Why you will pay more tax for the next 20 years

You were paying attention at the last Budget. You remember the chancellor making a song and dance about increasing all sorts of tax thresholds and promising millions of us would be better off as a result.

You’re pretty sure he says it every year, so we must be getting an increasingly better deal, even with inflation and marginal wage increases, right?

The truth is that, with figures from the Office for National Statistics (ONS) showing employment-related taxes hit £3,538 per person in the year to September 2018, we actually paid £3bn more in tax in 2018 than the year before.

That’s the highest amount ever recorded.

In fact, even after inflation is taken into account, over the past 20 years the amount of income tax we pay has gone up by a third, inheritance tax by 75 per cent and capital gains tax has more than doubled.

Now, as the end of yet another tax year approaches and we turn our attention to keeping as much of our cash in our pockets as legally possible, the Institute for Fiscal Studies has warned that the government will need to find another £5bn by 2023 to maintain its current spending on things such as social care and health.

The warnings follows predictions from the politically neutral economic think tank that we were in for 20 years of tax rises as the government tries to pay its way, particularly if there is a no-deal Brexit, when it would have to raise taxes or cut spending further unless there was a sudden surge in economic growth.

With GDP figures this week shrinking to just 0.2 per cent – the lowest rate of growth since 2012 – that certainly isn’t happening.

Today, almost half the UK’s taxpayers fear significant tax rises within the next two years, according to a separate study by Hargreaves Lansdown. And even if taxes don’t rise, you’ll still pay more.

“In the maelstrom of Brexit uncertainty, we’re all craving a bit more assurance over exactly where we stand. Unfortunately, the one area where we have this level of certainty, is the one where we’d be happy with a bit more ambiguity: we can be fairly certain that taxes are set to continue their inexorable march north,” says Sarah Coles, a personal finance analyst for Hargreaves Lansdown.

“Only one in six people aren’t worried about tax rises, compared to around half who are actively concerned. When asked when taxes are likely to rise, a quarter said within the next 12 months, and half said within the next two years. Only 2 per cent think it’ll be more than four years before the next rise.

"In 2018, the personal allowance rose, and yet we paid almost £3 billion more in income tax than a year earlier, because as your wages rise, your tax bill does too. Even if the income tax bill falls as a result of cuts after April, for basic rate taxpayers, the savings will easily be eaten up by higher council tax, VAT, fuel and other duties.

"Higher rate taxpayers may be marginally better off, but their saving is dramatically reduced by a rise in the threshold at which National Insurance falls. And because they typically live in bigger houses and spend more, it’s likely to be swallowed up by other taxes too.

“The only way to cut your tax bill is to take action, and take advantage of the schemes specifically designed to stop you paying unnecessary tax. Taking full advantage of your ISA and pension allowance alone can slice thousands of pounds off a tax bill, while clever use of things like salary sacrifice and exemptions for spouses can slash thousands more.”

1. ISAs

In an effort to encourage saving and investing, the government offers the chance to squirrel away £20,000 in this tax year – and protect this money from tax forever. If you don’t use it, you’ll lose it, so it’s worth putting away whatever you can afford before April.

If you’re saving to buy a first property, are aged 18-39, and have at least a year until you plan to buy, you should consider a Lifetime ISA because, in addition to tax free growth, you get a 25 per cent bonus on contributions. You can save or invest £4,000 this tax year and get a bonus of up to £1,000.

Don’t forget Junior ISAs too. In the current tax year, you can save or invest £4,260 in a JISA for any qualifying child, and all interest, dividends or capital gains are tax free. The money is tied up until they reach 18 – at which point they will have a useful nest egg with which to start their adult life.

2. Pensions

Each year most people have a pension allowance of £40,000 or their total earnings – whichever is lower. Even non-earners have an allowance of £3,600. It means you can contribute tax-efficiently to a pension on behalf of a child. Contributions to pensions attract tax relief at your highest marginal rate, and the first 25 per cent taken from the pension is usually tax-free.

3. Salary sacrifice

In some cases the government will let you give up a portion of your salary, and spend it on certain things free of tax (and in some cases national insurance). This includes pensions, childcare vouchers, bike-to-work and technology schemes.

4. Spouse exemptions

Assets that produce an income – such as shares, bonds, funds and buy-to-let property – can be passed between spouses without triggering a tax bill. They can therefore be shared between a couple, so that both take advantage of their income tax and dividend allowances. The balance can be held by the spouse paying the lower rate of tax, to reduce the tax payable.

5. Marriage allowance

If one spouse is a non-taxpayer, and the other is a basic rate taxpayer, the marriage allowance lets the non-taxpayer give £1,190 of their personal allowance to their spouse in the current tax year.