John Healey may hike taxes the problem is we don’t know which ones (Image: Getty)
That’s hardly surprising, given that the Budget is just under three months on Wednesday October 28. Which allows an awful lot of time for speculation to build. Before Rachel Reeves’s two budgets, speculation went into a frenzy. There is a serious danger it could happen again, driving people into making decisions they wouldn’t otherwise have taken, and may later regret. This could be an even bigger danger than the Budget itself.
Experts are urging savers and investors to keep their heads this time. Sarah Coles, head of personal finance at AJ Bell, said fears previously centred on fears that Reeves would target the hugely popular 25% pension tax-free cash lump sum. Today, pensioners can withdraw up to £268,275 under this option, but there were rumours she would cut this to just £100,000. This drove people to withdraw up to £10billion unnecessarily, but the change never happened. Most of those making withdrawals would have been better off leaving the money to grow free of tax inside their pension.
Reeves only ruled out cutting tax-free cash at the last minute which was far too late. Now there are calls for Healey to rule out this option early to prevent a repeat. Coles urged pension savers to tread carefully: “When faced with the threat of higher taxes, people will always want to protect themselves. But it’s essential to focus on those you’ll be grateful for, whatever the Budget ultimately delivers.” Coles has identified seven practical steps people can take now that should make sense regardless of what Healey announces.
Protect existing investments. If you still have spare ISA allowance this tax year, you can use the Bed and ISA process to move investments into a Stocks and Shares ISA, shielding future gains and dividends from tax.
Invest tax free. If investing new money, make an ISA your first choice wherever possible, so returns are protected from the outset. This is always a good idea, regardless of which taxes are eventually hiked.
Review your savings. Tax bills on savings interest are rising while the £20,000 Cash ISA allowance for under-65s falls to just £12,000 next tax year. Consider moving savings into a Cash ISA to shelter your interest from tax, especially if you’re one of those whose allowance will be cut.
Protect yourself from a potential wealth tax. Pressure is growing on Labour to introduce a wealth tax. Even if it doesn’t happen, it’s worth looking at how you hold assets as a family, to minimise the amount of capital gains tax or inheritance you may pay further down the line. “You could save an impressive amount of tax,” Coles said.
Married couples and civil partners can transfer assets between themselves without triggering an immediate tax bill, allowing both partners to use their ISA, pension, dividend, capital gains tax and inheritance tax allowances more efficiently. Parents may also want to consider Junior ISAs or Junior SIPPs for children.
Consider making lifetime gifts. Larger gifts can fall outside your estate for inheritance tax after seven years, while smaller annual gifting allowances may also reduce future tax bills. Coles cautioned: “Don’t give away more than you can comfortably afford.”
Think about paying more into your pension. Extra contributions can reduce your taxable income, help offset frozen tax thresholds and boost your retirement savings at the same time. Plus you can also claim upfront pension tax relief. For basic rate 20% taxpayers, tax relief means each £100 that goes into your pension only costs you £80. For higher rate 40% taxpayers, the cost is just £60. They must claim the extra 20% via a tax return. If you’re already planning to increase pension contributions, doing so while today’s tax relief rules remain in place may prove worthwhile, Coles said.
Coles said panicked decisions can prove costly but these should be fine whatever happens. “If there are no changes, all you’ve done is tidy up your finances.”
