With the Chancellor adding more than £20billion to tax bills in her Budget last week, households across the country will be feeling the squeeze.
Tax rates are going up on income from savings, dividends and property income, while a further three-year freeze in income tax allowances will result in still more people being dragged into the tax net or into paying higher rates.
But there are things you can do to minimise the impact of Budget changes and make the most of the options that are still available to you. These are my top five tips.
Max out your state pension with credits
Last week we learned that the state pension will be even more valuable from April 2026, with an above-inflation increase of 4.8 per cent in the rate of the basic and the new state pension.
This means it is all the more important to make sure you are getting as much as you can.
One way to boost your pension if you are under state pension age but not working is to claim free ‘credits’ that help boost your National Insurance record.
You need 35 years’ worth of NI contributions to receive a full state pension, and you can gain credits towards your record even if you are not earning, for example, if you are receiving maternity or paternity pay or are looking for a job.
One credit that is often missed is those for grandparents and other family members who stay at home to look after a child so that the child’s parent can go out to work. These so-called ‘Specified Adult Childcare Credits’ can be claimed even if you only spend a few hours a week looking after the child.
Steve Webb is a partner at actuary and consulting firm Lane Clark & Peacock
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Another is Carers Credits for those who care at least 20 hours per week for a disabled person in receipt of certain benefits. It is well worth checking out all the National Insurance credits to see if you might be eligible.
Go to: gov.uk/national-insurance-credits.
Just one extra year covered by NI credits can increase your pension in retirement by more than £350 per year, or a total of £7,000 over a 20-year retirement.
Use the marriage allowance
With income tax thresholds now frozen for another two years, it’s even more important to claim all the tax-free amounts you are entitled to. A couple who are married or in a civil partnership, where one spouse is a non-taxpayer, can sign over 10 per cent of their tax-free allowance to a basic-rate tax paying husband or wife.
This is known as the Marriage Allowance. By transferring £1,260 of unused allowance you can reduce the household tax bill by 20 per cent of this amount or £252 per year.
Even better news is that you can backdate as far as 2021/22, meaning you might qualify for four year’s worth of help, totalling more than £1,000.
Claim higher rate tax relief on contributions
The Chancellor’s decision announced in the Budget to freeze income tax thresholds until 2031 will mean around one in four workers could be paying 40 per cent tax or above by 2030.
But there is one bit of good news: if you do start paying higher rate tax, money you pay into a pension will earn you more tax relief. Higher and additional rate taxpayers earn 40 and 45 per cent tax relief on their pension contributions – compared to 20 per cent for basic rate taxpayers.
In some schemes you receive basic rate relief automatically, but have to apply for the extra relief by telling HMRC about your pension contributions.
More than two million people miss out on this free money because they don’t know they need to claim it.
With growing numbers paying higher rate tax, the problem could get worse, so make sure you don’t miss out. Go to: gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments
Top up your state pension
If you are still short of a full pension once you are sure that you are claiming all your free credits, you should consider voluntary NI contributions to top up your record.
The increased value of the state pension means that they represent increasingly good value for money, especially if you can pay at lower rates which may apply in some previous years.
Topping up is not right for everyone (for example, if you are likely to be on benefits in retirement, or if you only expect to draw a state pension for a short period) but many people will get back their initial outlay within three or four years of retiring, and the rest is profit.
You can fill gaps in your record going back up to six years and you may find that some years are cheaper than others to fill – especially if you have already paid some NI for the year in question and only need to top it up.
Go to: gov.uk/voluntary-national-insurance-contributions
Make the most of salary sacrifice
Although the Chancellor Rachel Reeves is capping the amount of salary that can be ‘sacrificed’ and put into pensions while benefiting from a National Insurance break, being in a salary sacrifice arrangement can still be worthwhile.
Firstly, the cap on salary sacrifice doesn’t kick in until 2029 and even then you can still sacrifice up to £2,000 a year.
When the cap kicks in, salary sacrifice may still be advantageous as it allows you to make it look as if you have a lower salary than you do, which makes you eligible for benefits you would otherwise lose.
For those close to the £100,000 threshold, having a reduced salary can help you avoid losing help with childcare.
A reduced salary can also reduce the risk that your personal allowance starts to be tapered away if your salary would otherwise be over £100,000.
For those in the £60,000 to £80,000 range, a lower salary can mean a lower ‘High Income Child Benefit Charge’. For recent graduates, a lower salary can mean lower student loan repayments.
Before your employer makes any quick decisions in response to the Budget, make sure you talk to them about the advantages to you of carrying on some sort of salary sacrifice arrangement.
Steve Webb left the Department for Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
Do you have a pensions question for Steve? He answers readers’ queries in his regular Ask Steve column on our sister website, This Is Money. To pose one, please email him at pensionquestions@thisismoney.co.uk
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