How to protect yourself against tax rises in the budget

By this stage of the rumour cycle, we’ve come to see any mention of the budget as a portent of doom, but talk of some taxes raise far more anxiety than others. If you’re one of the millions of people worried about higher income tax – or any of the other major triggers it can help to know where you stand.

Income tax

Hargreaves Lansdown (HL) has just done a piece of research into the UK’s biggest budget fears, and income tax is the runaway winner. Some 16% of people are most worried about this tax rising and another 5% are mainly concerned about a longer freeze in the thresholds. Among higher-rate taxpayers, this rises to 23% and 7% respectively.

The bad news is that the freeze hasn’t been ruled out and looks increasingly like a possibility. It’s a handy stealth tax that sticks with manifesto promises and only takes extra cash from pay rises, so people don’t feel it day-to-day. They simply end the month wondering where their pay rise went.

Read more: 12 taxes you may not hear about in the budget – and what you can do about them

The better news is that a higher rate of income tax was explicitly excluded in manifesto promises, which would make this more difficult. Of course, the sheer scale of the financial shortfall has led to speculation that it might not be entirely off the table.

There are steps you can take to protect yourself. You can shelter savings interest from income tax in a cash ISA. You can also pay into a pension or a SIPP, and get tax relief at your highest marginal rate (so a 40% taxpayer gets tax relief at 40%).

Meanwhile, if you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name, so you both take advantage of your tax allowances.

VAT

Second on the list of fears is a rise in VAT – which almost one in 10 people are concerned about. On the one hand, they’re right to be worried, because VAT is a percentage of spending, so will automatically rise with prices.

Read more: How to find the weak link in your finances

However, the VAT rate itself is highly unlikely to change, after being ruled out during the election campaign – especially given the impact it would have on inflation. It wouldn’t stop the government making tweaks, but as we saw with the pasty tax saga in 2012, this can be tricky.

Council tax

Around one in 10 people are most worried about council tax. We get rises every year, but there have been suggestions from think tanks that there could be an extra charge on pricier homes, a national surcharge, or even wholesale reform. However, this remains very firmly in the realms of speculation.

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Inheritance tax

Meanwhile 7% of people are worried about losing inheritance tax allowances or exemptions - like the nil rate bands or the rule that anything left to a spouse or civil partner is tax free. These are so important to people that changes would be incredibly unpopular. However, the rules aren’t written in stone, so can’t be completely ruled out.

If you’re worried about a potential inheritance tax change, you can give up to £3,000 away before the budget, which will fall within your annual gift allowance. You can give away larger sums and they will be outside of your estate after seven years.16% of people are most worried about income tax rising, according to research by Hargreaves Lansdown.·Pekic via Getty Images

There’s a separate rule that means you can give away surplus income inheritance-tax free too. If you were planning on giving money away, and you can afford to live without it, it may make sense to do it sooner rather than later.

Capital gains tax

Among higher rate taxpayers, different worries surface, including potential changes to pensions tax relief on contributions, pensions-tax free cash and capital gains tax (CGT).

Read more: How to build passive income

When it comes to CGT, investors have already had to deal with the dramatic cuts to the tax-free allowance, and a hike to the rate on stocks and shares, so it’s no wonder they’re worried the rate could rise again or there could be changes to the rule that means capital gains reset on death.

To protect against CGT, you can use your annual allowance of £3,000 to realise gains gradually over the years. At the same time, you can use the share exchange (Bed & ISA) process to move the assets into a stocks and shares ISA. You can also offset any losses against your gains, and give assets to a spouse or civil partner so they can use their annual allowance too.

A few sensible planning moves can ease some of the worries people have ahead of the budget. It also pays to bear in mind that rumours and think tank suggestions are not policy decisions. We’re likely to get tax rises in this budget, but not all of the theories doing the rounds and striking fear into people’s hearts right now will come to fruition.

Read more:

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