Making sense of the budget
Rachel Reeves’s first financial plan could have a big effect on your finances, says Paul Lewis
There were no rabbits pulled out of the hat in Rachel Reeves’s first Budget, but there were a few surprises.
One was the decision to end the freeze on the amount of income you can have before any tax is due. The personal allowance has been frozen at £12,570 since 2021 and the Chancellor will stick to the Conservative government’s plan for that to continue until 2027/28.
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However, from 2028/29 the allowance will rise in line with inflation. On the latest forecasts from the Office for Budget Responsibility that would mean an increase to £12,840 in 2028/29 and to £13,110 in 2029/30.
Of course, that is still a long way short of the estimated £16,960 it should have reached by then if it had never been frozen. And by then the new state pension will almost certainly be more than the personal tax allowance, meaning the DWP will pay it and HMRC will demand some of it back.
The freeze will continue for Inheritance Tax (IHT) thresholds, however. The main threshold of £325,000 before IHT is due was last fixed in 2009/10. This year it should be more than £500,000 to have kept pace with inflation, but the Chancellor announced that it and the other thresholds will remain unchanged until 2029/30. By then an additional 30,000 estates will pay IHT, though the proportion of estates paying it will still be less than one in ten.
Saving Inheritance Tax: Inheritance Tax on Savings (hl.co.uk)
The biggest factor in that increase is the end of a concession dating back to 2015 that allows people to pass on unused pension funds without them coming into their estate when IHT is calculated. From April 2027 pensions will form part of your estate and if the total exceeds your threshold then the excess will be taxed at 40%.
In future the best advice will probably be to leave your pension entirely to your spouse or civil partner if you have one so that it continues to be free of IHT – though income tax will be due when they spend it if you die aged 75 or more. Alternatively, turn it into an annuity – an income for life – or just spend it yourself. After all, that is what pension savings are for!