The government have been busy spreading their message that the Autumn Budget will be "painful", that "tough decisions" lie ahead, and that we will have to accept some "short-term pain".
It seems a world away from the excitement of ushering in a new Labour government just over two months ago, when incoming prime minister Keir Starmer said wealth creation was the "number one priority".
But as Starmer and chancellor Rachel Reeves settle into 10 and 11 Downing Street respectively, we are starting to see some big decisions emerge that will negatively affect our finances - with more likely to come in the Autumn Budget on 30 October.
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The Winter Fuel Payment is being axed for all but the poorest pensioners, while VAT will be applied to private school fees from January.
Experts fear that other tax hikes could be around the corner. “Labour's ‘big three’ tax pledge - vowing not to raise income tax, National Insurance or VAT - is a double-edged sword because it inevitably creates suspicion about which other areas could be vulnerable,” comments Jason Hollands, managing director at wealth management firm Evelyn Partners.
“Capital gains tax, inheritance tax and the tax-preferential treatment of pension saving have all featured in speculation around possible targets for a government that needs to raise revenues down the line.”
According to analysis by Hargreaves Lansdown, if all of the rumoured tax changes actually happen in the Budget, it could hike someone's tax bill by more than £200,000.
Sarah Coles, head of personal finance at the investment platform, says: "Warnings about the tax threats the Budget may hold have been deafening over the past few weeks, as every possible tweak has been called out. It’s enough to fill anyone with dread as to the horrors the chancellor has planned this side of Halloween."
We look at what steps you can take to prepare for the Budget and shelter your money from the Labour government.
Pensions: pay more in if you can
Labour have pledged to uphold the state pension triple lock, which means pensioners are on track to enjoy a £460 boost next April, thanks to wage growth figures released earlier this month.
However, there have been no assurances about not changing other pension policies or taxes, such as reducing pensions tax relief, changing the 25% tax-free cash, or even raising the state pension age.
Hollands tells MoneyWeek: “It is well known that politicians from across the spectrum – including former Tory chancellor George Osborne – have been tempted to reduce the attractive upfront pension tax reliefs available for high earners, so the availability of such features should not be taken for granted and made use of, as far as possible, while they remain available.
“Making a pension contribution is the single most straightforward way to reduce your income tax exposure, whether that is through a personal contribution or asking your employer to add to your pension in lieu of a pay rise or bonus, a process dubbed ‘salary sacrifice’.”
Basic-rate taxpayers currently get 20% tax relief on pension contributions, higher-rate taxpayers benefit from 40%, and additional-rate taxpayers get 45% relief.
While any changes to pension tax relief - if they were to happen - could be several tax years away, it makes good financial sense to save more for retirement if you can, taking advantage of the tax relief, and potentially cutting your income tax bill too.
There are also concerns that the chancellor may tinker with the 25% tax-free cash that savers can withdraw from their pension pots from age 55. It could be lowered to say 20%, or the maximum amount could be reduced.
Chris Rudden, head of investment consultants at the digital wealth manager Moneyfarm, tells MoneyWeek that he's seen a few clients take their tax-free cash earlier than intended, perhaps because they have a large pension and they're worried about "rumours of a cut or a cap of say £100k".
However, he adds that savers need to be careful here as pensions are a very "valuable tax wrapper, and any changes are unlikely to be immediate, at the earliest it would be in April 2025". According to Rudden, if pensions tax-free cash is reduced, "then a strong argument can be made for taking the 25% while you still can, but this needs to be invested in the same line with their goals, not festering in cash and it’s worth bearing in mind that the money will become taxable and probably should be drip-fed into ISAs."
We have more tips and advice on how to prepare your pensions before the Budget in Pension moves you should make before Labour’s Budget raid.
Capital gains tax: shelter your investments now
The Labour manifesto pledged to not raise four taxes: income tax, National Insurance, VAT and corporation tax.
Starmer said: “I don’t believe it’s fair to raise taxes on working people”, adding: “We are pro business and pro worker, the party of wealth creation.” The party promises to “cap corporation tax at the current level of 25%, the lowest in the G7, for the entire parliament”.
Labour also pledged to not increase the basic, higher or additional rates of income tax.
The elephant in the room, according to financial experts, is capital gains tax (CGT).
“The conspicuous lack of confirmation from the Labour manifesto that it would not raise CGT will spark significant concern among entrepreneurs and investors in the UK,” comments Rachael Griffin, tax and financial planning expert at wealth management firm Quilter.
Those who face CGT – primarily higher-rate taxpayers and entrepreneurs who realise gains from the sale of residential property, investments and other chargeable assets – have already seen their annual exempt allowance slashed by the previous Conservative government to just £3,000 a year.
Griffin notes: “If Labour was to increase rates, it would serve as a double whammy with higher rates and lower exempt allowances considerably increasing the capital gains tax take.”
For those looking to mitigate the impact of CGT there are several strategies you can employ.
Transferring assets to a spouse can be an effective way to maximise the use of both partners’ CGT allowance. Additionally, utilising tax-sheltered accounts such as ISAs and pensions can shield gains from CGT altogether.
According to Hargreaves Lansdown, you can either sell, wait for 30 days, and buy the same assets; sell and buy different assets immediately; or do a Bed & ISA process to sell and buy the same assets immediately in an ISA – which protects them from capital gains tax in future too.
Griffin adds: “Other more complex options include deferring gains by investing in Enterprise Investment Schemes (EIS), however these carry significant risk and it’s important to get professional financial help when looking at these types of options.”
Inheritance tax: start planning to avoid a future liability
Inheritance tax (IHT) got a brief mention in the Labour manifesto: “We will end the use of offshore trusts to avoid inheritance tax so that everyone who makes their home here in the UK pays their taxes here.”
This is part of Starmer’s aim to “address unfairness in the tax system”. Clearly, anyone using an offshore trust to avoid IHT will need to start thinking about alternative options now.
Whether Labour increases the rate of IHT (currently 40%) or reduces the nil-rate band (£325,000) over the course of the next parliament is unclear.
Hollands points out that Labour have suggested in the recent past that it regards some of the reliefs available from inheritance tax as too generous, particularly business and agricultural reliefs. So it’s possible we could see some IHT reliefs disappear.
But even if Starmer and Reeves do nothing - effectively continuing the freeze on IHT thresholds - more and more families are likely to be dragged into the inheritance tax net, mainly due to house price inflation.
If you’re worried about inheritance tax, it’s worth making the most of the gifting allowances to help reduce the value of your estate.
Gifts to spouses or civil partners are completely free of IHT and each tax year you can also give away up to £3,000 worth of gifts with your annual exemption. This means couples can gift £6,000 a year. In addition, there is no limit on excess income - above expenditure - that can be gifted.
You can also consider more significant gifts, but these will take seven years to see the full IHT benefit.
Coles adds: "There’s a separate rule that means you can give away surplus income inheritance-tax free too. You need to pay it from your regular monthly income and have to be able to afford the payments after meeting your usual living costs.
"If you have children in your life who are under the age of 18, you could consider paying into a junior ISA for them each year. This is counted as being given away immediately for inheritance tax purposes but is tied up until they reach the age of 18.”
ISA allowance: use it or lose it
There's an outside chance that ISAs could be targeted in the Budget. It would be a brave chancellor given the enduring popularity of these tax-efficient vehicles. But, on the other hand, ISAs cost the Exchequer almost £5 billion a year in tax relief, according to the accountants BDO - so cutting ISA benefits could be a handy way to help balance the books.
Experts agree that savers and investors should look to see if they can avoid tax by utilising their ISAs before 30 October. As Griffin puts it, "it has never been more important to maximise your £20,000 ISA allowance.”
The ISA allowance means you can protect your cash savings and investment returns from tax, while offering significant flexibility in how and when you can access your money – unlike a pension.
Hollands says: "With the tax environment becoming ever more hostile, people should make as much use of these as possible. Many people leave opening an ISA to the final months of the tax year, but if you have the cash available to bring this forward to before the Budget, it really does make sense to do so early this year.
"You can make withdrawals from an ISA at any point, so there really is no reason not to open your ISA early."
School fees: prepare for higher costs
The government have announced that they will add VAT onto private school fees from the start of 2025.
Hollands says it’s important families start planning for the extra cost now. “Those families staring at the prospect of VAT on already high private school fees are in a very difficult financial position.
“Most will be reluctant to pull a child out of a school, disrupting friendships and if key exams are on the horizon. But it is vital to face up to the challenge and make a plan.”
Many private schools offer pay-in-advance schemes, enabling parents to pay for a few years upfront if they are able to do so. While this won't sidestep the addition of VAT, it may help secure a discount or protect against fee inflation.
Hollands adds: “It would be prudent to prepare for the financial hit in other ways, such as making economies elsewhere if necessary, even downsizing your home or having a frank discussion with grandparents or other family members to see if they can help out.”
Lifetime gifts to help cover school fees can reduce an eventual inheritance tax bill on an estate, so this could be an option to consider for wealthier grandparents with sufficient assets to gift - providing they do not jeopardise their own financial security.
We have more information in Private school fees: how to plan financially.
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