Budget speculation

Last year, the newly elected Labour Government used the Budget to plug a £22 billion ‘black hole’ in the public finances inherited from the previous government. This led to tax-raising measures estimated at £40 billion, including an increase in Capital Gains Tax (CGT), pensions losing their Inheritance Tax-free status from 2027 and limiting the availability of Inheritance Tax (IHT), Agricultural Property Relief (APR) and Business Property Relief (BPR), which is causing great consternation in the farming community and for small business owners.

After climbdowns on winter fuels payments and the welfare reform bill this year, the ‘black hole’ is expected to be back this year, and it may be even bigger. Estimates of the shortfall of revenues are between £17 billion[1] and £51 billion[2] for this coming Budget. With the government still publicly honouring its manifesto promise of not increasing taxes on working people, Income Tax, National Insurance or VAT, these huge shortfalls will have to be found elsewhere.

[1] Capital Economics

[2] National Institute for Economic and Social Research

We now know the Budget will be on Wednesday 26 November, after the announcement by the Chancellor earlier this week.

It is standard that an Economic and Fiscal Outlook is published alongside the Budget, and the ten weeks’ notice has been given that is required for the Office for Budget Responsibility (OBR) to prepare this.

With the clock now ticking in the run-up to the Budget, if you are going to make changes, it is best to start thinking about that as soon as possible.

It is impossible to know conclusively what might change, and while there are some areas we have been talking about for years where action can be considered, it is difficult to know for sure what changes will be made.  What is becoming apparent though, is that the Budget has the potential to have a few nasty surprises in store as the government is forced to take action to reduce the growing Budget deficit.

With any decision based on speculation, there is the risk of unforeseen consequences and the possibility that you may end up being disadvantaged.

After the news in the last budget of pensions falling into the IHT estate from April 2027, there has been a lot of debate about their continued attraction. We have written separately about this and strongly remain of the view they still make sense but it is key to plan for how you will access them in retirement as leaving them wholly intact when you die will result in penal tax charges.

Tax free lump sum

After the news in the last Budget of pensions falling into the IHT estate from April 2027, there has been a lot of debate about their continued attraction. We have written separately about this and strongly remain of the view they still make sense, but it is key to plan for how you will access them in retirement, as leaving them wholly intact when you die will result in penal tax charges.

Tax-free lump sum

Not a new rumour, but the fear that the tax-free element of a pension may be taken away is doing the rounds again.

Currently, it is possible to take 25% of your accumulated fund as a tax-free lump sum (up to £268,275 or 25% of the old lifetime allowance of £1,073,100). Some people may have protected amounts which will let them get higher levels of tax-free sums. While the benefit could be removed altogether, this is highly unlikely. It has been speculated however, that there may be a cap on the lump sum, reducing the overall amount of the tax-free lump sum.

Pension contribution tax relief

The other rumour that gets dusted off at Budget time is that tax relief on pension contributions may be cut, and possibly for a flat rate of tax relief, no matter your tax bracket. At the moment, your rate of tax relief depends on your marginal rate of tax: 20%, 40% or 45% but as we will see below, tax relief can be much higher if your income is at certain levels – 60% or more.

In the past, Rachel Reeves has been in favour of a flat rate of pension tax relief. The annual bill for this relief is large, over £52 billion in the tax year 2023/24, with over two-thirds of relief for higher or additional rate taxpayers. A flat rate of possibly 30% could save a considerable amount for the government.

Salary sacrifice arrangements

As if that weren’t enough, there has also been talk of changing salary sacrifice taxation. This is when employees give up a proportion of their income in exchange for an employer pension contribution. This saves on Income Tax and National Insurance (NI) for the employer as well as the employee.

As with all of these, changes risk confidence in the pension system, but a targeted change, perhaps to levy employer NI on the salary sacrificed, could be on the cards.

Earlier this year, the rumour started that the Cash ISA allowance may be cut, possibly to £4,000 from the current level of £20,000. An announcement expected in July did not materialise, but at that time, the Chancellor said they would continue to explore reform of the allowance. It is thought that the Treasury wants individuals to have a better balance between cash savings and investments. At present, the £20,000 allowance can be split however you want between cash or investments.

There could be reform in the Budget, possibly with a reduction in the allowance overall, or for the amount of cash that can be held.

As we mentioned earlier, there were already significant changes to IHT in the last Budget with pension pots included in estates and reform to APR and BPR, with a cap on the currently unlimited relief to £1 million per individual.

With a focus on capital taxes rather than taxes on working people, we may see further reform for IHT.

Gifts

Generally, when someone makes a gift to an individual, this is regarded as a Potentially Exempt Transfer for Inheritance Tax purposes. This means that if the person making the gift (the donor) survives for seven years from the date of the gift, it will become exempt from Inheritance Tax.  However, if they pass away before seven years have passed, the amount of the gift will still be included in their estate for the purposes of calculating the Inheritance Tax due. To date, this has been an unlimited exemption, provided you survive the seven years. It has been suggested, however, that a cap on the transfers made, either an annual amount or a lifetime limit, could be imposed. There has also been the rumour that the seven years may become ten years. Indeed, a more comprehensive change with tax imposed as it is currently with gifts into trusts, where there is a potential lifetime IHT charge of 20% (so half of death rates), with the seven-year clock working in the same way and an additional 20% charged on death within this period.

Residence Nil Rate Band

The Chancellor was a fierce critic of the Residence Nil Rate Band (RNRB) when it was introduced in 2017. It has been thought that this allowance could see changes, a reduction or being cut completely. The RNRB gives individuals an additional £175,000 IHT allowance on death (£350,000 for a couple) for residential property being left to direct descendants – their children or grandchildren, for instance. It is worth up to £140,000 of IHT saved, but it’s also a very complicated allowance.

In the last few weeks, speculation has increased for tax rises on property. In the absence of (a difficult-to-administer) wealth tax, targeting property may be seen by the Chancellor as the next best thing.

There have been a number of rumours with potential reform discussed for Stamp Duty, perhaps replacing the one-off charge for an ongoing amount and council tax with potentially more bands for higher value property.

While the government ruled out imposing CGT on principal private residences in the last Budget, this has been resurrected with talk of a CGT charge on the sale of property worth over £500,000.

Landlords have also been in the firing line with rumours that an NI charge could be imposed on rental income.

With a government in need of raising taxes, it is likely that change will happen, but which taxes or reliefs will be affected and how they will change is unknown until Budget day. Many of the changes above have been speculated about for years, but there are good reasons why they may not happen. With taxes on working people seemingly off the table, it is becoming clear who are likely to be the targets for tax rises – businesses and people owning assets including pensions, property and investments.

We are not advocating any knee-jerk reaction to any of these rumours, but it would seem prudent if you have plans to utilise any of the current allowances or reliefs in the short term to consider carrying out these transactions before Budget day. We would always say you should take professional advice before taking any action to ensure there will not be unforeseen consequences.

As always, if you have any questions your Financial Planner will be pleased to hear from you.