There have been months of speculation and rumours, but tomorrow chancellor Rachel Reeves will step up to the podium and deliver her much-anticipated Budget to parliament.
Gossip has been rife as experts have attempted to predict how Reeves will address the country’s ailing finances, which includes a ‘black hole’ worth as much as £30bn.
Below, Trustnet rounds up the latest on how the chancellor could look to make money, from inheritance tax, to pension withdrawals – here are some of the ways your finances could come under threat.
ISAs
Reeves is said to be considering cutting the cash ISA allowance, with initial speculation suggesting it could be halved to £10,000 a year. It is part of a drive to encourage more people to invest.
The most recent reports state that the chancellor has softened slightly on the policy, upping the limit to £12,000, although still some way short of the £20,000 it currently stands at.
Reeves is also said to be considering adding a UK element to ISA reforms, with proposals to launch a new product whereby 20% of all money invested would be forced into domestic stocks.
Tom Selby, director of public policy at AJ Bell, said: “The slightly bizarre, back-of-a-fag-packet approach to ISA reform is deeply concerning and raises the spectre of unintended consequences at a time the government has stated its intention to create a retail investing culture in the UK.”
Pensions
There are three areas the chancellor could target in the upcoming Budget when it comes to pensions. On the private side, the tax-free lump sum and salary sacrifice benefits have been hot-button issues, while there are also rumblings of change to the state pension.
On the former, the most recent rumours suggest the tax-free pension lump sum is safe for now, with the 25% allowance likely to remain unchanged.
Previously, Reeves was reportedly considering slashing the allowance from 25% of a private pension pot up to £268,275, down to a £100,000 maximum.
However, one potential policy yet to be debunked is the introduction of a £2,000 cap on salary sacrifice pension contributions. Salary sacrifice enables employees to exchange part of their salary for employer pension contributions in a bid to reduce their income tax and National Insurance (NI) liabilities.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said restricting salary sacrifice on pension contributions could cause “long-term damage to people’s pension prospects”, adding that it will discourage employees from boosting their pension contributions beyond auto-enrolment minimums.
On the state pension, advisers said the chancellor could be tempted to make changes either by ditching the triple lock or accelerating planned increases in the state pension age.
Inheritance tax (IHT)
IHT is often cited as one of the most hated taxes in the country, but figures last week showed tax receipts continue to surge and remain on track for another record year.
While only paid by a relatively small minority of people, the decision to make pensions part of people’s estates for inheritance tax purposes from 2027 announced earlier this year is likely to bring more people into paying the tax.
Rachel Vahey, head of public policy at AJ Bell, said one area not yet attacked is the current gifting rules. At present, people need to survive seven years after gifting money, but this could be pushed out to 10 or even 12 years.
While less likely, the Budget could also revisit annual allowances or rules around gifts from income.
Income tax
Perhaps the most divisive rumours to swirl over the past few weeks has been whether the Labour government would reverse pledges from its manifesto and raise income tax.
There were fears that Reeves was considering an increase in income tax by either 1p or 2p across the board.
However, the latest from the government is that it has abandoned this proposal after significant pushback. Not all were pleased, however, as bond investors revolted. Gilts yields rose in retaliation as markets had previously seen the move as stabilising the nation’s finances.
At the minimum, people may expect thresholds to remain frozen for an additional two years at least to 2030, meaning more people will pay the higher rate of tax. Vahey said this was “almost nailed-on” to happen.
Capital gains tax (CGT)
The other main tax lever the chancellor could pull is CGT. Here, equalising rates with income tax could be on the cards.
Notably punishing on investors who hold assets outside a tax wrapper and people with more than one property, capital gains tax has already been hammered in previous Budgets, including a drastic reduction in the tax-free allowance and a hike to the rate on stocks and shares.
However, Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “If you’re worried about CGT changes in the Budget, it’s vital to consider the bigger picture before doing anything.”
Other options on and off the table
A wealth tax could be on the cards tomorrow, with calls for a 2% tax on wealth over £10m. Perhaps more likely could be a mansion tax, which would introduce a 1% levy on properties valued at more than £2m.
Elsewhere, investors could be hit if the chancellor is intent on upping the rate paid on dividend tax for basic rate taxpayers, as has been mooted. One study found that an upward revision from 8.75% to 12.75% could cost an additional £380, rising to £500 by 2029/30.
It may not all be bad news, however. As part of her initiative to get the country investing, Reeves could look to scrap the stamp duty chargeable on shares. Investors with stocks and shares ISAs pay a 0.5% levy when they buy UK-listed shares – a cost that is hidden within transaction fees and eats into their returns. This means they are effectively penalised for backing UK-listed companies.
Additionally, a hike in national insurance (NI) appears unlikely, after recently being tinkered with. There were rumours that it could fall, although this was predicated on income tax rising, something that is believed to be off the table.
One group that will pay close attention to NI is pensioners. At present, it is not levied on pension income and even those who continue to earn a salary after they reach state pension age are not subject to the tax, no matter how much they earn.
Danni Hewson, head of financial analysis at AJ Bell, said: “There has been a lot of debate about the generational wealth imbalance – the burden that working age people are having to shoulder to pay for an ageing population – so it might not be too far a stretch for the government to consider taxing those with gold-plated pensions or those who choose to continue working to supplement their retirement income.”
However, she added that this “feels like one fight the government is unlikely to pick”.