Changes to personal tax? – FFT looks at what the Budget could mean for you
As the Autumn Budget approaches, many are wondering how potential changes could impact their personal finances.
From Capital Gains Tax to pensions, the Budget may bring about changes in the way individuals manage their wealth and plan for the future.
Let’s take a look at some of the taxes that have been mooted for upheaval and how this may impact you.
Capital Gains Tax
One area of concern is Capital Gains Tax (CGT). Speculation suggests that Labour might push to move CGT rates so they match Income Tax rates, which could lead to notably higher tax bills, particularly for higher earners.
“Currently, those in the higher rate Income Tax band pay 24 per cent on gains from residential property and 20 per cent on other assets,” says Adam Caplan, Partner. “If these rates were to rise, the tax burden on many could increase substantially.”
Capital Gains Tax, as you know, is levied on the profit made from the sale of capital assets, including second homes, shares, business assets, and most personal possessions valued at £6,000 or more, excluding cars.
At present, taxpayers benefit from an exemption on the first £3,000 of profits or £1,500 for trusts. However, there is growing speculation that this exemption could be removed entirely, broadening the tax’s reach and potentially increasing liabilities.
There is also speculation that the Government might prevent assets from being reset to their market value at the time of death for CGT purposes, except for those subject to Inheritance Tax.
Currently, resetting assets to their market value at death can reduce CGT liabilities for heirs when they eventually sell the assets.
Reversing this policy could result in higher CGT bills for those inheriting assets not subject to Inheritance Tax, prompting many to reconsider their estate planning strategies.
Inheritance Tax (IHT)
Speculation is rife that the Chancellor may introduce significant changes to Inheritance Tax (IHT) as part of Labour’s plan to address the Treasury’s challenging financial situation. Currently, IHT is charged at 40 per cent on the value of an estate above £325,000 when someone dies.
However, what if the Chancellor decides to increase this rate or lower the threshold at which Inheritance Tax becomes payable?
“Such a move could result in a larger portion of estates being subject to IHT, increasing the tax burden on beneficiaries and reducing the financial security they might have expected,” notes Adam.
Currently, several exemptions help reduce the impact of IHT, including those on agricultural land and family businesses. But what if these exemptions are lifted or reduced?
“Removing these exemptions could mean that assets previously protected from IHT would now be taxed, potentially leading to increases in the tax owed by estates,” comments Adam.
“This could have a particularly heavy impact on families with deep ties to agricultural land or small businesses, possibly forcing them to sell assets to meet tax liabilities.”
Pensions
Pensions have rarely been out of the headlines over the past decade, and this Budget is expected to be no different.
There’s every reason to believe that changes to the pension system could be on the horizon.
At the moment, pension tax relief is delivered at the marginal rates of 20 per cent for basic-rate taxpayers, 40 per cent for higher-rate taxpayers, and 45 per cent for additional-rate taxpayers. However, there have long been calls for this to change, with one of the most discussed options being a ‘flat rate’ of pension tax relief at or around 30 per cent.
“This change would make pension saving more attractive for those on lower incomes, but it would represent a big reduction for higher earners, for whom pensions are a crucial part of wealth building and tax management,” says Adam.
Rachel Reeves, the Chancellor, has previously supported a similar measure, suggesting a flat rate of 33 per cent.
If this were to be implemented, it could lead to a change in how higher earners approach their pension savings, potentially reducing their contributions.
Another potential change could involve the annual allowance on pension savings, which was set at £60,000 in the 2023 Budget. This is the maximum amount most people can contribute to their pensions each year with tax relief.
“Such a move would limit the amount that could be tax-sheltered within pensions, potentially leading to higher tax liabilities for those who regularly max out their contributions,” adds Adam.
Another possible target for reform is the 25 per cent tax-free lump sum that pension savers can currently draw upon retirement. There’s growing speculation that this could be reduced or capped, which would mean that retirees could face a larger tax bill when accessing their pension savings.
“This would likely be an unpopular move, but it could be seen as a way for the Government to increase tax revenues without directly raising Income Tax or National Insurance,” comments Adam.
While these are all speculative scenarios, they illustrate the changes that the Autumn Budget could bring to personal taxation.
As more news comes to light regarding October’s Budget, we will be here to provide you with the necessary information and advice.
For assistance and guidance on managing your tax obligations in light of the upcoming Budget, contact FFT today.
