Sarah Coles, Hargreaves Lansdown Senior Personal Finance Analyst and Podcast Host for Switch Your Money On
Chancellor of the Exchequer Rachel Reeves has painted a grim picture of the nation’s public finances in her speech this week, axing spending pledges made by the former government that weren’t already funded. That’s according to Sarah Coles, head of personal finance, Hargreaves Lansdown who says Reeves has “also set the scene for hard choices and tougher times, including spending and tax.”
Coles offers tips on how to protect your earnings from more taxes yet to come.
Key facts following Reeves’s speech
- There’s a £22 billion shortfall in the public finances this year.
- Rachel Reeves said the government will drop some promises made by the previous government.
- It will axe the winter fuel payment for any pensioners not receiving Pension Credit.
- However, given the depth of the financial black hole, it’s not going to stop speculation about the potential for tax rises too.
- The Budget will be held on 30 October – when Reeves said she would outline more on tax and spending changes. She confirmed the government will stand by its manifesto promises not to hike specific taxes, but this leaves the door open for other tax hikes.
Reeves has confirmed that in this October’s Budget, she will stand by the tax pledges made in the manifesto, but this will “do nothing to quell rumours that the Budget could usher in changes to capital gains tax or inheritance tax, or mean scaling back tax advantages of pensions – all of which could take a horrible toll on savers and investors,” says Coles.
Those who are self-employed and heading into retirement have been dealt a “painful blow” says Coles now that the Labour Party has extinguished winter fuel payments for anyone who doesn’t receive Pension Credit. However, Coles is more concerned over frozen tax thresholds, which will put 8.5 million pensioners in tax territory meaning they will be £960 worse off as a result of the freeze.
With this in mind whether you are nearing retirement or not you should take advantage of tax-free incentives. Here Coles outlines them for you to consider
Maximise tax-free interest from savings
Basic-rate taxpayers can receive up to £1,000 in interest from savings accounts each year without paying tax, while higher-rate taxpayers can receive up to £500. Additional rate taxpayers don’t have this allowance. If your pension income is under the personal allowance, you also have the starting rate for savings – so the first £5,000 of interest on your savings is tax-free. You get the personal savings allowance on top of that. It means you can make £12,570 from your pension, and £6,000 in savings interest without paying any tax.
For every £1 of non-savings income over your personal allowance, you lose £1 of your starting rate, so if you earn £17,570 you don’t get the starting rate for savings at all. Meanwhile, there’s a real risk your savings will bust the savings allowance too. When you’re retired, it makes sense to have emergency savings to cover 1-3 years’ worth of essential spending. With savings rates as high as 5%, it won’t take long for you to start paying tax on your savings.
It’s worth considering a cash ISA. Savers can put up to £20,000 in a cash ISA in the current tax year and interest is completely tax-free. They can take advantage of every tax year until their money is sheltered. They can also consider putting some in Premium Bonds because prizes are tax-free – although they need to appreciate that the odds are stacked against them.
Take income from investments in an ISA
“You can take bond income or dividend income free of tax – or cash in your investment and take it out without paying capital gains tax. This can be a useful way of boosting your income without having to worry about going over a tax threshold. You can move existing investments into ISAs through share exchange (also known as bed and ISA), and you can protect up to £20,000 in the current tax year.
Any money withdrawn from a lifetime ISA from the age of 60 is tax-free, so if you’re currently aged 18-39 you can open a LISA and use it to create a tax-free chunk of income in retirement.
Couples can share assets to double their tax-free allowances
If you’re married or in a civil partnership, you can share assets between you and double the amount of money you can make before the taxman takes a slice. For example, you can share income-producing assets with your spouse, so you can both take advantage of your personal allowance, dividend allowance and ISA allowance.
Use allowances that help you generate extra income
These include the rent-a-room scheme, which means that if you rent a furnished room of your home to a lodger, the first £7,500 of rent each year is tax-free. Similarly, you could consider a money-making hobby or a side hustle, like crafting or gardening, because the trading allowance means you can make up to £1,000 tax-free. You can also make another £1,000 from your property tax-free, which means you could, for example, rent out storage space or a driveway.
Long-term care annuities pay a tax-free income
One of the most tax-efficient ways to help pay for long-term care is to use a long-term care annuity, also known as an immediate needs annuity. The income is tax-free if paid directly to the care provider.
Purchased life annuities can generate a tax-free income too
These are designed to provide a guaranteed income for life or over a fixed term, in exchange for a lump sum. Part of the income paid is deemed to be a return of your original investment and therefore is tax-free. The interest element of the income is taxable, but no tax will have to be paid if it falls within the personal allowance or personal savings allowance.
Venture capital trust (VCT) investors get tax-free income – plus 30% tax relief
VCTs invest in companies that are typically small, unlisted and high-risk. If you’re an experienced investor prepared to take high risks, VCTs offer substantial tax perks. Any income paid out is tax-free, and income tax relief is also available, up to a maximum of 30% of the amount invested. VCTs are also capital gains tax-free.”