In time honoured fashion it’s time to dust off the Budget crystal ball. While the outlook is murky in terms of the details, it’s clearly going to be a significant event in terms of the impact on personal finances.
In her speech today (4th November), the Chancellor set the scene for major tax rises by reaffirming that spending cuts were off the table and her ‘iron clad’ fiscal rules are here to stay.
So, with no obligation to cross my palm with silver – and the substantial caveat that I know no more than anyone else – let’s consider some of the rumours that have been circulating.
Income tax and national insurance
In its manifesto, Labour pledged not to raise income tax and national insurance (NI) on individuals, nor value added tax (VAT). But this commitment now seems well past its shelf life. They’re the only major taxes that have the revenue-raising potential to fill a large portion of the ‘black hole’ in the government’s finances.
With unwanted inflationary consequences of raising VAT and corporation tax a likely no-go area – as many businesses already struggling – it leaves income tax and national insurance firmly in the cross hairs for a broad increase.
One idea floated is to raise the basic rate of income tax, say by 2%, but reduce NI by the same amount. This would have no impact on employed or self-employed people as one balances out the other, but it would significantly impact those receiving pension or property income. It also fits the narrative of protecting ‘working people’ so this, or something similar, could easily happen. If not, we could expect to see a broader income tax rise affecting all taxpayers more equally.
You can also pretty much take it as read that income tax bands will be frozen further into the future – potentially to 2030. As things stand, they are set to rise with inflation again from 2028 – having been frozen since 2021/22 tax year – which means a continuation of the tax creep known as ‘fiscal drag’.
Pensions
If I had a pound for every time I’ve read that higher rate pension tax relief is to be ditched – or the 25% tax free lump sum is under threat – I’d be a wealthy man. At every Budget, speculation around this area is wheeled out.
The boy who cried wolf may have a point, but there are very good reasons why a Chancellor is yet to go there.
Restricting higher tax rate relief would result in a mess for pensions arrangements where contributions are made from pre-tax pay. Anyone contributing to one and earning over the higher rate tax threshold, including many public sector workers, would face a tax bill to claw some relief back and it would probably be received badly in many quarters. Any chicanery to ringfence defined benefits schemes from such measures would be met with accusations of unfairness.
Besides, there are already strict limits on how much people can contribute to pensions meaning tax relief is far from open ended. While its possible there could be some tinkering to pension rules at the margin, wholesale changes like moving to flat rate of relief seems unlikely.
As for the tax-free lump sum, any draconian moves would undermine confidence in the pension system at a time when people need to be putting more, not less, into their retirement provision. It would also represent a betrayal of millions of people that have accumulated pots – and taken on investment risk – under accepted rules to diligently provide for themselves in their later years.
Last year’s move to include pension pots in estates for inheritance tax has been highly disruptive for those that had planned with a legacy in mind. Yet the narrative of returning pensions to their sole original purpose of providing retirement income was too tempting to pass up for a newly elected government keen to fill the ‘black hole’. Reforming tax free cash – a well understood incentive of pensions saving that encourages people to provide for their own future and thereby reducing the burden on the state – would be far harder to justify.
Again, this pension perk isn’t open ended. There’s a monetary limit to pension tax free cash of £268,275, which seems more than sufficient compromise, especially as this will now be subject to the same fiscal drag effect as other allowances and tax bands.
We caution against any kneejerk reactions, especially before any announcements have been made. Taking the tax-free lump sum is an irreversible decision and doing so prematurely could backfire.
Potentially, it removes money from a tax-efficient environment to a non-tax-efficient one where income tax or capital gains tax (CGT) are payable on investments – over and above any money that’s added to an ISA. Plus, tax-free cash ‘recycling’ rules mean it’s not possible to put the money back without a nasty tax charge. Any decision to take tax free cash therefore needs to be very carefully thought through.
Property
If there’s one area that seems ripe for reform its property taxes. There’s a good case for getting rid of stamp duty on residential property altogether as it reduces transactions and hampers social mobility. But that’s probably not going to happen anytime soon thanks to it being a nice little earner for HMRC.
Meanwhile, reforming council tax bands has been mooted as a way to impose a ‘mansion tax’ on high-value properties through an existing system. This muddies the waters of national and local taxation, so it’s messy, but it does seem possible for a Chancellor who’s forced to think outside the box to implement some kind of workable ‘wealth tax’.
Some of the other speculations around property such as a levy on the sale of high-value properties – or even CGT on larger first homes – seem illogical. Such moves would increase the incentive for homeowners to stay put and further gum up the property market making it harder, rather than easier, for people to move home.
Inheritance tax
Having rightly adopted the brace position last time around, those concerned with estate planning will be surveying this year’s Budget with similar caution. The inclusion of pension pots in estates from April 2027 and the limitation of agricultural and business reliefs from April 2026 has already had a dramatic effect on intergenerational planning.
With renewed focus on gifting through annual allowances, potentially exempt transfers (PETs) and the ‘surplus income’ rule, there is some unease these methods may come under scrutiny. However, there is reason for the Chancellor to tolerate gifting rather than tighten up on it, especially from pensions where withdraws face marginal rates of income tax – therefore swelling exchequer coffers. The beneficiaries of gifts are also more likely to spend the money rather than keep it tied up in assets, which possibly translates to a small economic boost.
The Chancellor may therefore consider it pretty much job done on IHT and move onto areas that more meaningfully move the fiscal dial, though she may be considering some kind of new overall gifting cap. Presently, an unlimited amount can be passed on tax free provided the donor survives seven years.
Capital gains tax
To no-one’s surprise the Chancellor increased CGT in last year’s Budget. Upping the standard rates to align them with residential property assets at 18% and 24% for the basic and higher/additional rates respectively. Meanwhile, business asset disposal relief – whereby eligible assets attract a lower rate – was reined in with the rate increasing from 10% to 14% for 2025/26 tax year and 18% for 2026/27.
Is a second bite of the CGT cherry likely? We may already have reached the point at which raising tax further actually reduces overall receipts – the peak of the Laffer curve in economists’ parlance. Many disposals that attract CGT are discretionary and can be put off, so behavioural change is an important factor. What’s more, upping CGT would do precious little to raise revenue anyway as it only accounts for about 1.5% of total tax receipts.
However, this may not prevent the Chancellor having another go – especially if income tax is rising simultaneously. Maybe she could sweeten the deal with some kind of new allowance or relief for investing in ‘UK assets’ to help revive capital markets suffering from a dearth of investor interest?
Salary sacrifice
Salary sacrifice allows employees to exchange part of their pay for a benefit, such as a pension contribution. This saves income tax for the employee as well as national insurance for both employee and employer. It’s possible the national insurance components of these arrangements could be targeted, or possibly the scheme overall.
This would upend some long-established rules and increase the tax burden on both companies and individuals via the back door. Such a move would raise the expenditure involved in providing a certain level of pension benefit to an employee – effectively a further unwelcome increase in employment costs.
In terms of the impact on employees, the clue is in the name. Individuals sacrifice salary in exchange for a pension contribution to provide self-sufficiency in later life. Restrictions would directly reduce the amounts going into personal pension provision. Thereby, negatively affecting retirement outcomes at a time when people need to put aside more, not less. With a cap on the amount that can be added to a person’s pension provision each year – known as the ‘annual allowance’ – it seems unnecessary to get into the weeds on this when there’s an easier lever to adjust. Either way, some rule changes in this area are a possibility.
ISAs
Earlier this year, the government was rumoured to be considering a cut in the amount savers can add to Cash ISAs. Currently, you can contribute up to £20,000 a year across both Cash ISAs and Stocks & Shares ISAs in any proportion. Policymakers were looking to limit the cash part to encourage more investing, particularly in the UK stock market. There are now rumours that these plans are being dusted off for a Budget announcement, perhaps halving the amount that could be allocated to Cash ISAs to £10,000.
Paring back the extent to which people can contribute Cash ISAs looks possible, and a two-tier system for cash and shares isn’t without precedent. Back in the early days of ISAs, an individual had the choice of a ‘Mini’ Cash ISA and a ‘Mini’ Stocks & Shares ISA, with limits of £3,000 each, or they could contribute up to £7,000 in a ‘Maxi’ Stocks & Shares ISA. The tax-free environment was therefore larger for those wishing to allocate to shares.
Although these rules were a bit complex, they did achieve the policy goal of incentivising long-term investing on top of saving, while still offering savers a tax-free environment. It appears this is the sort of balance the Chancellor is looking to strike going forward.
Find out more: Is Rachel Reeves set to cut the Cash ISA allowance?
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