The Budget countdown is on: what could it mean for you?
There are less than two weeks to go before the Chancellor Rachel Reeves unveils her first Budget, with many people worried about what it could mean for their pensions, savings, and tax bills.
Nobody knows exactly what the Chancellor’s red box will contain, but some commentators predict that we might see changes to pension tax relief, which could include introducing a flat rate of relief. Currently, you get pensions tax relief at the highest rate of tax you pay. Others suggest that alternatively we may see pensions tax-free cash targeted, with the maximum someone can take in their lifetime – currently £268,275 – lowered, or that pension are brought into the Inheritance Tax net. Under current rules, pensions usually don’t form part of people’s estate for Inheritance Tax purposes.
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However, Tom Selby, director of public policy at AJ Bell, said: “Rachel Reeves’ first Budget has been preceded by feverish speculation over whether pensions could be in the firing line as the new government scrabbles to raise cash to plug a supposed £22 billion ‘black hole’ in the nation’s finances. However, having already drawn the ire of retirees by means-testing the Winter Fuel Payment, the chancellor will likely be cautious about hitting older people for the second time in the space of a year.”
There is also the chance that the Chancellor might review National Insurance relief on employer pension contributions. Employers currently pay National Insurance of 13.8% on all earnings above £175 per week. They don’t pay National Insurance on pension contributions, but this could change.
Mr Bell said: “Politically, this would be less risky as it wouldn’t hit voters directly in the pocket – although there is a danger employers will scale back remuneration, including pensions, to meet this extra cost.”
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Inheritance Tax and Capital Gains Tax may be targeted in the Budget too, with some suggesting that the Chancellor might even go as far as equalising CGT rates with income tax, or less radically raising the rate of CGT for higher rate taxpayers back to 28%. Labour has promised that it won’t tamper with income tax rates, although current thresholds could continue to be frozen, dragging growing numbers of people into the tax net.
Don’t make panic decisions
If you’re worried about what the October 30 will hold, it’s well worth thinking about what steps you might be able to safeguard your finances and optimise current rules. However, don’t be tempted to make any panic decisions which you might regret later on.
For example, if you’re concerned that there could be a reduction in the amount of pension tax-free cash you can take, you might be tempted to take as much as possible out of your pension now. However, it’s vital to consider the potential downsides of doing so.
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Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “Ripping money out of a pension now potentially deprives it of future investment growth and could leave it subject to a whole host of taxes that it otherwise might not be, such as inheritance, capital gains, dividend and income tax.”
If you’re not sure how to protect as much as your wealth as possible from the taxman, it’s well worth seeking professional financial advice on the options available to you.