There are several ways that taxpayers can mitigate the impact of chancellor Rachel Reeves’ tax grab through strategic planning before changes take effect and by maximising remaining tax breaks, according to AJ Bell’s Laura Suter.
Reeves’ second Budget extended the freeze to income tax thresholds, curbed salary sacrifice for pensions, cut the cash ISA allowance and raised tax rates on savings, dividends and property, raising an additional £26bn in tax revenue for public coffers.
Suter, director of personal finance at AJ Bell, said: “The chancellor unleashed £26bn of tax rises on the public, with much of it landing at the feet of savers, investors and workers. While there’s no doubt that tax increases are coming, there are clever ways to mitigate the impact of this tax tsunami.”
Strategy 1: Maintain salary sacrifice despite caps
The National Insurance perks of using salary sacrifice for pensions will be capped at £2,000 per year from April 2029.
“Whatever you do, don't stop your pension contributions,” Suter said. “Despite the National Insurance savings being limited, what you pay in will still be exempt from income tax and workers can still enjoy pension tax relief up to their marginal rate of income tax.”
Pension contributions to schemes like SIPPs will still reduce adjusted net income, which can pull workers out of higher rate taxes or punishing tax traps whilst boosting retirement savings.
Strategy 2: Use pension contributions to avoid frozen allowance traps
The chancellor has frozen income tax bands until 2031, meaning more people will be pushed into the next tax bracket. They will also fall into some “tax traps” if they move into a new bracket or earn above a certain level.
For example, the child benefit clawback starts at £60,000 adjusted net income and the personal allowance loss begins at £100,000. In both of these cases, extra earnings face an effective tax rate of 62% if National Insurance is included, Suter noted.
Pension contributions can reduce taxable income below these trap levels. “You just need to work out what extra contributions you need to make to reduce your adjusted net income,” she said.
Strategy 3: Maximise Lifetime ISA before review
Around 960,000 people subscribed to a Lifetime ISA in the 2023/24 tax year, according to HMRC statistics. The government has announced plans to review the product, but details on timings remain unavailable.
Those eligible can still pay in up to £4,000 each tax year and receive a 25% government bonus, adding up to £1,000 in free money per year. “For anyone saving for their first home, the Lifetime ISA is pretty unbeatable with that 25% government bonus boosting your deposit savings,” Suter said.
Strategy 4: Shield cash savings from new tax rates
The government estimates 2.64 million people will be hit with tax on their savings in the current tax year. From April, tax on cash savings rises to 22% for basic rate taxpayers, 42% for higher rate payers and 47% for additional rate taxpayers.
The personal savings allowance means basic rate taxpayers can earn up to £1,000 in interest before paying tax, whilst higher rate taxpayers have a £500 allowance. Additional rate taxpayers receive no exemption.
“For those nearing or exceeding their allowance, using a cash ISA can be a simple way to protect interest from tax,” Suter said. Savers can currently put in up to £20,000, though this drops to £12,000 for under-65s from April 2027.
Strategy 5: Execute Bed and ISA for dividend-paying investments
Dividend tax rates will rise next April to 10.75% at the basic rate and 35.75% at the higher rate. HMRC forecasts 3.7 million people will pay tax on their dividends this tax year, totalling £18bn.
“If you are in this situation and have some of your ISA allowance remaining this tax year, you could use a Bed and ISA to move the dividend-paying investments into your ISA and protect them from future tax charges,” Suter said.
Investors can potentially move £40,000 into their ISA by using this year's allowance now and next year's from April.
“If your non-ISA investment pot is larger than your ISA allowance, the smartest move is to prioritise shifting your biggest dividend-paying investments into your ISA first,” she added.
Strategy 6: Deploy gifting allowances to reduce inheritance tax
The government is freezing inheritance tax bands for another three years until 2030-31. Every individual can gift up to £3,000 per year free of IHT and this allowance can be carried forward if unused in the previous year.
Couples can combine allowances to give away up to £6,000 tax-free annually or £12,000 with carry-forward. Extra allowances apply for wedding gifts: parents can gift £5,000 to a child, grandparents £2,500 to a grandchild and anyone else £1,000.
Gifts outside these allowances only escape IHT if the donor survives for seven years. The most generous exemption is for gifts made from excess income, which can be unlimited if they do not reduce the donor’s standard of living.
Strategy 7: Explore cash alternatives ahead of the cash ISA cut
The cash ISA allowance drops from £20,000 to £12,000 from 6 April 2027 for those under 65. Suter suggested cash savers assess whether they are hoarding too much cash in light of this.
“We’re a nation of cash lovers and that often means we have more in cash than is necessary,” she added. “It’s a good place for money you need in the short term, your emergency savings pot and money you don’t want to take any risk with, but otherwise you could consider investing.”
Lower-risk cash alternatives within stocks and shares ISAs include money market funds, bond funds, short-dated bonds such as gilts and multi-asset funds. “You can opt for different risk levels of these funds to suit your needs,” she said.
Strategy 8: Claim all available tax breaks and benefits
While the government unleashed a £26bn tax grab, unclaimed tax breaks remain available. Suter recommended checking eligibility for marriage allowance, child benefit, free childcare hours and tax-free childcare.
Pensions offer particular opportunities. Basic rate taxpayers receive 20% tax relief, while higher and additional rate taxpayers can reclaim an extra 20% or 25% through self-assessment. For higher rate taxpayers, every £1 in their pension only costs 60p.
Every adult can pay in up to £20,000 a year into an ISA. “But use it or lose it, as once the new tax year hits next April that allowance is reset,” Suter warned.
Strategy 9: Invest in VCTs before tax relief cut
Investors who buy venture capital trusts (VCTs) on the primary market can currently claim a 30% tax rebate on investments of up to £200,000 each tax year, potentially reducing annual income tax bills by up to £60,000. This tax relief is being cut to 20% from April.
“These investments aren't for everyone, they are most often used by experienced, adventurous investors, especially those with large tax bills who have perhaps used up their pension and ISA allowances,” Suter finished. “But anyone planning to invest in VCTs could consider doing so before April, to lock in the higher tax relief.”