Rishi Sunak set to hit your pocket with ‘stealth tax raid’ – how Britons can avoid it

Budget 2021: Laura Kuenssberg's analyses Rishi Sunak's plans

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The Budget brought about a number of changes, however, many were relieved headline rates to numerous taxes remained unchanged. However, instead some experts are suggesting the Chancellor is benefitting from tax changes “by stealth” due to the freezing of certain thresholds. New figures buried in the Autumn Budget suggest Mr Sunak’s Treasury is set to rake in even more money than first projected when threshold freezes were announced earlier in the year.

Laith Khalaf, head of investment analysis at AJ Bell, said: “A growing economy and inflationary pressures have turbo charged the tax revenues the Chancellor is now expecting to harvest from freezing tax thresholds, which he announced in the March Budget.

“While this is good news for the Exchequer, it means income taxpayers are going to suffer the consequences of Sunak’s stealth tax raid, to the tune of £47 billion over the next five years, according to figures squirreled away in the small print of the Autumn Budget. 

“This is a significant upgrade to the tax revenue forecast in the March Budget, and goes some way to explaining why the Chancellor has so much cash to splash, and why the OBR says the tax burden is going to be the highest since the 1950s.

“Taxpayers can normally expect to lose some of their wage growth to fiscal drag, because earnings tend to rise faster than inflation, and tax thresholds are tethered to the latter. 

“But the move to freeze tax thresholds means taxpayers face fiscal drag on steroids. Wage increases won’t be offset at all by rising tax thresholds, and taxpayers will pay significantly more as a result. 

“It will be difficult to totally avoid the onslaught, but there are legitimate ways to offset extra taxes though tax planning and tax shelters.”

Mr Khalaf highlighted that up until 2025/26, the latest figures show the Treasury now expects to receive around £33billion from the freezing of Income Tax thresholds alone.

Earlier in the year, the Chancellor also froze a number of other tax allowances including personal tax-free allowance and the higher tax threshold, alongside Capital Gains Tax free allowance and Inheritance Tax allowance.

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But for those who are impacted by what is being dubbed as a stealth tax raid, what are the steps which can be taken to avoid this?

Firstly, Mr Khalaf highlighted stocks and shares ISAs, an increasingly popular option. Although people will not get upfront tax relief, their investments will grow free from Capital Gains Tax and Income Tax..

At present, the CGT tax-free allowance is frozen at £12,300 until 2026, despite the Office for Tax Simplification recommending a reduction of the sum to between £2,000 and £4,000.

While a frozen allowance may not be the best situation, it could, therefore, offer a good outcome for those who are investing. 

Mr Khalaf also touched upon pension contributions, and said: “If you’re a higher rate taxpayer, or become one soon, a pension contribution is a good way to reduce your tax bill. For each £800 you put in, the government adds £200 to your pension. 

“Higher rate taxpayers can then also knock a further £200 of their tax bill, which they would normally pay when they complete their tax return. If you contribute to a workplace pension, chances are your employer will get the extra tax relief applied automatically, you won’t have to claim it.

“The net effect is you get £1,000 in your pension, and it only costs you £600. Your investment growth and income are then tax-free inside the pension, and you can take 25 percent of your total pot as a tax-free lump sum at retirement. 

“The remaining income your draw is taxable, but in retirement, you’re likely to be paying a lower overall tax rate than when you’re working. 

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“The Chancellor did also freeze the pensions Lifetime Allowance at £1,073,100, so if you’re lucky enough to be bumping up against this, you need to think twice before adding more money to your pension.” 

Finally, Mr Khalaf looked at the idea of “buddying up”, that is to say, using one’s married status or civil partnership to help with taxes.

Those in this situation will be able to transfer assets between them without incurring capital gains, which can allow them to use two lots of the £12,300 CGT allowance. 

This could potentially save couples £2,460 in Capital Gains Tax, if the individual is a higher rate taxpayer selling shares.

With all tax related situations, Britons are encouraged to undertake research and speak to a financial adviser if necessary. 

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