Hikes among Inheritance levies and capital gains taxes are among the top five Budget fears for basic and higher rate taxpayers, a poll from Hargreaves Lansdown shows.
The wealth firm surveyed 2,000 adults last month ahead of Labour Chancellor Rachael Reeves’ 30 October Budget, where she will have to plug a £22bn black hole in the public finances left by the previous Conservative administration.
Labour has said it will not increase income tax, VAT or National Insurance in its first Budget for 14 years.
But it has not ruled out rises to capital gains, inheritance tax and other levies surrounding pensions.
The wealth firm’s survey found that the top five biggest Budget fears among basic rate taxpayers are:
- Paying more income tax — 15%
- Boosting council tax — 11%
- Higher VAT — 8%
- Higher duty affecting drivers — 8%
- Losing inheritance tax allowances or exemptions — 5%
Income tax
The basic rate of income tax runs from £12,571 to £50,270 where it is paid to 20% on wages and the higher rate threshold is from £50,271 to £125,140. Income over this level is taxed at the additional 45% rate.
Hargreaves Lansdown head of personal finance Sarah Coles says: “Income tax is rightly a concern, because the government is expected to leave allowances and thresholds untouched.
“It means that every inflation-linked pay rise will push more people into paying more tax, and more into paying higher rates.
“Thresholds have been frozen since April 2022, and by the time the freeze ends in 2028/29, there will be 3.7 million more taxpayers, 2.7 million more higher-rate taxpayers, and 600,000 more additional-rate taxpayers than if allowances and thresholds had been indexed to inflation and the additional rate threshold kept at £150,000.”
Inheritance tax
Inheritance tax is not liable on estates worth less than £325,000.
But after this, the standard rate above this threshold is 40%, although there are exemptions for agricultural land, businesses, some shares and pensions.
Last year, this tax raised £7.5bn and affected 4.4% of estates on death in the 2021-22 tax year.
Tax experts say that because this threshold has been frozen since 2009, while property prices have risen over that period, more people have been drawn into the tax.
Hargreaves Lansdown head of retirement analysis Helen Morrissey adds: “Almost one in ten are concerned about losing inheritance tax allowances or exemptions.
“This includes things that keep millions of estates from facing tax – like the nil rate bands that mean the first £325,000 of your estate, and £175,000 of property, can be left tax free — if the home is being left to a child or grandchild.
“It also includes the rule that anything left to a spouse or civil partner is tax free, and that if you leave everything to them, you also leave them your nil rate bands, so they can leave £1m free of tax.
Morrissey points out: “These allowances and exemptions make a difference to so many people that changes would spark a backlash, which could push them down the list. However, these rules aren’t written in stone, so cannot be completely ruled out.
“Inheritance exemptions also include the fact that pensions can be left free of inheritance tax. Changing the inheritance tax treatment of pensions would bring it into line with other products, such as ISAs.
“The government may consider this to be low-hanging fruit, and there have been reports that this is being seriously considered by the Chancellor.”
The top five concerns among higher-rate taxpayers were:
Higher income tax — 12%
Removal of tax breaks on pension contributions — 10%
Losing inheritance tax allowances or exemptions — 8%
Higher rates of capital gains tax — 7%
Higher VAT — 7%
Capital gains tax
Capital gains tax was paid by 369,000 people who had made £80.6bn worth of gains between them in the 2022-23 tax year, according to official figures,
The levy raised £14.4bn last year, 15% lower than in the previous tax year, mainly due to lower property prices.
Capital gains tax, in part, depends on your income tax rate. If your gain and your annual income falls within the basic rate tax allowance you will pay 10% on profits, unless they are from selling a residential property, in which case you will pay 18%.
Higher or additional rate taxpayers pay 24% on gains from residential property or 20% on gains from other assets. There’s a 28% rate linked to investment funds.
Hargreaves’ Coles says: “Some 7% of higher-rate taxpayers are worried about higher rates of capital gains tax, which is payable on profits from investments.
“We’re already seeing investors take action ahead of expected changes to capital gains tax.
“The concern is that rates could rise from 10% for basic rate taxpayers — 18% on property — and 20% for higher and additional rate taxpayers — 24% on property — to match their income tax rates of 20%, 40% and 45%.”
