The upcoming Budget on Wednesday could be the most significant in a generation, according to some experts, with the new Labour government likely to lay out its plans for the country’s financial future.
Facing a ‘black hole’ in the public finances, there are rumoured to be numerous ways in which chancellor Rachel Reeves will try to fill the government’s coffers.
Myron Jobson, senior personal finance analyst at interactive investor, said: “Speculation ahead of the Budget is usually rife, but this time around, with a new government at the helm, it is on steroids.
“The anticipation and uncertainty surrounding potential changes to the pensions and investment taxation regimes have driven the usual pre-Budget buzz to unprecedented levels.”
Below Trustnet rounds up the biggest areas that are being mooted for an overhaul.
Pensions
This is perhaps the area where there has been most discussion, with myriad suggestions for how Reeves can overhaul the system.
There is speculation that employer pension contributions could become subject to national insurance (NI), bringing them in line with income payments.
Claire Trott, divisional director of retirement & holistic planning at St James’s Place, warned however that this could be a step too far.
“Given the requirement for auto-enrolment and the savings that are often passed on through salary sacrifice, changes such as these would have a far-reaching impact and spread beyond the employer to hit the workers that have been promised to be protected,” she said.
There is also talk of a reduction in the tax-free lump sum, said Jobson. Currently 25% can be removed tax-free, but this could be reduced to a lump sum of £100,000.
“There have also been whispers of cutting the percentage of a pension pot that could be withdrawn tax-free. Any negative changes to tax-free lump sum rules are likely to go down like a lead balloon,” he said.
Noel Butwell, chief executive of abrdn Adviser, added: “We would urge against this rumoured change, which would serve only to undermine consumer confidence in pensions at a time when more people need to take responsibility for their own financial future and that of their loved ones. The worst outcome would be people choosing to opt out of pensions and long-term savings altogether.”
Lastly, there is talk of making pensions eligible for inheritance tax, a topic we covered last week.
Capital gains tax (CGT)
There are rumours that CGT rates could be increased. Currently, higher-rate taxpayers face CGT rates of 20% on most assets and 24% on residential property. Basic rate taxpayers pay 10% and 18%, respectively
One option being thrown around is that the government might raise these to align them more closely with income tax rates.
William Stevens, partner and head of planning at Killik & Co, said: “While this may sound like a potential revenue-raiser, aligning CGT with income tax could backfire. It might lead individuals to hold onto assets longer, avoiding transactions for fear of a higher tax burden.
“This could reduce investment in the economy and, ultimately, raise less money than anticipated. Moreover, the complexity of rebasing assets and delayed implementation until the new tax year would add further confusion and risk stagnating growth.”
When it comes to investing, Alastair Black, head of savings policy at abrdn, said if CGT rates do go up, they should not go too far and should either be limited (to avoid disincentivising investing) or indexation should be reintroduced (meaning capital gains are only taxed after inflation is accounted for).
There is also suggests there could be a CGT uplift upon death, said Jobson. At present, assets are revalued to the market value at the date of death, which can eliminate CGT liabilities for heirs, but this could be removed or limited in the future.
Threshold freezes
The existing freeze in tax thresholds will claw more of our income into the taxman’s coffers as earnings increase over time, Jobson noted, something known as fiscal drag.
“Fiscal drag has been a reliable source of revenue for the government, enabling it to bolster public coffers without the political fallout of overt tax hikes. Should the chancellor choose to freeze income tax thresholds beyond the current 2028 deadline, the implications for Britons could be profound,” he said.
“The gradual erosion of disposable income through higher effective tax rates is a subtle but significant burden on households. It is a sneaky tax grab that is set to hit those in the lowest income brackets the hardest.”
The removal of IHT relief on AIM shares
Abolishing inheritance tax exemptions on AIM shares is another potential consideration for Reeves. Laith Khalaf, head of investment analysis at AJ Bell, said currently much of the £70bn AIM market can be passed on free of inheritance tax if the shares are held for at least two years before death
“This incentive has created a significant industry dedicated to running AIM portfolios on behalf of those looking to protect their assets from tax. Put simply, the abolition of inheritance tax relief would be a car crash for investors in AIM portfolios, and for the AIM market itself,” he said.
Abby Glennie, manager of the abrdn UK Smaller Companies fund, said the Reeves should maintain the current tax regime and provide certainty that it will not be changed for the next 10 years.
“If, as we hope, no changes are made then we’d like to have a guarantee that AIM’s tax status would be protected for a set period of, say, 10 years. Ongoing uncertainty about whether certain reliefs will be maintained or not will make it impossible for investors to commit to long-term decisions,” she said.
Things people want to see
Although things may appear bleak, the budget could be a force for good too. Black said the government could use the Budget to simplify the ISA system, something it has already started by walking back the Conservative government’s Great British ISA pledge.
“Having been brought in to offer a simple way for individuals to hold cash savings or invest in stocks or shares, it has seen multiple government interventions overcomplicate it. There are now several different types of ISA accounts catering to slightly different customer needs. This is key a barrier to engagement in saving and investing,” he said.
This was echoed by Stevens, who said the current system is “overly complex”. Streamlining it “would not only make financial planning more accessible but also help individuals maximise their savings”.
Black also suggested the government could increase minimum pension contributions, which could “make a big difference” in avoiding a future retirement crisis.
Glennie added Reeves could also scrap stamp duty on UK shares, which “constricts liquidity in the marketplace, leads to lower growth and incentivises flows to other markets and products”.
“Given the difficulties faced by UK smaller companies specifically, a stamp duty cut on companies outside the FTSE 100 would be a good place to start – followed by an extension of the policy to all listed UK companies.”