Regular review

Governments regularly adjust tax rules to reflect political and economic priorities, and this Budget will be no different. These changes can affect your financial plans but are hard to predict, so it is important to use the allowances and tax reliefs available to you now, while they remain in place.

Planning for the future

The recent changes may not affect you immediately, but higher taxes could shape future planning. In this Insight, we highlight the main areas to consider.

A key area is the Inheritance Tax treatment of pensions from April 2027. Pensions have played an important role in passing wealth to beneficiaries over the last decade, but these changes may require a rethink for some clients.

Keeping more of your wealth

Reducing tax liabilities is a key financial planning objective. Many of you will have investments wrapped in pensions and Individual Savings Accounts (ISAs) where gains can be made and income earned without giving rise to a tax charge.

Alongside frozen tax thresholds, the last Budget introduced a two percentage point increase to the basic and higher rates of Income Tax on dividend income from 6 April 2026, taking them to 10.75% and 35.75% respectively. From 6 April 2027, the basic, higher and additional rates of Income Tax on savings and property income will rise to 22%, 42% and 47% respectively.

There will be no change in the dividend additional rate, which will remain at 39.35%.

If you invest, it is worth making full use of your dividend and personal savings allowances where possible. Spouses and civil partners may also be able to structure investment holdings to use both sets of allowances, savings allowances, dividend allowances and tax bands efficiently.

You should also consider maximising ISA contributions, particularly where dividends may exceed the dividend allowance, or income may fall into a higher tax band.

Maximising ISA allowances

From 6 April 2027, the maximum annual Cash ISA subscription will reduce to £12,000 within the overall £20,000 ISA limit for individuals under 65. Those aged 65 and over will still be able to subscribe up to the full £20,000 annual ISA limit to a Cash ISA.

The annual subscription limits will remain £20,000 for ISAs overall, £4,000 for Lifetime ISAs and £9,000 for Junior ISAs and Child Trust Funds. These allowances are frozen until 5 April 2031.

Aim to use your ISA allowance in full where appropriate, as ISAs can shelter savings and investments from current and proposed tax increases. Whether a Cash ISA or Stocks and Shares ISA is right for you depends on your circumstances, but over the longer term, investments may offer a better chance of keeping pace with inflation.

In her Budget speech last year, the previous Chancellor Rachel Reeves made reference to the lower returns available from Cash ISAs held long term, and this appears to be partly behind the decision to reduce the Cash ISA allowance.

Paying more into your pension

While the proposed IHT treatment of pensions may reduce their appeal for estate planning, pensions remain a tax-efficient way to save for retirement income.

Future changes are still possible, but pensions can currently offer valuable tax relief, making contributions worthwhile for many people.

Under current rules, you can usually contribute up to your earned income, capped at the £60,000 annual allowance each tax year. You may also be able to carry forward unused annual allowance from the previous three tax years, subject to your earnings, tapering rules and available allowance.

Company pension contributions

For many people, pension contributions are made by their employer or company. Employer contributions to a registered pension scheme can usually be deducted as a business expense, reducing taxable profits.

Any future change to tax relief on personal contributions may not affect employer contributions directly, but the wider changes to pension benefits and the proposed IHT treatment of pension funds should still be considered.

Changes to Salary Sacrifice

From April 2029, the Government will cap the National Insurance (NI) advantages of pension contributions made through salary sacrifice at £2,000 a year. Contributions above this level will still receive Income Tax relief in the usual way but will be subject to employer and employee NI.

The NI charges should be implemented automatically via payroll, and there will be no need for employees to declare anything to HMRC.

Employee pension contributions made through salary sacrifice should continue to reduce adjusted net income, which can help restore benefits and allowances such as Child Benefit and the personal allowance as described above.

The change will cover both existing arrangements and any new arrangements.

If you already use salary sacrifice, you should continue to benefit from NI savings for now. Employers are unlikely to make immediate changes given the timescales, but any contribution enhancements linked to salary sacrifice may be reviewed before April 2029.

Retaining personal allowances

There are also instances when the level of tax relief can be higher than the marginal rate of tax.

If your adjusted net income exceeds £100,000, your personal allowance is reduced by £1 for every £2 above that threshold, until it is fully removed once income reaches £125,140. A pension contribution can help reduce adjusted net income and may restore some or all of your personal allowance.

For example, someone with adjusted net income of £125,140 could receive effective tax relief of up to 60% on a pension contribution of £25,140, provided the contribution is eligible for relief. This reflects 40% tax relief on the contribution and a further benefit from not losing the personal allowance.

Avoiding the High Income Child Benefit Charge

If you or your partner receive Child Benefit and one of you has income above £60,000, the High Income Child Benefit Charge (HICBC) may apply. The charge is 1% of the benefit for every £200 of income above £60,000 and fully offsets the benefit once income reaches £80,000.

By making personal pension contributions, it is possible to effectively reduce your income for child benefit purposes and reduce the charge.

This is a complex area. The amount you can contribute and receive tax relief on depends on your income and pension rules, so it is important to seek advice before making a significant contribution.

Make Gift Aid donations

If you are a higher or additional rate taxpayer, similar tax benefits to pension contributions can be secured by making a cash gift to a UK-registered charity and ensuring you complete the Gift Aid declaration. This can also reduce your taxable income when calculating your entitlement to the tax-free personal allowance if your total income exceeds £100,000, in a similar way to the personal pension contribution described above.

When you make a cash gift to a charity under the Gift Aid scheme, this is treated as being made net of basic rate tax at 20%. The charity then reclaims the tax from HMRC. For example, if you make a donation of £80, the charity then reclaims a further £20 from HMRC.

Where you pay tax at 40% or 45%, you can claim additional tax relief through your tax return, so that you effectively pay only 20% tax on income up to the gross value of the donation, rather than at the higher rates that would normally apply. Continuing with the example above, as a 40% taxpayer, by making a donation of £80, the charity will receive a further £20 from HMRC, and you will receive relief through your tax return of another £20. The charity therefore receives £100, but the cost to you is just £60.

You can make a Gift Aid donation after the end of the tax year and claim to carry it back to the previous tax year, provided the donation is made before you submit your tax return and the claim is included on your original return.

Over age 55 and taking money out of your pension tax-free

If you are thinking of taking your pension lump sum, perhaps in the next few years, then taking it before the Budget would avoid any potential changes.  Our view is that it is unlikely the current 25% tax-free allowance will increase, so by acting now, you will at least secure your current entitlement.

Retaining money in pension funds is attractive for Inheritance Tax purposes until April 2027, when the rules are due to change. We are cautious about taking any pre-emptive action, and we would not recommend doing anything without advice, as this can result in significant Income Tax liabilities. Your Old Mill Financial Planner can advise you on how this may affect your financial plan and whether any action should be considered.

Changing investments

Even though we saw an increase in CGT at the last Budget, we could see further increases in the CGT tax rate or a further reduction in the annual exempt amount.

Under the Conservatives, the CGT annual exempt amount fell from £12,300 in 2022 to £6,000 in 2023 and £3,000 from April 2024.

As a result of the reduction in the annual exempt amount, we think it will be more common to pay CGT in the future. While paying any tax can be frustrating, this may be one of the more palatable taxes, given that at present it is only payable on a capital gain and the tax rates are still lower than Income Tax rates: 18% for basic rate taxpayers and 24% for higher rate taxpayers. However, media speculation suggests there may potentially be another increase in rates, perhaps an alignment of CGT and Income Tax rates.

As current CGT rates may increase again, there can be a case for realising gains now. The risk with this approach is that if rates do not rise, taxes may have been brought forward unnecessarily. If you are planning to sell assets in the short term, it is usually easier to bring this forward for an investment gain, though it may be less practical if you are considering selling an investment property. Remember, on a residential investment property, the gain has to be reported, and you have to pay any Capital Gains Tax due within 60 days of completing the sale of the property.

If you have any investments outside of the Old Mill portfolios that you have held for a number of years, now may be an ideal opportunity to ask your financial planner to review them in terms of their suitability to support your financial plans.  If you are sitting on sizeable capital gains, there may be a case to realise some of these gains now to be taxed at current CGT rates. Please note that these points do not constitute advice, and your financial planner can provide specific advice to you if appropriate.

You may also consider using any carried forward losses in case the rules change. However, caution is needed because if CGT rates rise, these losses could become more valuable in the future.

Utilise gift exemptions for Inheritance Tax

There are a number of potential exemptions available, but the standard Annual Exempt amount is £3,000. If total gifts within a tax year are less than this, the gifts will be immediately exempt, and the seven-year survivorship rule does not apply.

It is possible to carry forward an unused annual gift exemption for one year if it has not already been used. Therefore, if you did not make any gifts in the 2025/26 tax year, you could potentially make gifts of up to £6,000 by 5 April 2027 with immediate exemption from Inheritance Tax.

While not currently an annual amount, if you are planning to make direct gifts to family, then they will currently be treated as a Potentially Exempt Transfer (PET), but as we discussed above, this could change.

Other tax wrappers

Where investments sit outside pensions and ISAs, it is becoming harder to avoid additional tax. Depending on your circumstances and investment value, other tax wrappers, such as onshore or offshore bonds, may be worth considering.

These wrappers can defer some or all tax over time, with tax potentially due when withdrawals exceed certain limits or when the bond is encashed. Their benefits should be weighed against the additional complexity and cost.

Your planner can help determine whether a bond wrapper has a role in your wider financial plan.

The most important point is to plan ahead. If you are already considering pension contributions, ISA funding, gifts, or investment sales, the period before the Budget is a sensible time to take advice and check whether action should be brought forward.

If you have any questions or would like to discuss your circumstances with an Old Mill financial expert, please get in touch.