I can’t think of a time an upcoming budget has had everyone so worked up about the impact to their personal financial planning. People are genuinely worried about what this budget could mean to them and their families.

It’s not been helped by Keir Starmer telling us to expect it to be painful, saying “things will get worse before they get better“.

As a general rule I’d say that, like with investing, worrying about the things outside your control isn’t helpful (i.e. global events that cause markets to go up/down). You want to focus on the decisions you can make and the actions you can take (i.e. things you can control) to drive the best outcomes.

You can’t change what Rachel Reeves puts forward in the October budget. Yet, making changes to your financial planning now based on rumour could backfire if the budget doesn’t evolve as you think it might. So, I would suggest treading cautiously here.

In this post I’ll explore with you what everyone is so worried about, the financial planning decisions you could be making ahead of the budget, along with the things that might catch you out if things don’t turn out the way you think.

If you prefer video content, Nova Partner James Shackell has created this handy video guide on YouTube.

What we know so far

Labour have made a lot of noise about the “unexpected” state of the government finances. There’s some scepticism to be had on how unexpected this really is, but the end result is there’s a £22bn ”unsustainable” shortfall in tax revenue that needs to be filled.

However, Rachel Reeves has got her hands a little tied. Labour have been clear that they won’t be increasing VAT, Income Tax or National Insurance on "working people". Those three taxes make up nearly 60% of government revenue, so changes to these would have made a large impact in making up any shortfall.

So, if Labour are not changing these key taxes, what else could it be?

Well, three key areas that look to be in the spotlight from a financial planning lens are:

• Pensions
• Inheritance tax
• Capital Gains Tax (CGT)

Pensions

I would put this very high up the likely list. Every government since the dawn of time has made changes to pension legislation.

Add to that a Labour manifesto stating a commitment to “review the current state of the pensions and retirement savings landscape” and it looks like we’re in for another round of changes.

Pensions currently benefit from a wide range of benefits such as:

• Tax relief on contributions
• Tax-free growth
• A tax-free lump sum once at retirement
• Exemption from IHT

The reason for these tax benefits is to encourage individuals to save for their financial future, avoiding them from being reliant on the public finances in later life. So, the Chancellor will need to strike a careful balance here.

There are many elements of pension legislation that could potentially be in for change, but likewise many of these have theoretically been ruled out. That’s not to say Labour may change their mind on things…

So, what could be in scope?

Tax relief on contributions

Currently, paying money into a pension gives you tax relief at your marginal tax rate. That means higher and additional-rate taxpayers can claim 40-45% tax relief on the contributions they make. Likewise employer contributions often avoid employers' National Insurance.

Combined, these tax perks cost the exchequer about £50bn a year, so you can see why many are speculating this area is likely in for some change.

One example of reform that has been mooted for a while now, is a flat rate of tax relief. Depending on the value of tax relief, this could potentially benefit lower rate taxpayers but would almost certainly impact negatively those paying 40% income tax or above.

Changing the way pensions are taxed could increase the amount the government can invest into UK growth by over £20bn a year, adding up to £100bn over five years, according to analysis by one pension specialist.

However, The Times recently reported that the government has abandoned any plan for a flat rate of tax, after assessing the impact on public sector workers. It used the example of a nurse earning £50,000, who could face an additional tax bill of £1,000 on their pension contribution if tax relief was lowered.

One to wait and see then.

Tax-free cash

Currently, individuals are able to take up to 25% of their pension as a tax-free lump sum. Some people are speculating that we might lose this, or the value will be reduced.

Tax-free cash has been a key tenant of saving into pensions for a long time now, so is unlikely to change. Likewise, historically changes like this have had forms of transitional protections to ensure those who’ve already saved on the basis they’d get 25% tax-free aren’t penalised. Which means unless Labour don’t provide any transitional protections, it’s not going to raise much additional tax revenue any time soon.

That’s not to say it won’t change. Just that it’s unlikely. Especially when you add in this quote from Labour during the election campaign:

“The ability to withdraw 25 per cent of your pension as a tax-free lump sum is a permanent feature of the tax system and Labour are not planning to change this.“

Lifetime Allowance

The previous conservative government scrapped the Lifetime Allowance, which capped the maximum you could save into a pension without paying a tax charge. Some commentators have speculated this could be reintroduced.

Labour made clear in their election campaign that they won’t be reinstating this. Similarly to tax-free cash, previous changes to the Lifetime Allowance also typically came with transitional rules to protect those already over any cap that was introduced, which would have to be removed to increase tax revenue in the short-term.

In a world where various governments are trying to simplify pensions and with their election commitment, it feels unlikely that Labour would re-introduce a feature that has been incredibly complicated for individuals to adhere to previously.

Pensions exemption to Inheritance Tax (IHT)

Currently, pensions aren’t included inside your estate for Inheritance Tax (IHT) purposes. Likewise, if you pass away before 75, those who inherit the pension can take the money out tax-free.

Being frank, the current pension tax regime is more generous on Inheritance Tax (IHT) than it has been for a long time. With the view of “those with the broadest shoulders should bear the heavier burden” this one feels like it’s in for a change.

Some have speculated pensions could be included inside the taxable estate and thus taxed on death. Another outcome could be that those who inherit your pension will pay income tax on the withdrawals instead of receiving them tax-free.

Actions you could take

In general, if it made sense to put money into pensions before any budget changes, then this is likely still good planning to do. Likewise if you were planning a withdrawal of some of your tax-free cash, there might be sense to take a portion now if you need it.

However, making extreme changes to your pension planning, to preempt a budget and the changes within it could end up catching you out.

Some questions you may be asking yourself are:

Should I take all of my tax-free cash now, in case the allowance is reduced?

• If you do, you will now have money outside of the pension pot, where it would have potentially been able to grow free of capital gains or income tax.
• It is also now inside of your estate for inheritance tax.
• So unless you have a specific plan for your tax-free cash, taking it out now would mean that it is likely to be subject to tax and IHT.

What about making a big contribution to your pension, in case pension tax relief is reduced to a flat rate?

• Sounds good, unless that change doesn’t happen and you now wish you hadn’t locked money away for retirement.
• That could be even more annoying if they reduce the IHT exemption, or the tax-free lump sum.

The key point for both of these fairly crude examples is that, unless these actions made sense as part of your normal planning, taking any extreme measures to avoid tax changes we don’t know are happening is very likely to end up not helping in the long term.

Also, just remember: there will be another government at some point in the future who may change everything all over again.

Inheritance Tax (IHT)

IHT looks to be a key area where we could see a tax increase. It might surprise you to know that currently, according to HMRC data, only one in 20 estates will pay any IHT bill. So, changes here would fit with the overall agenda Labour have set out.

Many of the current core allowances (nil rate band of £325,000 and residence nil rate band of £175,000) have already been frozen since 2009, which, when accounting for inflation, means significant reductions in real terms. These frozen allowances have meant tax revenues from IHT have been gradually increasing for a while now, as both house prices and the savings of individuals increases over time. But further reductions to these allowances could still be made.

The Chancellor may consider revising some of the rules around gifting, which currently allow individuals to completely avoid Inheritance Tax (IHT) if they survive for seven years after making a gift of any value. There are also allowances for smaller gifts, though these primarily serve to reduce administrative burdens, as they don’t significantly impact overall tax revenues.

There is also speculation around removing or reducing Agricultural Relief and Business Relief when gifting businesses. While this change could generate additional revenue, critics argue it may negatively affect the UK’s entrepreneurial economy - the very businesses that the Chancellor aims to support.

Another potential focus is reviewing the types of businesses that qualify for Business Relief when investing. For example, shares on the AIM market often carry IHT exemptions that can help mitigate taxes on estates.

We’ve already covered speculation on pensions being brought into the taxable estate, or some of the pension IHT benefits being reduced.

So whilst the UK has one of the highest inheritance tax rates in the OECD at 40%, even outside of a headline rate change you can see there are many options for further taxation here.

Actions you could take

Well, like with the pension example, taking any specific action for IHT purposes should only really be considered if it was already part of your wider financial plan.

Added to this, IHT is an inherently long-term tax. You are not likely to pay it tomorrow. Often, the tax charge is years away and all manner of changes to the regime could come in by then, so why act especially differently today?

If you were already planning to make some gifts in the near term, then making these before the 30th October 2024 could be prudent.

However, making large gifts which have not been carefully considered to avoid a potential budget change has the risk of backfiring and causing you financial detriment. It’s important to first focus on our own financial requirements, before we look to gifting large sums to our loved ones.

Capital Gains Tax (CGT)

This is the one that we’ve been talking to clients about for a long time now. There has been a lot of noise about changes to capital gains tax for a good while and we think this is likely in scope for reform.

Currently, if you sell investments and realise a capital gain, you pay tax at a lower rate than your income tax rate.

• That could be 10% for lower rate taxpayers, or 20% for higher/additional rate taxpayers.
• These rates are slightly higher when looking at property, but still sit lower than income tax.

For some, it feels unfair that they pay more tax on income through work than others pay from their growth on investing.

However there’s a wider picture to be seen - the lower tax rate is often needed to offset the risk that investments typically carry:

• Take property as a very simple example: in the UK the property market has grown less than inflation over the last 10 years.
• So if you sell your property, whilst it might have grown in value, it may still be worth less in real terms than when you purchased it.
• You’ll then get taxed on the growth, further putting you in the red in real terms.

From a policy perspective, increasing CGT is not a straightforward matter. Often, making changes has unforeseen consequences. Increasing rates here may discourage people from investing in companies, property and other important sectors which help drive the economy.

When CGT rates are high, people tend to not sell so much and hold onto assets for longer - on the basis that a future change of government will likely come and rates could change again.

Did you know that the government’s own predictions show that many strategies for increasing CGT end up in less revenue from the tax by 2027/28?

So what could change?

The headline rates for CGT could be set for an increase. That could be across the board, or in a specific area (investments vs property for example). The increases could be relatively small or, in the extreme some have suggested the rates could be aligned to income tax.

As said, simply increasing the rate of CGT to income tax rates doesn’t properly account for the fundamental difference between income and asset growth. One solution to this is something called indexation, which means you pay capital gains tax on any growth above inflation. Seen by some as fairer, it would potentially limit the revenue such a change could make.

When could changes take effect?

There’s an interesting point here that if you're trying to raise taxes quickly, giving people an incentive to sell things now and pay CGT would deliver that. If the Government announces CGT rates go up from April, many people will start to sell things before then to lock in a lower rate of 20% for example.

That said, many commentators agree that to avoid this very issue it is possible that any changes to CGT could take effect from the date of the budget instead of the new tax year i.e. any sales from the 30 October 2024 tax rates could be at a higher rate than now.

Actions you could take

This is probably the main area where we can see people thinking about making changes before the budget.

If you look historically at these rates, they are at all time lows. It’s unlikely that they will fall further than current rates under the current government.

So, if you have plans to sell your investments in the near future, it could be prudent planning to lock in the gains under a known tax rate which is relatively low.

But as ever, this is not to be done without careful consideration:

A few considerations to selling down gains

• Tax rates may not go up, so you may be triggering tax you don’t need to
• Be aware that you’ll need to put aside the money to pay the tax bill you trigger, which is money that was previously invested with the potential to grow
• If you don’t need the money in the short term, future governments and budgets could easily reduce this tax rate again
• You typically need to sell an investment for at least 30 days before you rebuy it to trigger a disposal for CGT - if you sell to cash for 30 days you might miss out on market returns that could wipe out any benefit from locking in a lower tax rate.

Some other planning opportunities to think about around CGT include:

• Utilising your annual CGT exemptions (£3,000 each)
• Interspousal transfers - you can transfer assets between spouses without triggering CGT, meaning the lower rate tax payer can sell down the assets in their name.
• If you’re not doing so already, reinvesting into products that have the potential to grow tax free such as ISAs and pensions is normally very beneficial over the long term.

The 30 day rule

The 30 day rule for selling investments does present a potential planning option. You could, for example, sell one investment and buy an alternative one to avoid staying in cash for 30 days.

• If tax rates increase, you hold for 30 days then rebuy your original investment, rebasing your portfolio and paying tax at the lower rate.
• If tax rates don’t increase, there’s an opportunity to sell right away and rebuy the original investment within the 30 days to avoid paying any CGT.

Just be mindful, care should be taken on finding a suitable alternative investment for that time period. Markets will move and you may crystallise gains on the other side of the budget at higher tax rates. There’s also the risk of anti-avoidance measures being put in place to stop people attempting this type of planning, which could easily end with you paying tax you didn’t need to.

There is no guarantee that this will leave you in a better position for all of the above reasons - as previously mentioned, making these sorts of preemptive planning decisions, based on hypotheticals, could easily be regretted. The only way to be sure you are making the right decisions, and in the most optimal way, is for you to wait until the 30th October and to know for sure what’s changing. Food for thought.

Closing comments

Many of the actions people might take before the budget have both potential advantages and drawbacks. In trying to mitigate one issue, which is not yet known, you could take on other issues many of which are known. The right course of action will vary between different people depending on their circumstances and appetite for risk, so warrants a conversation with a professional.

The best thing you can do is ensure you’ve got a good financial plan in place including a model of your finances over time. This can help you cut out the noise and focus on the things in your control, confident that you’re on the right track.

A good financial planner will be making sure you’re taking advantage of various allowances each year and keeping you tracking against a long term financial plan.

Likewise, a financial planner will have access to a whole range of tax planning tools and investment solutions that can help you reduce your tax bill more generally, or optimise the tax on investments more effectively.

If you’d like to have a chat to us about how we can help you with your tax planning, or building a financial plan and model of your finances - please get in touch.

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