The Labour government has stated that it must fill a £22bn gap in the public finances by increasing taxes, targeting those “with the broadest shoulders”. In light of this message ahead of a “painful” Budget, effective financial planning that targets tax efficiencies has never been more important.
In the past few weeks, Prime Minister, Keir Starmer, and Chancellor of the Exchequer, Rachel Reeves’ message about what to expect from the upcoming Budget has been both clear and unambiguous: measures being announced will require individuals to endure short-term pain for the benefit of long-term gain.
The Prime Minister has also been explicit about targeting individuals with incomes in the higher tax brackets, claiming that the burden might fall heavily on their shoulders. He spoke of a “painful” Budget to come, where individuals with “the broadest shoulders should bear the heavier burden”.
Effectively managing any potential changes ahead of the Budget on Wednesday, 30 October is crucial to help minimise the negative impact of measures which may affect you. Reviewing your financial plan with your financial adviser now could help ensure you are benefitting from the tax allowances available to you.
Bracing for change
The Fabian Society, which is a political think tank, indicated in their recent report that over half of tax relief went to upper and top rate taxpayers in the tax year 2022/23, even though taxpayers in these brackets only make 19% of the taxpaying universe. In addition, the government could potentially raise at least £10bn per year of income for the Exchequer by applying a flat rate of income tax relief on pension contributions, increasing taxes on pensions in retirement, applying levies on National Insurance and pension contributions, and further supporting under-pensioned groups.
The Chancellor has also said she plans to increase taxes. This increase is likely to come in the form of Inheritance Tax (IHT) and Capital Gains Tax (CGT) raises, even though the government previously said “… we will not increase National Insurance, the basic, higher or additional rates of Income Tax or VAT.” IHT and CGT raises could largely affect individuals in the higher rate tax bands, by placing increased pressure on these households to address the £22billion black hole in the public finances for 2024/25 which was uncovered during a spending audit.
The calm before the storm
Given that an individual’s pension is an important element of their financial position, it could be beneficial to assess whether you are making the most of your pension in the lead up to the Budget.
Here is a brief pension checklist to help ensure you are in a strong position to navigate any potential changes. As always, it is important to take financial advice to ensure that any changes made are in line with your financial planning objectives.
Pensions should not be considered in isolation
Always consider your pension as one of the tools that will help you achieve the retirement you have worked towards. An important part of checking you are leveraging your pension is to understand how well it complements the other elements of your financial plan.
A pension should be considered as part of your financial plan and not in isolation. Also consider how you could benefit from leveraging tax-efficient savings vehicles such as ISAs, JISAs, Venture Capital Trusts (VCTs), or Enterprise Investment Schemes (EIS). Please note that VCTs and EIS are higher-risk investments and it is essential that you consult a financial planner as they will not be suitable for everyone.
There is no one-size-fits-all financial plan, so it is important to ensure your financial plan is tailored to your own specific goals.
Use your current allowance
You can contribute a certain amount towards your pension without paying tax on it every year. The standard pension annual allowance is £60,000 for tax year 2024/25, which gradually reduces for higher earners with a threshold income above £200,000 or an adjusted income above £260,000.
The tapering of an individual’s annual allowance stops at £360,000, meaning that the total annual allowance could suffer a reduction to the value of £10,000 per tax year.
Have you used your previous allowances?
Each year, an individual’s allowance gets renewed, and they may carry forward any unutilised allowances from the previous three tax years. Therefore, to maximise from previous allowances, ensure that you use all your allowances before they expire.
Is your pension working as hard as it should?
Individuals with a defined contribution (DC) or workplace pension have the flexibility to choose how their pension is invested.
A pension could be invested across different funds and asset classes, with some being riskier than others, and you should choose the level of risk you are comfortable with for your investments by choosing the type of instruments you invest in.
Consider consolidating your pension pots
Consolidating various pension pots should provide some administrative relief, making it simpler to track and manage your pension savings in one place, rather than across multiple accounts.
Additionally, combining your pensions could reduce fees if you transfer them into a plan with lower charges.
However, before making any decisions about transferring your pensions, it is important to review the type of pension you are considering moving. You may lose valuable benefits, such as guaranteed annuity rates or guaranteed growth rates, if your current pensions offer any of these.
We’re here to help
This checklist is not exhaustive, but aims to highlight some key considerations for those looking to make the most of their pension allowances ahead of the Budget in October this year.
If you have any questions regarding your pension or any aspect of your financial plan, or would like to explore whether adjustments to your financial plan could be beneficial, please get in touch. Our advisers would be delighted to have a conversation with you. Please contact us on 020 7444 4030 or email us.
The information and/or any reference to specific instruments contained in this article does not constitute an investment recommendation or tax advice. The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information. This document reflects our understanding of current legislation. Past performance is no guide to future returns.