After going through the budget with a fine-tooth comb, it looks as though there is only one new measure that will really hit the average person’s wallet. And Darling didn’t actually mention it in his Budget speech.
He intends to freeze all personal allowances at their current levels. That’s the amount of money you’re allowed to make before he starts taxing it. You might think that doesn’t sound like much of a big deal, but it is.
Everyone under the age of 65 gets a personal allowance of £6,475 – those aged 65 – 74 get £9,490, and anyone aged 75 or above gets £9,640. Usually this allowance rises in line with inflation. So our actual purchasing power doesn’t change year by year. By freezing it instead at a time when inflation is 3%, Darling is effectively increasing his tax take at the expense of our take-home pay.
For example, if you get a 3% pay rise this year you won’t actually be able to afford to buy any more things. Inflation is knocking around 3% so the real value of your salary won’t have changed.
However, because you are technically earning more, you’ll be paying more tax regardless. That’s particularly the case if you earn just under the 40% tax threshold (£37,400). The freezing of this threshold will soon push many more people into the upper band.
So what can you do to fight back?
Use your other allowances
One allowance has risen. From 6 April, we can all put up to £10,200 into an Individual Savings Account (Isa). Money held in these accounts – up to £5,100 can be cash, and the rest stocks and shares – is free from income tax and capital gains tax. And the allowance is now set to rise each year in line with inflation. So, if you can, increase how much you are saving into your Isa. I’ve covered which Isas are best in the latest issue of MoneyWeek magazine, out tomorrow. (If you’re not already a subscriber, you can subscribe to MoneyWeek magazine.)
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Another freeze to watch out for
Darling also announced that he would be freezing the inheritance tax (IHT) threshold at £325,000 for the next four years. This means that more and more people could face hefty tax bills after the death of a family member.
The golden rule to minimise your IHT bill is to die with as little money/assets as possible. One of the least understood ways of doing this is giving away surplus income. Normally if you give a gift, then if you die within seven years, it counts as part of your death estate for IHT purposes.
However, under the Inheritance Taxes Act, you can give away regular sums of money out of your income as long as you can show three things: that the money is part of your regular spending, that it came out of your income, and that after the money is taken away, you still have enough money to maintain your usual standard of living.
If you can demonstrate this, then any money you give away is not subject to the seven-year rule.
So, for example, if you earn £40,000 a year and happily live on £35,000 a year, you could set up regular payments to whoever you want and start giving that money away.
A really good option is to set up pensions for younger relatives. You can put up to £2,880 a year into a pension for a child and enjoy basic-rate tax relief so that the contribution is topped up to £3,600.
Do that from birth until they are 18 and then, even if the child never contributes to a pension itself, they would have a £1.8m (assuming an investment return of 6% – which is admittedly optimistic) pension pot when they turned 55. Find out more here: How to make your child a pension millionaire.
All in all, it was a dull Budget this year. But another one will no doubt be with us in just a few weeks’ time when the new government – whoever ends up in charge – issues an emergency Budget. I for one will be tuning into Channel 4 on Monday at 8pm to watch the live debate between the prospective Chancellors. Who knows? It might give us an idea of what’s in store in May.
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