Quilter: Treasury makes a pretty penny as NI hike comes into play and more are caught in the IHT net

by | May 24, 2022

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Rosie Hooper, chartered financial planner at Quilter, comments on the latest HMRC tax receipts and National Insurance statistics:

“The latest figures show receipts from Income Tax and National Insurance payments for April 2022 were £37.9bn, up £6.5bn compared to the same period a year earlier. This considerable increase has been driven by a number of factors, including a rise in the number of paid employees in the last month and an increase in monthly pay. Additionally, this month’s data includes the first month of increased National Insurance contributions following the government’s 1.25 percentage point hike which came into play on 6 April. 

“For those already feeling the cost of living squeeze, the NI hike will have caused an unwelcome dip in their monthly income. However, as announced in the Chancellor’s Spring Statement, this element of the increase will see a dip in the coming months as the NI threshold is set to increase to £12,570 a year in July in line with the Income Tax threshold.

“Not only has the government made a pretty penny through the NI hike, but Inheritance Tax has continued to be a fairly lucrative area for the Treasury. The latest figures show that IHT receipts for April 2022 were £0.5 billion, up £10 million than in the same period a year earlier.

“These ever-increasing figures show that the government are gradually increasing tax revenues without significantly increasing the burden on taxpayers. However, IHT was once viewed as a tax on wealthier individuals, but the reality is that the average UK property price has continued to creep ever closer to the standard NRB. With the NRB and RNRB frozen until 2026 and house prices still on the up, many more people could face a hefty IHT bill. 

“While house prices may soon see a slowdown due to the long list of financial concerns facing the UK, particularly inflation which now looks set to hit double figures, this is unlikely to take the sting out of IHT bills for some time.

Three ways to lower your IHT bill:

Make full use of your nil-rate band and residence nil rate band:

“This tax year, you can pass on up to £175,000 of your property tax-free, which is effectively doubled to £350,000 when combined with the allowance of your spouse or civil partner. That’s layered on top of your inheritance tax allowance – or nil rate band – of £325,000, meaning it is possible to pass on £1m inheritance free as a couple. However, the RNRB only works for those with direct descendants to inherit the family home and is capped at the value of the property being inherited (less any mortgage outstanding), while the UK’s six million cohabitees are less fortunate and cannot claim the combined allowances.

Make a gift to family members: 

“There are other ways to reduce your inheritance tax exposure, such as gifting to family members. Gifts to spouses or civil partners are completely free of IHT and each tax year you can also give away up to £3,000 worth of gifts with your annual exemption, so as a couple you could gift £6,000 a year. In addition, there is no limit on excess income – above expenditure – that can be gifted. Unfortunately, gifting allowances have failed to keep up with inflation, and the currently soaring inflation rates will do little to help matters in terms of IHT bills.

Consider a transfer:

“If required, you could also consider more significant gifts which would be Potentially Exempt Transfers (PETs) or Chargeable Lifetime Transfers (CLTs), but these will take seven years to see the IHT benefit. As well as reducing the taxable estate value, gifting is particularly useful for estates (above £2million) impacted by the RNRB taper as the gifts can immediately reclaim the extra band.”

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