Possible pre-Budget actions

Paying more into your pension

Given pension tax relief is unlikely to be more generous under any new rules, if you are planning on making additional pension contributions before the end of this tax year and especially if you will benefit from relief above the basic 20% level, it would be worth considering bringing any contributions forward.

Labour may reduce the amount you can pay into a pension, which is currently set at a maximum of £60,000 a year. There is also currently the ability to carry forward unused pension allowances from previous years, which could potentially permit contributions to be paid of up to £200,000 and receive full tax relief. They may seek to change/reduce this, so again, bringing forward plans to take advantage of the current reliefs may be worthwhile.

Retaining personal allowances

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

When your income (adjusted net income) is greater than £100,000, your personal Income Tax allowance is withdrawn by £1 for every £2 above this limit until there’s no personal allowance at all once income is over £125,140. A pension contribution can help bring income back down below £100,000 to retain the personal Income Tax allowance.

Someone with a total income of £125,140 could get effective tax relief of 60% on a pension contribution of £25,140. This would be just enough to retain their personal allowance. That’s 40% tax relief on the £25,140 going into their pension and a further 20% by getting their personal allowance back.

Avoiding the High Income Child Benefit Charge

For those with younger children and a salary above £60,000, if you or your partner are receiving Child Benefit, there is the High Income Child Benefit (HICB) charge which starts to offset the benefit, with the tax charge – at the rate of 1% of the benefit for every £200 over this threshold equalling 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, however, a complex area and dependent upon your level of income, there are set rules as to how much you can contribute during a tax year and obtain tax relief, so do be careful and seek advice before making a contribution.

Company pension contributions

For many of our clients, pension contributions are made by their companies. Tax relief on employer contributions to a registered pension scheme is given by allowing contributions to be deducted as an expense in computing the profits of a trade, profession or investment business, and so reducing the amount of an employer’s taxable profit.

So any change to tax relief on personal contributions may not impact this, but the wider changes to how benefits are taken and IHT on the fund will be applicable.

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 gift of cash to a UK-registered charity (and ensuring you tick the gift aid declaration). This can also be effective in reducing your taxable income for the calculation of your entitlement to the tax-free personal allowance if your total income exceeds £100,000 in a similar way to a personal pension contribution we 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 only pay 20% tax on income up to the gross value of the donation, rather than at the higher rates as you would normally. 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 actually make your gift aid donation after the end of the tax year and claim to carry it back to the 2024/25 year, as long as the donation is made before you submit your tax return and the claim is included on your original return (you cannot claim this on an amended tax 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 currently attractive for Inheritance Tax purposes, but this will change in April 2027. We are cautious about taking any pre-emptive action, and certainly we would not recommend doing anything without advice, as this can result in significant Income Tax liabilities. The best course of action for most is to await any changes affecting the Inheritance Tax treatment of pension funds.  Once these are known and properly digested, your financial planner can advise you individually on how this may impact your financial plan and advise on any course of action you should be considering.

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 last year.

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 galling, 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 Taxes: 18% for a basic rate taxpayer and 24% for higher rate taxpayers. Media speculation however, is that there may potentially be another increase in rates on the way, perhaps an alignment between CGT and Income Tax rates, so an increase to 20% for a basic rate taxpayer and 40% for higher rate taxpayers.

As the current rates of CGT may go up again, there can be a case for realising gains now. The slight risk with this approach is that if rates do not go up, taxes will 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, perhaps less so if you are thinking of selling an investment 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 surrounding these changes. Although you may need to be cautious, as if CGT rates go up, 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 2024/25 tax year, you could potentially make gifts of up to £6,000 by 5 April 2026 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.

Make use of Individual Savings Account (ISA) allowances for you and your family

ISAs are a great vehicle for tax-efficient investment as income arising from the underlying investments is tax-free, as is the capital growth, so no exposure to Income Tax or Capital Gains Tax. In an era of very high personal taxation, the tax-free status of ISAs makes them very valuable tax wise.

The annual limits for ISA investment are currently £20,000 in total for an adult and £9,000 for Junior ISA for a child under the age of 18.

While Labour was very careful to reassure people that there would not be a ‘tax shock’ if they were elected, the rhetoric since has pointed towards taxes going up. If you are considering any of the options above in the near future, it may be beneficial to bring this forward before the Budget, while we know the rules. It is certainly wise to ensure you are maximising the allowances you have ahead of the Budget, whether it be using the maximum current Individual Savings Account (ISA) allowances or gifting to your family.

While it is not certain that Capital Gains Tax will change again, if you have large capital gains and are able to crystallise these at a 18% rate of tax, then this may be worth considering as it is unlikely this rate of tax will be lower in any future changes. Do speak to your financial planner however before you take any action.

Based on main UK tax rates and allowances for the 2025/26 tax year: not Scotland.

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