The upcoming Autumn Budget in the UK could significantly impact high earners, particularly those with incomes exceeding £50,000. Chancellor Rachel Reeves is reportedly considering measures that may include restrictions on salary sacrifice arrangements and a reduction in cash ISA allowances. These changes, if enacted, could further strain finances for those already paying higher rates of income tax.
Proposed Salary Sacrifice Changes
One of the most notable proposals involves capping tax-free pension salary sacrifice at £2,000 annually. This adjustment could potentially generate up to £2 billion per year for the government. Under current salary sacrifice arrangements, employees can exchange a portion of their gross salary for non-cash benefits such as pension contributions, childcare, or electric vehicles.
This arrangement allows both employees and employers to save on national insurance contributions. For high earners, salary sacrifice is often a strategy to lower taxable income, potentially moving them into a lower tax bracket. For instance, someone earning just over £50,270 may use this method to reduce their taxable income and avoid higher tax rates.
Experts are voicing concerns about the implications of these changes. Shaun Moore, a personal tax expert at Quilter, warned that the proposed cap could deter individuals from saving adequately for retirement, exacerbating the UK’s existing savings crisis. Similarly, Craig Rickman, a personal finance expert at Interactive Investor, cautioned that businesses may respond by offering less generous pension packages, which could undermine workers’ retirement savings.
Income Tax Threshold Adjustments
In addition to potential salary sacrifice restrictions, there are discussions about adjusting the income tax thresholds. Previously, there were expectations that Reeves would raise income tax rates to address a fiscal shortfall. However, reports now indicate that she may not pursue this option. Instead, she could consider lowering the income thresholds at which higher rates of tax apply.
If the threshold for the 40 percent income tax rate were reduced from £50,270 to £45,270, and the 45 percent rate from £125,140 to £120,140, individuals earning £60,000 could face an additional £700 in tax liabilities. Those on salaries of £150,000 might see their tax bill rise by £950.
These changes would mean that anyone earning above £45,270 would incur higher taxes, while those below this threshold would remain unaffected. To mitigate this potential increase, workers could consider maximizing their pension contributions, which still offer tax relief at the marginal rate.
Impact on Savings and ISAs
Currently, basic rate taxpayers in the UK can earn £1,000 in savings interest tax-free, while higher rate taxpayers see this allowance halved to £500. Additional-rate taxpayers pay tax on all savings income. The annual cash ISA allowance, which currently stands at £20,000, may also face cuts, with suggestions it could drop to £10,000 or £12,000.
Such a reduction would disproportionately affect high earners, who rely on these allowances to maximize their tax-free savings. If the government follows through with these proposed changes, individuals earning over £125,000 could face tax liabilities exceeding £3,000 on their savings over five years, should the cash ISA allowance be reduced.
For those willing to accept a higher risk, shifting funds into stocks and shares ISAs might be a viable alternative, as there are currently no indications that these allowances will be reduced. This option presents the potential for higher returns, albeit with the inherent risk of market fluctuations.
The upcoming budget announcements could reshape the financial landscape for high earners in the UK, compelling them to reassess their saving and investment strategies. As details unfold, individuals will need to remain vigilant and consider proactive measures to navigate these potential changes in the tax environment.
