As the General Election campaign progresses, the focus on taxes—whether on property, assets, or income—is intensifying. Recent figures from HMRC shed light on the significant impact that frozen tax thresholds are having on individuals. With the thresholds remaining unchanged despite inflation and rising incomes, more people are finding themselves pushed into higher tax brackets, effectively paying more in taxes without corresponding increases in their real earnings.
In a recent report, HMRC disclosed that PAYE Income Tax and National Insurance Contributions (NIC) receipts for April to May 2024 have soared to £77.2 billion. This marks an increase of £2.8 billion compared to the same period in 2023. The rise in receipts is partly attributed to wage growth and increased employment, but it also highlights how more individuals are affected by the static thresholds, resulting in higher overall tax payments. This trend underscores the growing financial burden on taxpayers as inflation continues to erode the value of their incomes.
Inheritance Tax receipts have also seen a notable uptick. For April to May 2024, these receipts reached £1.4 billion, up by £0.2 billion from the same period last year. The increase reflects the impact of rising property values and the unchanged tax-free allowance, which means more estates are now liable for the tax. This growth in receipts has become a point of contention, as critics argue that it disproportionately affects those who may not have substantial wealth but are penalised due to rising asset values. As tax policies continue to dominate the political discourse, these figures highlight the ongoing debate over the fairness and efficiency of the current tax system.
Both the Conservatives and Labour have indicated that they plan to keep all major tax thresholds frozen until at least 2028 if they win the upcoming General Election.
A representative from business consultancy Hargreaves Lansdown commented, “Frozen tax thresholds continue to strain our finances, with neither major party committing to easing this pressure. The anticipated cuts to inheritance tax were not included in the Conservative manifesto either.”
For years, it was widely suggested that the Conservatives would reduce this tax, which has been increasing, even though the overall tax take remains relatively small. Last year, inheritance tax receipts reached nearly £7.5 billion, and this year has already started strongly with £1.4 billion collected so far.
If the total value of our assets, including homes and savings, surpasses the IHT nil rate band of £325,000 and the residence nil rate band of £175,000, our families could face an inheritance tax bill. The rising value of properties and savings means that more families are likely to be affected by this threshold. However, it’s important to note that inheritance tax often does not apply to Self-Invested Personal Pensions (SIPPs) and other pensions. This makes pensions a highly tax-efficient way to transfer wealth across generations, often overlooked by those planning their estates.
An important aspect of pensions is the tax treatment based on the age at which the pension holder passes away. If you die before the age of 75, your beneficiaries can inherit these funds without paying income tax. This can provide significant financial relief and peace of mind, ensuring that unexpected deaths do not leave families struggling with immediate tax burdens. On the other hand, if you pass away after the age of 75, the inherited pension is subject to income tax, which could impact the overall amount that beneficiaries receive.
This preferential tax treatment of pensions is seen by many as a crucial aspect of financial planning, yet it has also sparked debate about its fairness. Critics argue that the rules might be overly generous, allowing substantial sums to be passed on tax-free in some cases. Given these concerns, there is speculation that future reforms could target these provisions, potentially altering how pensions are taxed upon inheritance. Therefore, staying informed about these rules and planning accordingly is essential for anyone considering how best to manage and protect their estate for future generations.
Hargreaves Lansdown highlights that income tax isn’t just limited to taxing your monthly take-home pay. According to their consultancy, once your personal savings allowance is used up, you also start paying income tax on any savings account interest. For those pushed into the higher rate tax bracket, this doesn’t just mean a higher tax rate on savings, but also that your personal savings allowance halves to £500. This means you end up paying this higher rate on more of your savings.
Wealth Club suggests that inheritance tax revenue could rise if Labour wins the election. They plan to restrict non-doms from moving money offshore, expected to raise £430 million a year. This would represent a 6% increase in the total inheritance tax collected.
Inheritance tax has been a key issue in many election manifestos this year. Labour proposes ending the use of offshore trusts to avoid inheritance tax, which is projected to generate significant additional revenue for the Treasury. Meanwhile, the Conservatives aim to keep inheritance tax reliefs for family farms, ensuring these can be passed down without additional tax burdens.
Wealth Club investment manager Nicholas Hyett notes that Labour is focusing on non-doms who keep their money abroad, while the Conservatives have suggested Labour may have further plans not disclosed in their manifesto, specifically regarding inheritance tax. On the other hand, Reform UK is promising significant inheritance tax cuts to attract voters.
Regardless of which party wins, inheritance tax is likely to increase. Freezing thresholds over recent years, coupled with rising house prices, has pulled more estates into the inheritance tax bracket. While targeting wealthy non-doms with increased taxes might be politically appealing, the burden will still largely fall on families who don’t see themselves as particularly wealthy.
For these families, their living standards haven’t improved; in fact, inflation might have reduced their purchasing power. However, with frozen allowances, the government now deems them wealthy enough to be subject to inheritance tax, even though their financial situation hasn’t necessarily gotten better.
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