From cutting savers’ annual cash ISA allowance to speculation over higher taxes on savings income, we explore the potential tax threats ahead

High earners could find themselves in the Chancellor’s crosshairs in the upcoming Autumn Budget.

Rumours of policies that could be enacted include curbs on salary sacrifice arrangements and the shrinking of cash ISA allowances.

Some of these policies will particularly hit those that pay higher rates of income tax, with marginal tax rates going up from 20 to 40 per cent once someone earns over £50,270, and 40 to 45 per cent once someone earns over £125,140.

Here, The i Paper explores the potential tax threats, and what those with the broadest shoulders can do to tackle them.

Salary sacrifice under review

Rachel Reeves is reportedly planning to cap tax-free pension salary sacrifice at £2,000 annually – a measure that could raise up to £2bn a year.

Under a salary sacrifice arrangement, an employee agrees to give up part of their gross pay in return for a non-cash benefit such as pension contributions, childcare, or an electric car.

Because their salary is lower, both the employee and employer pay less national insurance (NI). Employers benefit by saving on employer NI contributions, while employees pay less income tax and NI on their reduced salary.

Higher earners often use salary sacrifice because lowering their pay can move them into a lower tax band or help them avoid thresholds where tax charges increase.

For example, if you earn just over £50,270 – you may use salary sacrifice to get your income below that figure, so none of your income is subject to the higher rate of tax.

Currently, there is no limit on how much an employee can contribute via salary sacrifice before it becomes subject to NI.

Shaun Moore, personal tax expert at Quilter, warned this could “risk discouraging people from saving adequately for their future.”

He added: “At a time when the UK already faces a chronic under-saving problem, adding extra costs for employers and workers could create yet another barrier.”

Craig Rickman, personal finance expert at interactive investor, said this move could lead to businesses offering less generous pension packages, “blowing a hole in workers’ future retirement pots at a time when they need all the help they can get”.

One option for workers affected by this change – if it does come in – is to pay more money into a pension yourself.

While pension payments are subject to NI, you do get relief on income tax at your marginal rate. If you are a higher or additional rate payer, this means 40 or 45 per cent income tax relief on your payments, and you will be increasing the size of your retirement pot.

Bigger income tax bills

The Chancellor had been expected to raise rates of income tax in the face of a blackhole in her spending plans but reports suggest she will no longer go ahead with this.

Instead, she could look at adjusting the thresholds at which people pay the higher and additional rates of tax, which would also bring in more revenue.

Reeves could opt to reduce the salary thresholds at which people pay 40 per cent income tax from £50,270, as well as the £125,140 threshold at which they pay the 45 per cent rate.

If she were to drop both rates by £5,000 – from £50,270 and £125,150 to £45,270 and £120,140, someone on £60,000 would pay £700 more in income tax and national insurance, while someone on £150,000 would pay £950 more.

All workers earning above £45,270 would pay more tax, and everyone earning below this would pay the same amount.

Using pensions tax relief to cut your income tax bill – as highlighted above – could be an option if tax thresholds are lowered.

More tax on savings

Currently in the UK, basic rate taxpayers can earn £1,000 in savings interest every year tax-free, but for higher rate taxpayers, this allowance halves to £500. Additional-rate taxpayers, meanwhile, pay tax on all savings income.

At the moment, you can pay £20,000 into cash or stocks and shares ISAs every year, and avoid paying any income tax or capital gains on the money you make.

Reeves is considering cutting savers’ annual cash ISA allowance, with reports suggesting this could go down to £10,000 or £12,000.

If the annual cash ISA allowance is slashed later this month – as is rumoured – high earners would be hit most, as they have the smallest allowances for tax-free savings interest, and pay the most tax on the interest too.

Savers pay their usual rate of income tax on savings interest over a certain threshold not held in ISAs.

Some of the highest earners – those making more than £125,000 a year – could end up paying more than £3,000 in tax on their savings over five years if the allowance is cut to £10,000.

One option, if you are comfortable with the risk and this policy does come to fruition – is putting your money into a stocks and shares ISA instead of cash.

There is no suggestion the allowance on these will be cut. The gains can be higher than with cash, but there is also a risk that you can lose money with investing, unlike with cash.