget Responsibility (OBR) estimates that an extra one million taxpayers could be paying the higher rate by 2026. Several other thresholds – including the capital-gains tax (CGT) allowance, pension contributions and inheritance tax – have also been frozen. The “stealth tax raid” looks set to raise £47bn over the next five years, says Laith Khalaf of AJ Bell. Taxpayers always face “fiscal drag” – the practice of the Treasury holding tax threshold increases below the rate of wage increases. Yet these frozen thresholds amount to “fiscal drag on steroids”. The freeze means a taxpayer earning £80,000 could pay an additional £5,505 in tax over the next five years, assuming current OBR forecasts for wage growth and inflation.  

There are some winners at the lower end of the income spectrum: households on universal credit will enjoy a slightly lower “taper rate” of tax on extra income, while the national living wage has been raised. A planned fuel-duty rise has been scrapped, although soaring oil prices mean motorists are unlikely to notice. Overall, the OBR says that Britain is heading for levels of taxation not seen since the 1950s.

The dogs that didn’t bark

For investors, most important were the dogs that didn’t bark. A widely discussed rise in CGT didn’t materialise, while higher-rate tax relief on pension contributions once again escaped the chopping block. The pensions lifetime allowance remains frozen at £1.073m, with the annual allowance likewise stuck at £40,000. Yet this only amounts to a reprieve, as Michael Martin of Seven Investment Management tells the Financial Times. It is difficult to “make large tax changes in the middle of a tax year”, but changes to the CGT regime “must be in the pipeline… be prepared for an announcement in March 2022, with potentially a year’s window to crystallise gains… before the higher tax rate comes in”. 

With taxes only heading upwards it is crucial to use up tax-free allowances. Make the most of tax relief on pension contributions (especially for higher-rate taxpayers) and the £20,000 annual individual savings account (Isa) allowance. For assets outside of a pension or Isa wrapper, make the most of the £12,300 per person CGT allowance while it lasts, says Angela Lloyd-Read for This is Money. “Transferring assets to a spouse or civil partner, free of CGT, allows them to use their allowance too, effectively doubling the household CGT allowance for the year.” 

There is one silver lining to the tax grab: improved economic forecasts from the OBR mean that the chancellor could have £25bn of spare fiscal room to play with by the end of this parliament. That war chest could eventually turn into pre-election giveaways. 

Recommended

Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Wholesale gas prices are on a downward trajectory, but does this mean lower energy bills later this year?
27 Jan 2023
Best regular savings accounts – January 2023
Savings

Best regular savings accounts – January 2023

You can earn an attractive rate on the best regular savings accounts. We tell you the best on the market to take advantage of right now
27 Jan 2023
Equity release v downsizing – which is best?
Personal finance

Equity release v downsizing – which is best?

Equity release hit a record high in 2022. But is downsizing a better way to hold on to your money?
27 Jan 2023
Self-assessment tax returns: what you need to know about getting your tax bill right
Income tax

Self-assessment tax returns: what you need to know about getting your tax bill right

Understanding how self assessment works can help you ensure you pay the right amount of tax, as well as avoid penalties for missing the deadline.
27 Jan 2023

Most Popular

House prices could fall 30%. Should investors be worried about a repeat of 2008?
Investments

House prices could fall 30%. Should investors be worried about a repeat of 2008?

Some analysts are predicting that house prices could fall as much as 30%, which, when compared to the fact that prices have jumped 28% since April 201…
24 Jan 2023
Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Wholesale gas prices are on a downward trajectory, but does this mean lower energy bills later this year?
27 Jan 2023
Council tax increases 2023 – how much more will you pay?
Tax

Council tax increases 2023 – how much more will you pay?

Your council tax bill will go up in April - we reveal the councils that have confirmed what this year’s increase will be.
23 Jan 2023