Navigating the uncertainty

During the election campaign the now Chancellor and Prime Minister insisted they wouldn’t raise taxes on working people. The big three being income tax, VAT and national insurance.

These would seem the obvious source of any rises as a small percentage increase on any of these would result in billions being injected into the public purse. However, this has not been a strategy of previous governments and we have seen more stealth taxes in the past.

It is difficult to pinpoint exactly what will happen here as raising taxes never sits well with anyone and as such, we may see some tinkering around the edges. When we talk about stealth tax but not raising the percentages of income tax, we may well see a stagnation of the tax bandings. This does not seem like a huge benefit to the government, however, with wage inflation on the rise this could certainly collect more tax by a freeze on thresholds.

Rachel Reeves did not announce too much yesterday from a financial planning perspective, more will be revealed potentially in the budget on 30 October.

When considering financial planning and where the Chancellor may be able to raise some revenue, pensions have regularly been tinkered with by successive governments. If we go back to pension simplification in 2006, there have been many budgetary changes since then. There are broadly three different avenues the chancellor could pursue to raise funds:

1. The one that could have the biggest impact on retirees is restricting tax-free cash when they access their retirement funds. Currently, most people can take up to 25% of their fund from age 55 tax-free, with this minimum access age due to rise to 57 in 2028. The amount of tax-free cash most people can take over their lifetime is capped at £268,275.
2. The most common pre-Budget pension tax relief speculation centres around the future of higher-rate pension relief and the potential move to a flat rate of pension tax relief. At the more extreme end, this measure could see pension tax relief restricted to the basic rate of 20% across the board. This could raise billions for the Treasury.
3. Currently you can pass on your whole pension, inheritance tax (IHT) free, to your beneficiaries. If you die before age 75 this is free of income tax too, if you die after 75 this is tax at the beneficiary’s marginal income tax rate. This has made pensions a very attractive way to pass on wealth IHT free, but was that really the intention of pensions? This seems like an obvious, very generous, tax allowance to review.

Currently there is little in the way of confirmed plans so all eyes will be on the upcoming budget. If you have any questions then please get in touch.