Rachel Reeves | Autumn Budget | Income Tax
This afternoon, Rachel Reeves delivered the Autumn Budget after warning that it will involve “difficult decisions”. It’s the first Budget by a female Chancellor. It’s also the first Labour Budget in 14 years and has been highly anticipated after the General Election.
Keir Starmer has acknowledged that this Budget will be challenging. It is necessary for long-term stability and growth. He said people must “accept short-term pain for long-term good”.
Income tax: Budget fears quashed
- Ahead of the Budget, people’s biggest fear was paying more income tax. This fear was shared by 15% of people according to an HL survey of 2,000 people with Opinium, September 2024.
- Contrary to widespread rumours, Rachel Reeves hasn’t extended the freeze on income tax thresholds.
- We still have years more of the freeze on income tax, which will end in 2028/29.
“Rachel Reeves has quashed one of the biggest fears about the Budget. She announced there would be no additional freeze on the income tax thresholds. It means from 2028/29 they’ll be uprated with inflation. It will bring an end to the rapid escalation of people paying more tax at higher rates.
Sarah Coles, head of personal finance, Hargreaves Lansdown
Of course, we still have to get through several years of a freeze. There’s some hope now the end is in sight.
There are an estimated 37.4 million income taxpayers in the current tax year, up 4.4 million from when thresholds were frozen in 2021/22. There are 2.1 more basic rate taxpayers, 1.88 million more higher rate taxpayers and 610,000 more rate taxpayers. More than double the number before the freeze. There are also around 8.5m taxpayers over state pension age – around a quarter more than before thresholds were frozen. It means we’re parting with even more of our hard-earned cash. In this tax year so far, we’ve paid £211.9 billion in income tax and National Insurance – up £5.7 billion in a year.
It will take a toll while we wade through the last years of the freeze. It’s not just the tax on earnings that’s affected. When you start paying a higher tax rate, your personal savings allowance shrinks from £1,000 to £500. It disappears altogether for extra rate taxpayers. You also pay a higher rate of capital gains tax when you cross into paying a higher rate of tax. Your dividend tax rate rises as you cross each income band.
National Minimum Wage set to increase by 6.7%
Chancellor announces pay rise for over 3 million workers next year, as National Living Wage rises by 6.7%
A pay boost worth £1,400 a year is available for an eligible full-time worker. This is a significant move towards delivering a genuine living wage.
18-20 National Minimum Wage will rise by £1. It is the most significant increase on record. This marks the first step towards a single adult rate.
The proposals would be expected to come into force in April 2025.
Ways to manage your income tax bill.
You can pay into a pension or a SIPP, and get tax relief at your highest marginal rate. It won’t leave you with more money in your pocket today. It will put the full value of every pound into your pension for later.
The best way to protect savings from income tax is to hold them in an ISA. You can protect up to £20,000 in the current tax year. This is particularly valuable for higher earners. They have a smaller savings allowance and pay a higher rate on the excess.
To protect against higher rates of capital gains tax and dividend tax. It makes sense to invest within a stocks and shares ISA, which are free of both taxes. If you have existing investments outside an ISA, and you have the available allowance, use Bed and ISA. This method moves them into the ISA. This will protect them from tax. Take care not to exceed your capital gains tax annual allowance of £3,000 in the process though.
You can transfer income-producing assets into your partner’s name if you’re married or in a civil partnership. This applies if your partner pays a lower rate of tax. It means you can both take advantage of your tax allowances. You can also use all the tax-efficient vehicles at your disposal. These include your ISAs and pensions. You can also use any qualifying children’s Junior ISAs and SIPPs.”
