Rachel Reeves has left office, but her tax legacy is only now beginning to bite. Even if Labour Chancellor John Healey does not increase a single tax in his Budget on October 28, millions will still pay more tax next April, thanks to the efforts of his predecessor.
Reeves unleashed £70 billion worth of new taxes on jobs, homes, incomes, savings, pensions, capital gains and inheritances during her two-year tenure. The IMF expects the UK's tax take to rise from around 38% today to 42.1% of GDP by the end of this Parliament. The UK used to pay less tax than its European neighbours, but Reeves changed that, crushing growth and economic sentiment in the process.
Tax rises still to come
The Tories began the tax assault to fund the Liz Truss debacle. Rishi Sunak and Jeremy Hunt froze income tax bands, slashed capital gains and dividend tax thresholds, and cut the top rate tax band. Then Reeves extended the tax threshold freeze by three years to 2031, dragging more Britons into HMRC's clutches every year.
In April this year, she imposed a 2% tax surcharge on non-ISA dividend income above £500. From next April, that 2% surcharge will be extended to savings interest and rental property income, taxed at 22%, 42% and 47%, depending on the band.
ISA and pension changes
Thanks to Reeves, the Cash ISA allowance will fall from £20,000 to £12,000 for under-65s from April, although the overall ISA allowance remains £20,000. Over-65s retain the full £20,000 Cash ISA allowance.
Possibly her most controversial move hits next April, when unused defined contribution pension pots become liable for inheritance tax. This could drag another 10,500 estates into paying the death tax. In 2029, almost three years after Reeves's exit, her tax raid on pension salary sacrifice will come into force.
Stealth tax raids continue
Stealth tax raids did not start under Reeves. Former Labour chancellor Alistair Darling tapered the personal allowance for people earning more than £100,000 from 2010. It remains with us today, cutting the personal allowance by £1 for every £2 of additional income up to £125,140, creating a brutal marginal income tax rate of 62%. Many turn down promotions as a result, as the extra effort and responsibility is not worth it.
AJ Bell's head of personal finance Sarah Coles said people should fight back by making full use of ISAs to shelter investments from dividend and capital gains tax. The under-65s should use the £20,000 Cash ISA allowance before next April's cut. Pension contributions can reduce taxable income to keep some people below tax thresholds. Married couples can consider splitting assets between them so both partners make better use of their allowances. Those planning for inheritance tax can also use gifting allowances, including the £3,000 annual exemption, or make larger gifts that fall outside the estate after seven years.
Reeves may be gone but her tax legacy is only now beginning to bite. And now we have John Healey to worry about too.
