With the Autumn Budget fast approaching, many are concerned about the impact it may have on their finances. In this article, we explore potential changes and their implications.

Budget predictions

The Labour government has identified a substantial shortfall in public finances following 14 years under Conservative leadership, and Sir Keir Starmer has warned that the Budget is “going to be painful”. While there is still speculation surrounding the government’s first Budget and the measures they will introduce to address the funding gap, we do know that in a ‘triple lock’ guarantee, Labour pledged not to increase the ‘big three’ taxes: income tax, national insurance and VAT. According to Labour, it will be those with the “broadest shoulders” that are likely to be pursued, meaning other areas like capital gains tax, pensions and inheritance tax could be affected.

Capital Gains Tax (CGT)

The current CGT regime allows individuals to crystallise gains of £3,000 (annual allowance) each year without being subject to CGT. Thereafter, gains are subject to either a 10% (for basic rate taxpayers) or 20% (for higher and additional rate taxpayers) tax. If gains are realised on a residential property sale, these rates increase to 18% (for basic rate taxpayers) or 24% (for higher and additional rate taxpayers), other than for a sale of one’s principal private residence.

It has been suggested that these rates could be aligned with income tax rates, increasing the 10% rate to 20% and the current 20% rate to either 40% (higher rate) or 45% (additional rate). This is seen as an increasingly likely move, given it would only affect wealthier individuals. Less likely is the removal of the annual allowance, given the minimal effect this would have, but it cannot be discounted.

This potential change presents individuals with the decision of whether to crystallise gains ahead of the Budget or retain their assets for the long-term. Furthermore, questions arise regarding the timing of these changes - whether they will take immediate effect or commence from the new tax year. The latter would give individuals additional time to plan and realise assets, potentially providing the Government an earlier windfall.

Pensions

Pensions have often been a focus for change, and this Budget is unlikely to be any different, with the reduction of tax relief on contributions for higher and additional rate taxpayers, again suggested. Currently, higher and additional rate taxpayers receive tax relief at their marginal rates (40% or 45%) on eligible pension contributions, and basic and non-earners receive tax relief at 20% on eligible contributions. It has been suggested that tax relief could be limited to basic rate tax across the board or a flat rate (30%). Alternatively, and perhaps simpler to implement and administer, would be to apply National Insurance to employer’s pension contributions which are currently exempt. It is estimated that up to £16 billion* could be raised by ending the National Insurance exemption on employer’s pension contributions.

Additionally, pensions currently fall outside of the scope for inheritance tax (IHT) purposes. This is beneficial to those fortunate enough to source their retirement income from other assets, where the majority require their pension savings during their retirement to provide an income. Removal of this benefit may not only increase the IHT take but, subsequently, income tax too, as more pensioners decide to use their pensions rather than storing them to pass on. However, this may be a short-sighted policy, as even though pensions can be passed on free of IHT, beneficiaries will generally pay some income tax when they draw monies from the pensions.

Recent developments have also suggested the pension commencement lump sum (PCLS) or tax-free element of a pension, might be slashed from the current maximum £268,275 to £100,000. The current rules allow 25% of your retirement funds to be accessed without tax up to the £268,725 limit (unless previous protection is in place) and reducing this maximum would bring more of people’s pension pots into the income tax regime.

*Lane Clark & Peacock (LCP) - Pensions, Tax and the Budget: Section 03 National Insurance

What steps can you take

Currently, these changes remain speculative. While we consider some more likely than others to come into effect, we recommend individuals consider the following planning strategies ahead of the Budget to mitigate potential adverse impacts.

While it’s unlikely that the annual allowance will be removed, it would make sense to use this where possible prior to the Budget, particularly as it’s good practice to use earlier in the tax year anyway. Similarly, it may be beneficial to use any carried forward losses or losses in the current tax year and offset these against gains. In terms of crystallising gains above the allowance or losses it might also be advantageous to consider releasing cash now (making taxable gains), particularly if funds are going to be required in the next few years. Going further, realising further gains to rebase your investment portfolio and investing in a structure that can facilitate ongoing rebalancing without crystallising gains might be an option until rates become more attractive again, assuming they may rise.

Many individuals may consider adopting a wait-and-see approach, deferring action until after the Budget is confirmed, leaving any built-up gains to continue accumulating in the meantime. This strategy can be sensible in some scenarios, however, it would be wise to ensure that your investment portfolio is also at the right risk level, competitively costed and performing as expected. If not, you may incur higher costs and experience greater underperformance than the potential cost of paying tax at current rates and rebasing your portfolio.

When it comes to pensions, higher rate and additional rate taxpayers might consider topping up their pensions now, maximising contributions for the current tax year, where possible, and looking at any carry forward allowances that may be available. Tax relief at marginal rates of 40% and 45% remain very attractive although any decisions on contributions should be taken in the context of one’s overall financial planning and circumstances.

Conclusion

Although the upcoming Budget remains uncertain, sensible planning now is unlikely to put you in a worse position and could prove valuable if immediate changes are implemented. You might consider the following with your advisers:

• Utilising your annual CGT allowance prior to the Budget.

• Utilise spousal CGT allowances where possible and consider spousal transfers if necessary.

• Consider using any carried forward losses or existing uncrystallised losses.

• Consider taking additional gains above allowances and rebasing your investment portfolio at current CGT rates if you are likely to draw down from your investments in the future.

• Take this opportunity to review the risk, performance and costs of your investment portfolio and ensure they are as expected.

• Consider structures that can align your risk and rebalance assets without crystallising gains.

• Consider investing in assets that are exempt from CGT.

• Consider bringing forward any pensions contributions this tax year to before the Budget.

• Consider utilising any carry forward allowance for pension contributions.

Buzzacott Financial Planning is authorised and regulated by the Financial Conduct Authority. This article has been prepared to keep readers abreast of current developments. Professional advice should be taken in light of your circumstances before any action is taken or refrained from. The value of investments, and the income from them, may go down as well as up and investors may not get back the amount originally invested.