Autumn budget tax implications

With the general election bringing in a new government, rumours of significant tax changes in the upcoming budget have hit the headlines. With the first budget of our new government scheduled for 30 October 2024, major changes to pension and tax rules have been mooted.

Chancellor Rachel Reeves has stated that she does not intend to ‘raise taxes on working people’ which means that we do not expect Income Tax, National Insurance, or VAT to increase. The government have been clear in saying that taxes do need to rise, so the focus turns to which taxes they might increase in October. If they are unlikely to amend income tax, national insurance or VAT then the other obvious taxes to increase would be Capital Gains Tax, Inheritance Tax and pension tax relief, all of which would provide substantial revenue.

So, what are the options for the Chancellor in the upcoming budget?

Capital Gains Tax

Currently, any gain (or profit) on an asset a person sells is taxed at 10% (for basic rate taxpayers), or 20% (for higher and additional rate taxpayers) with a small £3,000 allowance per person per year. There are also special rates for when someone disposes of property of 18% and 24%, respectively.

The think tank ‘the Institute for Public Policy Research’ (IPPR) has suggested that aligning CGT rates with Income Tax rates would raise an additional £12 billion a year. This would return us to the position that prevailed between 1988 and 2008, where capital gains were taxed at the same rates as income. This was originally introduced by former Conservative Chancellor Nigel Lawson, and then revoked by former Labour Chancellor Gordon Brown.

This would mean that the highest rate payable on capital gains would increase to 45% (48% in Scotland), and is likely to impact anyone selling a buy-to-let property, significant quantities of shares or other taxable investments, or anyone selling a business once they had made full use of their Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief, which is taxed at 10% up to £1m).

Leaving aside the potential reaction to this change, this would mean that capital gains and income would be taxed at the same rate for the first time in 16 years, which is a meaningful change. Even on present trends, CGT is expected by the Office of Budget Responsibility to raise around £24 billion a year by 2028/29, so whatever happens, this is big money.

Source: Office for Budget Responsibility – Recent trends and latest forecast

Inheritance Tax

Inheritance Tax (IHT) is a 40% tax levied on all assets above a person’s nil rate band (£325,000 per person, potentially rising to £500k per person if the family home is part of the estate). There are various reliefs available for businesses, agricultural land, regular and lump sum gifts, and charitable donations.

What we have seen since 2009 is a freezing of all these allowances which is effectively a tax increase given that the cost of assets tends to rise each year, but IHT allowances remain static. We may see a reform of business relief and agricultural relief which would be a notable change to the current rules which have been in place for a number of years.

This means that an ever-increasing number of estates will need to pay IHT as the average estate size increases, but the allowances remain unchanged.

Pension Tax Relief

Pension contributions that an individual makes personally (as opposed to being paid by their employer) benefit from tax relief at their marginal rate of income tax. In other words, if someone pays £10,000 into their pension from income that has been taxed at 40%, they get 40% income tax relief on the contribution. They receive an immediate uplift of 20% automatically added to their pension by the government and claim the remaining 20% (or higher if additional rate taxpayer) in their tax return. This tax relief ensures money added to pension is free from tax and encourages working people to save into personal pensions, increasing the number of people self-funding their retirement rather than relying on the state.

The government have spent considerable time and resource building people’s trust in pensions, encouraging them to save so that the reliance on state pension as their only source of retirement income is reduced. Any changes will need to be carefully thought through and the implications of eroding trust in pensions will be one of the key considerations for the current government.

It is reported that the Chancellor is considering introducing a flat rate of pension tax relief at 30%. This would be a bonus for basic rate taxpayers who would normally only receive 20% relief, but would penalise higher and additional rate taxpayers who had previously received 40% or 45% (up to 48% in Scotland). This could significantly reduce the £50bn of tax rebates annually from the government to pension investors.

Pension Commencement Lump Sum

Another area hitting the headlines is Pension Commencement Lump Sum changes, previously tax-free cash lump sum. Currently people can take 25% of their pension tax free as a lump sum in retirement up to £268,275 (25% of the old Lifetime Allowance before it was abolished recently by the outgoing Conservative government). There are occasions where a pension has protected tax-free cash, meaning an amount higher than 25% is available so it is always important to review each pension in depth.

Any reduction to the 25% tax-free amount would potentially increase tax revenue in the future but this would not be immediate and may take a number of years to come through. Any such change has historically come with significant protection for existing pension holders and it may need a reasonable lead-in time so that providers and pension companies can amend their systems and processes to deal with the change. A change would significantly impact the trust workers have in pensions so it is one that will need to be well-considered as the last thing the government will want is to disincentivise current pension savers from adding further to their pension.

Autumn Budget tax implications – What can we do now?

The short answer is…wait. Wait to see what changes are announced in the budget and react to them in a constructive manner. Making significant changes to your pension or other financial planning based on rumoured changes is unlikely to be a sensible option.

If you have shares that you are likely to sell in the near future, doing this pre-budget may be a sensible move. Similarly, if you are likely to make a pension contribution this tax year then perhaps making that before 30^th October would be sensible. Same could be said for ISA allowances, contributing now reduces the impact of any changes made in the upcoming budget.

As for anything else, speak regularly with your financial planner and work with them to update and revisit your financial plan. Any new rules will often come with protections and quirks that are worth working through before developing a plan that fits with your plans for the future. If you would like to discuss any of this with one of our financial planners, please get in touch.