EVERYONE could end up paying thousands more in tax next year, even though rates are staying the same.
This is because as wages go up and prices rise, people end up having to hand over a bigger slice of what they earn and spend to the taxman.
1
Here’s how the various political measures are likely to affect our wallets.
We’ll have to pay more income tax
One of the main areas where people end up paying more is through income tax.
At the moment, you can earn £12,500 a year without paying any tax on it, if you earn over £50,000 a year, you pay the top rate of tax.
Often, this allowance increases each year, but the government has said that it is going to keep it the same until 2021.
If everyone earned the same amount, it wouldn’t make any difference, but because wages are predicted to increase it means anyone who earns over £12,500 will have to pay more tax.
But wages rose by 3.5 per cent on average and the National Living Wage is due to go up by six per cent on average.
If they rise by 3.5 per cent again, then someone earning £12,500 in 2019/20 would pay £88 more in income tax in 2020/21.
Someone earning £50,000 in 2019/20 would pay £700 more in income tax in 2020/21.
Some people might end up being pushed up a tax bracket as well, which means they’ll have to pay a higher rate.
HOW TO MAKE SURE YOU DON’T PAY TOO MUCH TAX
SARAH Coles, personal finance analyst, Hargreaves Lansdown:, explains her top tips for keeping your tax under control.
- ISAs
In an effort to encourage saving and investing, the government offers the chance to squirrel away £20,000 in this tax year – free of tax.
If you’re saving to buy a first property, are aged 18-39, and have at least a year until you expect to buy, you should consider a LISA, because in addition to tax free growth, you get a 25 per cent bonus on contributions.
Don’t forget Junior ISAs too. In the current tax year, you can save or invest £4,368 in a JISA for any qualifying child, and all interest, dividends or capital gains are tax free.
- Pensions
Contributions to pensions attract tax relief at your highest marginal rate, and the first 25% taken from the pension is usually tax-free.
There’s tax relief on pensions even for non-taxpayers – on the first £3,600 a year. It means you can contribute tax-efficiently to a pension on behalf of a child.
- 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 schemes, and technology schemes.
- Spouse exemptions
Assets that produce an income 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 allowances.
The balance can be held by the spouse paying the lower rate of tax, to reduce the tax payable.
- Marriage allowance
If one spouse is a non-tax payer, and the other is a basic rate taxpayer, the marriage allowance lets the non-tax-payer give £1,250 of their personal allowance to their spouse in the current tax year.
You’ll probably end up paying more VAT
VAT is another tax we’ll end up paying more of, even though rates are staying the same.
As prices rise thanks to inflation and we all start spending more, the taxman gets a bigger slice of the action.
That’s because VAT is a percentage of everything that’s spent, if we buy more – we pay more tax.
Last year, VAT rates stayed the same but the government took £132billion more than the previous year – an increase of 5.3 per cent.
The average household spent £5,656 on these taxes in 2017/18.
Assuming another 5 per cent annual rise, this would mean they spend £5,939 in 18/19, £6,236 in 2019/20 and £6,548 in 2020/21 – a total increase of £312.
Council tax could get more expensive
Councils will be able to raise rates by two per cent, or four per cent if they have responsibility for social care.
The average council tax bill for band B and D properties in in England is £1,750.
That means a four per cent increase would cost the average household £70
National Insurance could get cheaper
The government has pledged to raise the National Insurance threshold to £9,500 in April.
This means that the amount of money you can earn without paying NI contributions will go up, which should leave you better off.
It’s not much of a saving though, you’d get to keep an extra £104 each year.
Sarah Coles, personal finance analyst, Hargreaves Lansdown said: “You might have big plans for this year’s pay rise, but after the taxman’s finished with it, there’s a good chance you’ll get far less out of its tattered remains than you’d hoped.
The government has promised not to raise key tax rates, but that’s not the full picture, because when it comes to tax, simply by keeping things the same, the taxman can take more of our cash.
“In fact, if you’re currently earning £50,000 you could spend £1,000 more in tax next year.”
From bulk buying to slashing your fuel bills, here’s how to save £3,500 in 2020.
How to get out of debt in eight simple steps – and get advice for free.
Credit card customers who only make minimum repayments could have cards suspended under new rules.
