- There remain questions over whether there will be changes announced to the ISA regime, despite a period of reflection following the Mansion House speech.
- There have also been suggestions Rachel Reeves might consider changes to pension tax relief and there are ongoing questions around the future of tax-free cash.
- The government is looking into the idea of a cap on lifetime gifts and changes to taper relief within inheritance tax rules.
- There are also rumours of a possible change to capital gains tax, which could include changes to how it’s treated after someone dies.
- Four no-regrets moves to consider ahead of the Budget.
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“Budget speculation season has kicked off, with a huge range of potential tax hikes and rule changes dragged into the debate. Today, a tax on the sale of properties worth over £500,000 is up for discussion. While it’s just speculation at the moment, separate reports suggest it won’t happen, and Pensions Minister Torsten Bell refused to be drawn on the subject, it will be raising concerns among anyone planning to sell. The Budget could bring any number of potential tax hikes. Each one will have a major impact on anyone affected, and some could hit millions of people. However, we know from speculation last year that we don’t just need to worry about the effect of the changes themselves. Even if a rumour comes to nothing, there’s a risk people will have taken steps to get around potential changes that leave them much worse off in the long run.
Cash ISA changes
The speculation: The government said it won’t rush into any changes on ISAs, but there’s still the chance we could see tweaks proposed in the Budget. Cuts to the cash ISA limit have yet to be completely ruled out. This would be miserable news for diligent savers. If they’re saving for the short term, cash is the right home for their money, so they would end up being forced to pay more tax through no fault of their own. If they have a longer time horizon and they’re still in cash, then the reason they’re not investing yet isn’t anything to do with tax. It comes down to the fact they’re not comfortable with investing because they don’t know enough about it. Punishing them with a lower cash ISA allowance would do nothing to change that. In fact, it could end up doing more harm than good, because it risks undermining people’s faith in the security and certainty of ISAs.
The danger of knee-jerk reactions: Any rumours that make people focus intently on a single aspect of their finances risks them taking their eye off broader needs. It’s why there’s a chance some people will end up prioritising cash for their ISA allowance when their circumstances are better suited to investment. The good news is that you don’t have to come to regret this move, because it’s easy to switch from cash ISAs to stocks and shares ISAs – and back again – whenever you want. You just need to get in touch with your new provider and arrange for a transfer in. And even if Cash ISA limits were to come down, it wouldn’t happen overnight at the Budget.”
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:
Lifetime ISA changes
The speculation: “There’s the question of whether the government reacts to the Treasury Select Committee report on Lifetime ISAs, which raised concerns as to whether people understood the product and whether it was the right approach. The LISA isn’t perfect, but it’s vital the government doesn’t throw the baby out with the bathwater. The combination of the government bonus, alongside the ability to access the money in times of financial stress (albeit subject to an exit charge) means it has a vital role to play in retirement resilience. It could supplement a workplace pension for basic rate taxpayers who have maxed out any employer contribution. It’s also a vital option for self-employed people – only 21% of whom are on track for a moderate retirement income. The 25% bonus on a LISA acts in the same way as basic rate tax relief on a pension and the money can be accessed if needed, subject to a penalty. Added to this, any income can be taken tax free. Tweaks could make it even more valuable. We have long argued that cutting the withdrawal penalty for early access from 25% to 20%, would simply remove the government bonus and not penalise savers, which could encourage take-up among self-employed people. We also believe that removing the age 40 limit on opening a LISA would open the product up even further, given that many people don’t become self-employed until later in life. Enabling people to open a LISA and benefit from the bonus up until the age of 55 could be a gamechanger in boosting the retirement prospects of this under-served group. HL Savings and Barometer research shows that up to 1.2m households could benefit from these changes.
The danger of knee-jerk reactions: Raising questions over the Lifetime ISA risks undermining faith that it will be around for the long term. Investors might worry that it could be withdrawn, so they won’t consider using it for their long-term plans.This risks putting off people who could really benefit from the government bonus in building for their long-term future.
Pension tax relief
The speculation: There have long been rumours that government is looking to reduce the amount of tax relief available on pension contributions. Potential levels vary, with some suggesting a blanket rate of tax relief of 20% while others suggest a flat rate of around 30% would boost retirement savings of basic rate taxpayers. This could be expensive and time consuming to implement. There’s also the chance that reducing the amount of tax relief available to higher and additional rate taxpayers will act as a disincentive to save into a pension.
The danger of knee-jerk reactions: Pension investors need certainty over the tax system so they can plan for the future. Uncertainty risks disengaging them or distorting their behaviour, so lower earners put off saving until after the rules have changed. There’s a risk they simply skip making contributions for a period. If any changes don’t materialise, or take a while, it could have a serious impact of the value of their pension pot at retirement
Pension tax-free cash
The speculation: Rumours around tax-free cash have been rife, with speculation that the Chancellor may look to trim back how much you can take. Rumours are concerning, but they are just that – rumours, and it’s important you don’t feel pushed into taking a decision that you later come to regret.
The danger of knee-jerk reactions: We know from last year that there’s a risk speculation encourages people to take their tax-free cash earlier than they need to, and once it is removed, there are no guarantees it can go back in.Doing so without a plan for what you are going to do with it can create all sorts of issues. A pension is a hugely tax efficient way to build wealth – taking it out and putting it elsewhere risks leaving you open to a host of taxes, such as capital gains or dividend tax. You could also miss out on all important investment growth that would give you not only a bigger pension, but also a bigger slice of tax-free cash further down the line. If you leave the money in an easy access account, there’s also the chance that you fritter it away over time.
Those who take the tax-free cash and hope to reinvest it back into their SIPP if the change is not made need to be incredibly careful. There’s every chance you could fall foul of strict pension recycling rules that could see you clobbered with a substantial tax charge. Some thought they could make a late instruction to take tax-free cash in the run up to the last Budget and then cancel it if needed, only for HMRC to say they would be unable to do so. It’s a situation that can cause upset and distress.
Pensions are a long-term game, and we need a long-term approach to be taken – not short-term tinkering. With the government focusing on pension adequacy, it is important it focuses on delivering this certainty, to ensure people receive the right incentives to save for their future. This will build confidence in the system and enable people to save for the long term in the knowledge that their efforts won’t be undermined further down the line.”
Sarah Coles:
Capital gains tax
The speculation: “As a tax on wealth, this could be in the frame at a time when the government is keen not to focus on taxes on earned income. There have been suggestions of a potential shake-up to capital gains tax, including how it’s treated after someone dies. Recent governments have hiked the tax and cut the annual tax-free allowance, but while data for 2023 shows that it dragged 87,000 more people into paying CGT, the tax take itself actually fell by a third. There’s a strong chance wealthier investors are hoarding assets until they die, because capital gains reset on death. It raises the question of whether the government will tweak this rule, so it remains payable by the estate. It could be horrible news for those who invest outside a stocks and shares ISA, whose estate could end up paying both CGT and IHT on their investments.
The danger of knee-jerk reactions: Rumours around possible changes to capital gains tax can force people to rush into selling up. The CGT take soared in the months running up to last year’s Budget, and in October, we paid 44% more than a year earlier. The tax rate on stocks and shares rose, so acting before the Budget will have benefited those with significant sums outside ISAs that they specifically needed to sell out of quickly. However, for those who could have realised the gain gradually and moved it into a stocks and shares ISA, there’s a risk they paid needless tax. For landlords who decided to sell up, they reacted to a tax hike that never came, and the exodus of landlords from the rental market has caused huge headaches for tenants.
IHT
The speculation: The government is thought to be exploring the possibility of a cap on gifts that people can make during their lifetime. It would need to balance that against the risk it stops money passing through the generations and stimulating the economy, and the complexity of implementing the tax. It’s also said to be looking at changes to taper relief, which would introduce an additional cliff edge to the system, which always raises the risk of unfairness. IHT relief on AIM shares is also coming under scrutiny.
The danger of knee-jerk reactions: Sensible lifetime gifts can help support younger family members at a time when you’re still around to see your family enjoy the money. There’s a risk that, after the changes, people hold back on making these gifts, leaving their families struggling. There’s also the danger that people will rush to make gifts under the current regime, and give away more than they can afford, before they can afford to do so. This could leave them horribly short of cash, especially if they need care later in life. If you’re not sure what to do, it’s vital not to rush into anything you could come to regret.
Four no-regrets steps ahead of the Budget
1. Make a pension or SIPP contribution
This has the dual benefit of making less of your income subject to income tax, and taking advantage of the rules as they stand.
Check if your employer operates a salary sacrifice scheme, where you give up a portion of your salary, and spend it on certain things free of tax – including pensions. If not, you can still pay into a pension and receive tax relief at your highest marginal rate.
2. Pay into an ISA
It makes sense to make the most of the system as it stands, ahead of any changes, while you can be certain of the allowances and tax treatment.
A stocks and shares ISA will protect you from any potential tweaks to things like capital gains tax and dividend tax, while if you’re making income from savings interest, you can use a cash ISA to protect as much as possible from income tax – in case the thresholds are frozen for even longer. Consider the right combination of cash ISAs, stocks and shares ISAs, the Junior ISA and the Lifetime ISA.
3. Use share exchange (Bed and ISA) for existing investments
If you have investments outside tax wrappers, and the available allowance this year, it’s a no-brainer to move some of them to a more tax-efficient environment. The good news is that this can be really straightforward, through share exchange – otherwise known as Bed & ISA. You can realise gains within your capital gains tax allowance, and move them into an ISA where they’re protected from dividend and capital gains tax.
4. Consider financial advice
It can be incredibly difficult to know what to do at times of uncertainty, especially if your financial position is complicated. There are plenty of people who are happy working through the speculation and focusing on the right moves for them. But if you’re worried about making a mistake, or struggling to balance competing demands, getting advice can offer real peace of mind.”
