Chancellor Rachel Reeves is, once again, under pressure to deliver a Budget that must make a positive impact on the UK’s finances.
This time, pressure has a different shape. While last year the Labour party claimed it had inherited a black hole in the economy left by the Conservative party, now it’s around grappling with an economy that has failed to deliver on the expected growth levels.
In this update, we’ll cover some of the areas where there might be room for the Chancellor to make changes that may impact your journey towards financial freedom.
What do we know
The Chancellor will deliver the Autumn Budget on Wednesday, 26 November, making this one of the latest fiscal events to take place in the calendar year for some time.
This additional time to finalise the measures to enable growth and reduce the hole in the public finances, which economists believe could be as much as £40 billion.
Potential changes
There are different buttons the Chancellor could push to close the gap in the UK’s finances which could affect those thinking about their journey towards financial freedom.
It’s important to note that most of the following measures are based on potential actions, none of which are confirmed for implementation. Therefore, we encourage you not to make decisions based on these possible changes without full consideration of your position, objectives, the effects of such action either way and on having taken professional advice.
Pension Tax Relief
- Flat Rate Relief Proposal: One of the most talked-about ideas is replacing the current system of marginal-rate tax relief with a flat rate—possibly around 20% to 30% for all taxpayers.
- Currently, basic-rate taxpayers get 20%, higher-rate 40%, and additional-rate 45%.
- A flat rate would reduce benefits for higher earners but increase support for lower earners.
- The Institute for Fiscal Studies (IFS) estimates this could raise £15 billion annually, mostly from the top fifth of earners.
- Cap on Tax-Free Lump Sum: Another suggestion is to reduce the maximum tax-free lump sum from £268,275 to around £100,000, potentially saving £2 billion per year.
- Salary Sacrifice Reform: HMRC has explored capping National Insurance (NI) exemptions on salary sacrifice schemes. One scenario would allow NI exemption only on the first £2,000 of sacrificed salary.
Inheritance Tax
It has been widely speculated that the Chancellor could introduce further changes to the Inheritance Tax (IHT) regime.
Following the Autumn Budget last year, the government has introduced legislation on the inclusion of pension funds into the value of an estate for IHT purposes.
This measure, which will come into effect from April 2027, has prompted some clients to contact us to seek ways of minimising the consequential IHT liabilities.
If the government is looking to increase revenues originating from IHT in this Budget, it could alter the rules around gifts. According to the current legislation, individuals are allowed to gift £3,000 tax-free every tax year.
Gifts (Potentially Exempt Transfers) are subject to the seven-year rule and any gifts above the exemption thresholds may be liable to IHT in the event the donor passes away within seven years. The government could look at increasing revenues by changing the period under which IHT is payable after gifting, abolish it, or introduce a cap on the amount a person can gift before tax starts to be paid upfront.
In addition, the government could consider making changes to the nil-rate band (i.e., the value of the estate where no IHT is payable, currently set at £325,000) either by extending the freeze beyond 2030 or by reducing the threshold.
There are various other exemptions and possibilities surrounding tax-efficient gifting, so if you’re interested in exploring these, please contact us for further information.
Capital Gains Tax
In last year’s Budget, the government increased the lower rate of Capital Gains Tax (CGT) from 10% to 18%, and the higher rate from 20% to 24%.
Even though the government hasn’t been reported to be considering changes to the CGT regime, it could look for ways of increasing revenues from this type of taxation. One way could be to increase the rates further; and it could also reduce the annual exemption allowance even further, or even abolish it.
Property Tax
Some media reports have mentioned the government could indeed abolish the CGT exemption for high-value homes (a mansion tax) as it looks to overhaul the UK’s property tax system.
It is also thought that Reeves is considering ending the CGT exemption on primary residences, which would mean applying a 24% rate on the increase in the value of a property for homeowners who are higher-rate taxpayers.
Experts have criticised the introduction of further rates on property transactions as a measure that could slow down the property market, as well as discourage individuals to downsize.
Rental income is not currently subject to NI contributions, this could be an area for change, which would reduce the attractiveness of holding Buy-To-Let properties.
At PWM, our mortgage experts have been following these developments closely and are ready to provide advice to our clients if the government decides to make any property tax-related changes.
Income Tax
The Labour party has pledged not to raise headline rates of income tax, NI or VAT. But it could again extend the freeze on income tax thresholds, creating a fiscal drag.
When fiscal drag occurs, individuals’ wages increase with time and they jump into higher tax brackets, having to pay more tax without any changes in taxation rules.
How to prepare for the Budget
The best way to prepare your finances, at any point in time, is to ensure your financial plan is leveraging all the possible benefits of the current rules and you are in regular contact with your financial adviser, whilst also being ready to react to any changes that are announced.
It would be premature to make changes based on the assumption of what may or may not happen in the upcoming Budget, as clearly there is a lot of speculation and presently no facts. However, if you’re concerned about how any of these potential changes could affect your finances, please talk to us; whether you’d like to understand how any changes might affect you, or perhaps you’re seeking reassurance that your wealth plan represents your current ambitions and is working hard for you.
We’re delighted to help with the preparation and implementation of your plans to help protect you and your family against legislative changes that are negative to your financial position and future objectives.
Please note that this article is intended for educational purposes only and should not be taken as investment advice. Tax rules are subject to change and taxation will vary depending on individual circumstances. The value of investments can go down as well as up and you could get back less than you invested. Investment in funds will not be suitable for everybody and you should make yourself aware of the risks before investing and if you are unsure, you should seek professional advice.