Worried about the Autumn Budget? We can help

Uncertainty is inevitable when taking risk in business or investing money. It’s the price paid for aspiring to grow wealth over the longer term. Businesses can fail, investments can fall as well as rise. That’s always been the case.

But to have confidence to take risks entrepreneurs and investors alike want a reliable framework around rules and taxation. For some that confidence has turned to doubt surrounding what might, or might not, be announced in the upcoming Budget on the 30^th October.

The only certainty is uncertainty

This is the most unpredictable Budget we have faced in living memory. A new Labour government with a considerable majority has a mandate for change and an urge to fill a so-called ‘black hole’ in public finances of £22bn. Unsurprisingly there is significant rumour and speculation being amplified by the press and social media, which we must all remember to take with a pinch of salt.

However, the fact remains that the Chancellor could, among other things, introduce some significant changes to:

• Pension rules
• Inheritance tax
• Capital Gains Tax

For anyone who faces financial planning issues around these areas there are, quite naturally, concerns that sudden rule changes could catch them out. So, let’s look at these areas, outline the possible changes and ways to plan ahead.

Which tax changes could Labour make?

1. Pensions

Pensions could also be an area of focus in the Budget, so the attractive upfront pension tax reliefs available for high earners should not be taken for granted. Presently, basic-rate taxpayers get 20% tax relief on pension contributions, higher-rate taxpayers benefit from 40%, and additional-rate taxpayers get 45% relief.

However, significant changes to the tax relief regime in the very short term seems unlikely as Labour has already pledged to undertake a review of the pension and retirement landscape. This subject requires consideration of wider societal issues such as adequacy of retirement provision, the role of the state pension, and declining home ownership. It would therefore not make sense to rush through any policies that undermine the well-understood benefits of pensions before this is complete.

In addition, any ambition to reform tax relief on pension contributions, perhaps migrating to a flat rate of relief as has been mooted, would quickly become complex around relief at source arrangements including defined benefits schemes. Any move to flat rate relief must apply equally to both defined benefit and defined contribution schemes, otherwise it would be hugely divisive.

This kind of reform wouldn’t be impossible, but it is not something that can be brought in overnight. At a minimum we would expect a period of intensive industry consultation and appropriate testing of second order consequences before introducing something so impactful. In the meantime, it may be worth considering maximising any higher or additional rate tax relief while it remains available.

Rather than making rash changes to the regime of pension tax relief, a tweak to the annual allowance is more likely. This is the maximum amount that can be contributed to a person’s pensions each year to receive tax relief. Jeremy Hunt raised the allowance to £60,000 from £50,000 for the 2024/25 tax year, and it would be an easy lever to pull in the opposite direction for a Chancellor alarmed by the extent of tax relief given away to higher and additional rate taxpayers.

Of particular concern to those nearing the time they wish to draw on their pensions is the ability to take tax free cash from their pension. Presently for defined contribution schemes such as SIPPs there is a maximum of 25% up to a limit of at £268,275. Under current rules this can be done from the age of 55, rising to 57 by 2028.

It is possible a lower percentage figure might be applied by a government wishing to water down this tax perk, but it’s far more likely any additional restriction imposed will revolve around the monetary limit. Reducing this, to say £200,000, would target larger combined pots without altering the well understood narrative around the general tax efficiency of pensions. Limiting the pension tax-free lump sum to a greater degree would be hugely unpopular and undermine efforts to boost long-term investing, including in UK businesses – so it is unlikely.

We therefore emphasise that anyone potentially affected should not rush into any decision. It wouldn’t be customary or indeed practical for changes to occur overnight. Pension companies would need due notification to reconfigure their systems, and to impose any a sweeping change on people making potentially life-changing decisions about their retirement would be grossly unfair. We therefore anticipate that any change, if there is one, would be appropriately flagged in advance so retirees and their advisers have time to plan for the ramifications.

It is imperative that people do not make impulsive decisions based on conjecture or rumour that they come to regret. Taking a lump sum from a pension is an irreversible decision that means moving money from a tax efficient environment to, potentially, a non-tax efficient one. This can have a significant impact on your retirement income later in life, so any move to pre-empt changes to pension rules could ultimately backfire.

Before acting you should seek professional financial advice or guidance on the best course of action to take based on your individual circumstances. If this issue is on your mind, why not talk to one of our financial coaches? We can’t predict the future, but we can at least provide a reliable sounding board and outline the pros and cons of various options.

A final issue relating to pensions is their inheritance tax (IHT) treatment. Presently a pension pot falls outside a person’s estate for IHT purposes, and it’s quite likely that we will see reform in this area to bring pensions into the net in some way, though again we would not expect this without due warning as it would significantly impact the process of probate valuation.

Read more: What’s the average pension pot in the UK by age?

2. Inheritance tax (IHT)

More broadly on IHT, the Labour manifesto was silent in the matter, leaving the door open to reform. With the baby boomer generation hitting their sixties and seventies their accumulation of wealth is increasingly being passed through gifts and through the taxation of estates. The easiest way to tax wealth is when it moves, and it’s a distinct possibility we will see changes in this area.

In addition to the potential move to drag pensions onto the IHT regime, it’s possible that rule changes result in a higher tax rate or the reduction of reliefs including the ‘nil rate band’, the extra residence related nil-rate band or those relating to business assets. IHT is usually paid at 40% on the value of your estate over the £325,000 allowance. There’s an additional allowance of up to £175,000 if you pass on your family home to children or grandchildren. If you’re married or in a civil partnership, you can combine your allowances and transfer assets between each other free of the tax.

If you haven’t already, now is a very good time to consider who you want to benefit from your assets and check whether you might be affected by IHT. It may be that some forward planning can help minimise the amount of tax your estate pays or eliminate it altogether. There are simple ways to do so such as making gifts, as well as more specialist methods for larger estates. If you are concerned about this issue then speak to one of our financial coaches who can offer insights and understanding of your situation and outline the options for professional advice if required.

3. Capital Gains Tax (CGT)

Capital Gains Tax could also be in the spotlight in the Budget, even though the tax net has already been closing in this area for a while. The CGT allowance – the portion of realised gains you don’t pay tax on – halved to just £3,000 for the current 2024/25 tax year. Labour previously said it has “no plans” to change CGT rates. However, with its audit of the nation’s finances now complete, some plans could be forming.

Any moves to align CGT rates to those of income tax, as has been speculated, could catch some people out. Current rates of CGT are 10% and 20% for basic and higher rate respectively, with extra for second properties, it’s 18% and 24% for the current tax year. Increasing this to someone’s marginal rate of 20%, 40% or 45%, which would be a considerable rise when you consider the history of Capital Gains Tax.

There could also be more targeted ways to increase taxes on capital, such as reforming the ‘reset’ of capital gains on transfer of assets to a spouse on death (presently assets can be passed on CGT free) or reducing CGT business reliefs. Currently, business owners may pay 10% CGT, up to the value of £1m (previously £10m for gains made prior to 11 March 2020), on the sale of their business by claiming entrepreneurs' relief, and it’s possible the Chancellor may be scrutinising this.

Entrepreneurs and business owners looking to dispose of stakes or assets should therefore be on high alert to any changes that might occur. However, selling a business usually takes time, so there may be little to be achieved in the short period between now and the Budget when we will know for sure what is changing, if anything.

For investors looking to mitigate the impact of CGT transferring assets to a spouse can maximise the use of both partners’ CGT allowance. Additionally, utilising tax-sheltered accounts such as ISAs and pensions can shield gains altogether.

You’re not on your own

It’s vital not to make any knee-jerk decisions based on what might happen in Rachel Reeves’ Budget. In a matter of weeks we will know much more and, very likely, there will be time to mull over any changes and take appropriate action if necessary. For now, be alert but focus on long term goals and ignore the noise.

You also don’t have to face these issues on your own. Our financial coaches can answer many of your money-related questions to help you think more clearly about your options and get the help you need to make the right decisions.

Financial Coaching

Charles Stanley is not a tax adviser. Information contained in this article is based on our understanding of current HMRC legislation. Tax reliefs are those currently applying and the levels and bases of taxation can change. Tax treatment depends on the individual circumstances of each person or entity and may be subject to change in the future. If you are in any doubt, you should seek professional tax advice.