As ever, we are seeing extensive press speculation ahead of the Budget on 30th October. Just because it’s in the newspapers doesn’t mean it’s going to happen, so people should be very wary of making any kneejerk changes to their personal finances that might ultimately backfire and put them in a worse position.
Yet there’s no doubt this Budget could be a significant one. Often commentators are scratching around for any major changes when the Chancellor stands up to speak. A tweak here and a tweak there, but nothing seismic. This time could well be different. Not only is the inaugural fiscal set piece of the new Labour government, but the Chancellor has committed to only one event a year. With no spring Budget or statement this Budget will likely confirm all the short-term tax changes that lie ahead.
It’s therefore a good time to look at your overall financial planning situation and consider actions that could benefit you even there are no changes that end up affecting you.
1. Use your ISA allowance
ISAs are often the first port of call for investors looking to save tax. They are simple, flexible and tax efficient. As well as being able to invest in a wide range of assets you can easily access your money, so they are suitable for a variety of saving and investing needs. There’s been no rumours about any changes to ISA rules or limits in the Budget, but they shouldn’t be taken for granted. And with the tax net closing on income and capital gains they are more valuable than ever.
The ISA allowance is available to any UK resident over 18 and can be split between different types – the main ones being Cash and Stocks & Shares. Charles Stanley Direct offers Stocks and Shares ISAs. These could deliver a higher return than Cash ISAs over the longer term but remember that there is a risk the value of your investments could fall – especially in the short term.
The benefits:
- Gains realised on the sale of stocks and shares within an ISA are free from capital gains tax (see below)
- Any dividends or interest income are free of tax
- In the event of the death of a spouse/civil partner, the surviving spouse/civil partner can inherit the tax benefits.
- ISAs are portable and can be transferred between providers without losing their tax-free status.
By maximising the allowance each year it’s possible to build up a large pot of money sheltered from tax. Remember too that ISA investments don’t need to be declared on a tax return, so they can also simplify your finances.
The full ISA allowance is £20,000 in the current 2024/25 tax year, but just in case there is any reduction in the Budget it might make sense to make the most of this now. If you are investing in a Charles Stanley Direct Stocks & Shares ISA, you don’t have to decide on the investments right away. You have the option of leaving cash in the account until you decide, though this should only be considered a temporary arrangement and a higher interest is likely to be available through a competitive cash ISA or a low risk fund product such as a money market fund.
2. Open or add to a Junior ISA
Education, a first car, getting married and a deposit for a house are just some of the daunting costs faced by the younger generation. Investing from an early age could be a great way to give your child or grandchild a head start towards some or all of these.
A Junior ISA (JISA) remains a popular option with these life goals in mind. Family and friends can help build tax-efficient investments for a child with an allowance of £9,000 a year. Importantly, it has the same tax benefits as an adult ISA – there is no tax on profits or income.
Withdrawals are possible from age 18 when it automatically converts to an adult ISA, meaning the pot can be useful to help with the cost of university or a deposit for a house, or invested for much longer.
A parent or legal guardian of a child under the age of 18 and UK resident can open a JISA. With the Charles Stanley Direct Junior Stocks & Shares ISA this can be done online. Grandparents, relatives or family friends can also contribute to the account.
The parent or guardian is responsible for the management of the JISA and can make investment decisions, but the investments belong to the child. Investors can have either a Cash JISA or a Stocks and Shares JISA, or one of each, subject to the annual investment limit.
3. Optimise pension contributions
Almost everyone includes a comfortable retirement as one of their financial goals. Pensions are often a highly effective means of achieving this due to the tax relief available on payments into them. However, there’s speculation there could be changes to pension legislation in the Budget. This may include limitations to the amount of tax relief that is available for higher and additional rate taxpayers, so it may be worth bringing forward any planned contributions just in case.
Currently, anyone under 75 with UK earnings can receive tax relief when they make a contribution within the annual allowance to a personal pension such as the Charles Stanley Direct SIPP. 20% is added by HMRC and any further higher or additional rate income tax relief can be reclaimed – potentially a simple way of reducing your income tax bill for the year.
For example, an investor contributes £8,000 into their SIPP and £2,000 is claimed back from HMRC by the pension provider. A higher rate taxpayer could claim back up to a further 20% via their tax return, reducing the overall cost of the contribution to as little as £6,000. In the same instance, additional rate taxpayers could claim back up to a further 25% making the cost just £5,500 for a £10,000 contribution. Please note that rates of income tax differ in Scotland, but the same principle applies.
For the 2024/25 tax year £60,000 can be invested into your pensions each year (including any tax relief and employer payments), or a sum equal to your annual income if lower. However, high income earners get a lower annual allowance, which could limit their maximum contribution to as little as £10,000 a year. The rules on when this ‘tapered annual allowance’ kicks in are complicated but are only potentially an issue for very high earners.
There’s also a lower annual allowance of £10,000 for people that have started to access their pensions flexibly post-retirement age, for example by taking an income through drawdown. Lower earners and those with no income at all still get a minimum annual allowance of £3,600.
Remember, the tax treatment of pensions depends on individual circumstances and is subject to change in the future.
Will I have enough for the retirement I want?
Budget: Will pension tax free cash be axed?
4. Consider whether you should use your CGT allowance
Capital Gains Tax (CGT) is the tax you pay when you realise a profitable investment – unless it is in a tax efficient wrapper such as an ISA or pension.
This 2024/25 tax year you can realise profits on investments of up to £3,000 free from CGT. Above this the rates payable on Capital Gains Tax are presently 10% basic rate and 20% higher rate, but on residential property (other than your own home) the rates are 18% and 24% respectively. Your rate of capital gains tax will depend on your taxable income and gains combined. It’s possible these rates could be amended in the Budget, either with immediate effect or, more conventionally, from the start of the new tax year on 6th April 2025.
It’s not possible to carry the CGT allowance over to the next tax year. Therefore, if you are planning to sell assets that have gone up in value by more than your capital gains tax allowance it may make sense to split this over more than one tax year. There may be opportunities to make use of the annual exemption if you hold investments in a general investment account by selling investments and purchasing them back within an ISA or a Pension. This way assets are transferred from a taxable environment to a tax free one.
‘Bed and ISA’: Shelter your shareholdings from tax and use your CGT allowance
In addition, it may be worth considering the following, and seeking professional tax advice if unsure:
- Making any planned disposals ahead of the Budget to have greater certainty over the tax liability
- If you are married or in a civil partnership, it may be worthwhile transferring certain assets to or from your partner. You usually don’t pay CGT on an asset you give or sell to your husband, wife or civil partner. They may have to pay tax on any gain if they later dispose of it, but they may pay a lower rate and/or be able to use their CGT allowance.
- Understanding the impact any change to a CGT relief you are particularly reliant upon for your planning.
- The consideration of more sophisticated products such as offshore bonds for tax planning through your adviser.
Will Capital Gains Tax increase in the Budget?
How to pay less tax on investment gains
5. Think about inheritance tax
Inheritance Tax (IHT) is a tax on the estate (the property, money and possessions) of someone who's died. It is currently payable at a rate of 40% on estates worth over a basic allowance threshold of £325,000.
Under present rules, married couples and Civil Partners can pass their thresholds between them meaning that there is normally nothing to pay on the first £650,000 of a joint estate. A ‘main residence’ allowance in respect of family homes under £1m in value increases this figure to £1m, though this extra allowance starts taper off for estates worth over £2m – and those over £2.7m have none.
It’s possible the Chancellor could modify the IHT rules and exemptions in the Budget so, if you haven’t already, now could be an opportune time to consider the rules as they stand, who you want to benefit from your assets and whether you and your family might be affected.
The simplest way to reduce the size of your estate, and a potential IHT bill, is to gift money to others, perhaps children or grandchildren to help them out financially. Gifts automatically exempt from IHT include an annual £3,000 lump sum, which can be given to one person or divided between several people, plus £250 a year to as many people as you like.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
