It sounds like the Chancellor will be raising taxes when she announces her first budget on 31st October.
However, prior to the election, she ruled out the obvious ways of increasing the government’s tax revenue. Unless she goes back on those promises, there will be no increases in the rates of income tax, National Insurance or VAT.
We do know that school fees will be subject to VAT from 1st January 2025, but that is unlikely to make up the shortfall (and school fees shouldn’t need to go up by 20% as schools will be able to reclaim input VAT).
The media has been indulging in a game of “guess where the extra tax will come from” and we think we shouldn’t be denied the chance of joining in. For us, as your financial planner, this is quite a useful game, as it allows us to start to develop some contingency plans. But, like anybody else, we are only guessing!
My guesses are based on the Chancellor wanting to collect a lot of tax (or reduce tax relief) in a short period of time. I’m not the Chancellor, so I don’t know what will happen, but here are my guesses:
- Remove the Residence Nil Rate Band (RNRB) for inheritance tax. This is a complex part of the inheritance tax rules, which is intended to allow widows and widowers to pass on up to £1million to their families, without paying inheritance tax. The complexity makes it hard to follow, and the Chancellor could even accompany its removal with an increase in the basic nil rate band for inheritance tax and still increase the tax take, which would be politically expedient.
- Re-introduce a tax on death for pension funds. At present, there is no inheritance tax payable on the remaining value of pension funds (apart from a very few exceptions). In the past, it wasn’t even possible to inherit a pension fund, and pension funds were still subject to tax on death as recently as April 2015. This would only affect people with investment linked pensions, so those with final salary schemes (e.g. doctors, civil servants and MPs) wouldn’t be any worse off.
- Remove the exemption from capital gains tax on death. At present, capital gains tax dies with you, and this means that people can simply keep hold of assets with taxable capital gains for their lifetime, and avoid paying tax. It’s even possible to move assets between spouses, in order to make a tax silver lining out of a very dark cloud. This exemption means that capital gains tax can be a voluntary tax for those in later life.
- Reduce the annual allowance for pensions. At present, it is possible for up to £200,000 to be paid into an individual’s pension in a tax year, without a tax charge (the £200,000 is made up of the current year’s annual allowance, plus the allowance for the last three years. It’s quite complicated, so I won’t explain it in more detail than that, for the time being!). It has already been reduced before, with the last reduction taking place in April 2011. Reducing the amount of the annual allowance would reduce the amount of tax relief granted on pension contributions.
- Increasing the starting rate of savings. Another complicated rule, but this allows some people to earn up to £5,000 in interest, tax-free, in a tax year. The “starting rate” could be increased from 0% to 10%, for example, and/or the amount could be reduced from £5,000.
Those are my top five guesses! You may notice that my guesses don’t include the scrapping of the tax free lump sum – this is either because I think it would be difficult to implement and unfair, or because I am “just argumentative” (my family tell me this regularly and I cant resist disagreeing, which makes their point for them, it seems!). I don’t think it is impossible that the maximum amount of the lump sum could be reduced (this has happened in the past, so it isn’t without precedent) and the rules introduced in April this year would make it fairly easy to implement.
In the longer run, I suspect that we will see some more substantial changes to our tax system, and my guess is that the next “fiscal event” after this one will be more significant.
We would always advise against taking action, without considering the consequences, particularly if the action is irreversible. If, for example, someone decided to withdraw the maximum tax free lump sum now, they should first consider the consequences of doing so – this would include removing money from the tax advantaged pension wrapper and putting it somewhere, where the returns might be subject to capital gains tax and income tax, and its value subject to inheritance tax on death. However, the media can often encourage us to act in haste, without properly considering the consequences.
We would always suggest that you take advice and consult with us, before making changes to your portfolio. We will always be here to talk things over with you.
Philip Wise | philip@sussexretirement.co.uk
Managing Director and Chartered Financial Planner
This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of pensions and any income from them can fall as well as rise. You may not get back the full amount invested.
A pension in a long-term investment and the value is not guaranteed. Any advice or considerations are personal to each individual’s circumstances.
The Financial Conduct Authority (FCA) does not regulate Inheritance Tax Planning or Trust Advice.
