Rachel Reeves's £30bn tax bomb is about to drop on the middle classes, says JEFF PRESTRIDGE - Here's how to protect YOUR wealth

Despite all the promises not to in the aftermath of last autumn’s calamitous Budget, it now looks a near certainty Rachel from Accounts will be picking our pockets later this year.

Tax rises, £30 billion of them, are heading the way of the middle classes like a gathering storm, impacting on everything from the tax we pay on our income, the pension funds we assiduously pay into and the wealth we have accumulated over many years. Help! Thirty billion helps!

Although Labour, come the Budget, will no doubt blame the Conservatives for its need to hike taxes (again), the blame game is over. These tax rises will all be of Rachel from Accounts’ making. Calamity Rachel.

As a result of U-turns on the winter fuel payment and (most likely) welfare cuts, waving through generous pay rises to public sector workers and borrowing more than the country can afford, the Chancellor has boxed herself into a corner.

The only logical way out is to raise yet more tax revenue from working people, the retired and businesses, small and large.

Although Rachel from Accounts and Prime Minister Keir Starmer have repeatedly said they will not be coming back with more taxes after April’s £40 billion National Insurance (NI) hit on businesses, every credible economic think-tank thinks otherwise.

Be it the Institute for Fiscal Studies (IFS) – ‘an extra £5 billion on child benefits and winter fuel… makes the Government’s promises on tax and borrowing now difficult to stick to’ – or Capital Economics: ‘Tax rises are starting to feel inevitable.’

A ratcheting up of the country’s defence spending, announced this week by Sir Keir in Glasgow, will also crank up the pressure on Ms Reeves to raise taxes. ‘Chunky tax increases’ was the response of IFS boss Paul Johnson.

And we mustn’t forget the emboldened ‘left’ of the Labour Party which is keen that the Chancellor raises taxes rather than applying drastic cuts to welfare spending. The results of Ms Reeves’s spending review will be published next week.

Earlier this year, ahead of the spring statement, Deputy Prime Minister Angela Rayner sent Ms Reeves a memo suggesting numerous tax raising measures which would not impact on ‘working people’. Although ignored at the time, some could find their way into the Budget.

So, what extra taxes could be on the Chancellor’s radar – and what can you do, if anything, to mitigate them between now and the Budget?

Yesterday, we sought the views of leading financial boffins and tax experts. Although they do not agree on what taxes are coming our way, they all believe tax hikes will dominate the Autumn Budget.

According to Rachael Griffin, personal tax expert at wealth manager Quilter, tax hikes are rarely popular, especially when taxes already stand at a 75-year high.

But if they have to rise in the Autumn Budget, she says that ‘increasing income tax would be the most transparent way to raise revenue, rather than tweaking lots of allowances and exemptions’.

The Government’s own figures indicate that a one penny rise in the basic rate of income tax (from 20p to 21p in the pound) would raise just short of £8 billion in the tax year starting April 6, 2026.

An identical increase in higher rate tax (currently 40 per cent) would bring in £2 billion of extra revenue. In total, a third of the way to the £30 billion.

Yet this isn’t likely to happen unless the Chancellor wants to sign her own ministerial death warrant by blatantly breaking Labour’s pledge made ahead of the Election not to increase income tax, National Insurance contribution rates or VAT.

Jason Hollands, a director of wealth manager Evelyn Partners, says one option could be for Ms Reeves to reduce the threshold at which additional rate tax (45 per cent) kicks in – from £125,140 to £100,000.

He says: ‘Strictly speaking, this would not increase the rate of tax as Labour pledged in its Election manifesto, but it would raise extra tax quickly.’

He also says that the Conservatives would not have a leg to stand on, given they dropped the 45 per cent threshold from £150,000 to its current level in April 2023.

A sneakier, less blunt tactic – and one which Mr Hollands says is more probable – would be to extend the current freeze in income tax thresholds beyond 2028, maybe to 2030.

By dragging yet more people – especially the elderly – into tax, or higher rates of tax, experts say this move would generate £14 billion of extra revenue.

‘This is likely,’ says Jonathan Hickman, tax partner at financial group BDO. ‘It’s a guaranteed source of revenue and hard for taxpayers to mitigate other than to make extra pension contributions to keep their taxable pay below specific income tax thresholds.’

Tim Shaw, partner at tax firm Forbes Dawson, agrees. He says such stealth taxes are now used by Chancellors ‘to raise taxes without obviously or overtly contravening manifesto pledges on tax rates’.

Not all experts agree, however. Quilter’s Ms Griffin says an extension to the freeze in income tax thresholds ‘would be an easy lever to pull, but unlikely given the likely backlash from taxpayers’.

Robert Salter, tax technical director at accountancy firm Blick Rothenberg, says the Chancellor could tread a middle ground.

He explains: ‘She could extend the freeze to April 2029, giving her scope to increase the thresholds just ahead of a likely election a couple of months later in June. A politically savvy move.’

The tax breaks we receive for building our own pension pots are a big cost to the Government. Latest figures indicate that the annual bill is just short of £50 billion.

This comprises £46.8 billion of income tax relief on contributions – relief which means that a basic rate taxpayer only pays £80 for every £100 that lands in their pension pot while a higher rate taxpayer pays £60. The Government funds the balance.

On top is £23.8 billion of NI relief on pension contributions. To counter these costs, the Government receives £22 billion of income tax on pensions in payment.

Chipping away at the eye-watering cost of encouraging pension saving is never far from the minds of financially challenged Chancellors.

And even though there are still five months to go before the Budget, the rumour mill on what Ms Reeves has in mind on pensions is in full swing.

Top of the list is an axing of ‘salary sacrifice’ schemes. These allow employees to reduce their salary in exchange for their employer making an equivalent contribution into their pension pot.

By doing this, the employee cuts both their income tax and NI bills. The employer also saves on NI costs because the employee’s salary – upon which its NI liability is calculated – is reduced.

His Majesty’s Revenue & Customs has tested the waters about possible changes with employers which currently offer them. All options involve a paring back in NI relief.

Mr Hollands says a clampdown on salary sacrifice may ‘well be in the pipeline’. Quilter’s Ms Griffin says: ‘If such reform is implemented, millions of workers could be impacted.’

She estimates that if the NI benefit was removed, it could result in a 20-year-old seeing their pension fund being reduced by around £25,000 by the time they come to retire at age 67.

This assumes the 20-year-old is a basic-rate taxpayer, makes annual pension contributions of £2,000 and their pension fund benefits from average annual returns of 4.5 per cent.

Helen Morrissey, head of retirement analysis at wealth manager Hargreaves Lansdown, says any worker currently contributing into a work pension set up on a salary sacrifice basis should keep doing so.

She adds: ‘Pensions are an enormously tax-efficient way to save for the future, so it’s important to continue contributing.’

Other possible changes include a restriction in the amount of tax-free cash that people can take when they access their pension. Currently, most people can take 25 per cent tax-free cash, subject to a maximum of £268,275.

A possible cap on tax-free cash was rumoured ahead of last year’s Budget, resulting in many people withdrawing tax-free money from their pension ahead of a clampdown. But the Chancellor chose to keep things as they are.

This issue is likely to get another airing ahead of the Autumn Budget, but Ms Morrissey says most people with the potential to access tax-free cash should hold fire.

‘It’s a complex area,’ she says. ‘The potential for poor outcomes is huge, so unless you have a specific plan for your tax-free cash, it is best to leave it alone.

‘If you take it, you remove money from a tax-efficient environment into one where you could incur capital gains and dividend tax charges. You could also unintentionally allow the money to fritter away.’

Blick Rothenberg’s Mr Salter says a cap cannot be ruled out. A £75,000 limit, he says, would not impact on most savers given they do not have total pension savings in excess of £300,000.

Yet, he says it would prove counter-productive, ‘undermining the willingness of taxpayers to save for retirement and become financially independent in later life [not a burden on the State]’.

One final point. In Angela Rayner’s memo to the Chancellor on possible tax raising measures, she argued for the reintroduction of the lifetime allowance.

This was a cap on the amount you could save into a pension, beyond which extra taxes (up to 55 per cent) could be applied to the surplus. The allowance, just over £1 million, was abolished by the Conservatives in April last year.

While Labour initially said it would be reintroduced if they got into government, they later jettisoned the idea because of the complexities involved – and a fear that it would trigger a damaging exodus of highly paid doctors from the National Health Service, looking to avoid punitive taxes on their excess pension savings.

Mr Salter says it would resultingly be ‘illogical’ for Ms Reeves to bow to the Deputy Prime Minister’s wish. Ms Morrissey says high earners should not be put off funding their pensions further.

Although businesses – and charities – continue to reel from the hike in NI bills introduced in April this year, some experts believe that the Chancellor may again turn to NI in the Autumn Budget as a provider of much-needed revenue.

This time it won’t be employers that bear the brunt but workers who are currently exempt from NI or people who receive income that falls outside the NI net.

‘There are ways of increasing the NI take,’ says Mr Salter. ‘For a start, the Chancellor could impose employee NI costs on workers once they reach state retirement age. Currently, those who reach age 66 stop paying NI.’

It’s a view shared by BDO’s Jonathan Hickman. He says: ‘Labour could see it as a way to raise funds in order to finance wider entitlement to the winter fuel allowance for retired individuals.’ An announcement on winter fuel payment reform is likely next week.

Mr Salter says that NI could also be applied to income that landlords receive from letting out their properties. Currently, only income tax is charged on rental income.

AS the Chancellor has already shown, Labour despises inherited wealth – and is happy taxing it to the hilt.

So far, she has announced a curtailment in the inheritance tax (IHT) relief available to businesses and farmers passing down assets through the generations.

From 2027, she will also bring unused pension assets into the scope of IHT, landing loved ones with massive tax bills.

Yet Ms Reeves could come back with further measures aimed at mining more IHT revenue. Reform of the rules governing potentially exempt transfers (PETs) is a possibility.

Currently, gifts of any size can be given to anyone – and as long as you live for another seven years, it’s out of your estate for inheritance tax purposes.

But if you die before the seven years is up, a 40 per cent IHT charge is applied in years one to three – and a reduced rate thereafter.

Some experts believe the seven-year rule could be extended to ten. Says Sarah Coles, head of personal finance at Hargreaves Lansdown: ‘Anyone planning to give gifts in order to cut inheritance tax on their estate should consider it sooner rather than later.

‘While the risk of an extension to this seven-year period may be a worry, it shouldn’t stop you from making sensible gifts and getting the clock ticking.

‘It doesn’t mean anyone should panic. Equally, they shouldn’t give away money they can’t afford to. However, it highlights the benefit of planning early, and considering gifts to younger members of families when they need them the most.’

Mr Hollands says there is a chance that the gifting regime could be overhauled by Labour with the various annual allowances swept away and replaced by a single lifetime gifting allowance.

Such massive reform is unlikely to be announced in the Budget, but it’s coming. So use the various allowances available to mitigate IHT while they are still around.

These include the annual gift allowance of £3,000 that can be made to one person or several people. If the allowance wasn’t used in the previous tax year, it can be utilised too, meaning couples can pass on £12,000 to friends and relatives.

Annual small gifts of £250 can also be made to any number of other people. Furthermore,

wedding gifts can be made to a child (£5,000), grandchild or great-grandchild (£2,500) or a friend (£1,000).

A ‘temporary’ cut in fuel duty of 5p a litre has been in place since March 2022, resulting in a fuel duty levy of 52.95p a litre.

Experts believe this cut will be dropped in the Budget, with the full charge of 57.95p a litre being restored. Furthermore, it will then be increased in line with inflation.

Says BDO’s Mr Hickman: ‘If the inflation position is looking better, perhaps below 3 pc, a fuel duty increase would be an easy “win” for the Chancellor.’

In any article on mitigating tax, it would be remiss to forget the tax-freedom offered by Individual Savings Accounts.

Whether you’re using an Isa to save or invest, do utilise as much of this tax year’s £20,000 annual allowance as you can. All interest, dividends and capital gains within an Isa roll up tax-free.

For savers, this is especially important given the likelihood of the Chancellor restricting the amount of allowance that can be allocated to cash from the start of the new tax year next April.

Also, if you’ve got children, think about setting up Junior Isas (Jisas) and pensions for them.

The annual Jisa allowance is £9,000 while current pension rules allow you to pay a maximum £2,880 a year into a plan for a child, with tax relief topping this up to £3,600.

Although grandparents can’t set up the Jisa or pension, they can contribute on behalf of a grandchild once the plans are up and running.

[email protected]