Her two budgets were a nightmare as she hit Britons with £66 billion in extra taxes. It followed months of panic as everyone wondered what she might do. After all, she attacked our pensions, savings, investments, homes and inheritances in an all-out attack. She may have been fired as chancellor, but she’s not done yet. Many of its changes are still under development, many of which will come into force in April next year.
Emma Sterland, chief financial planning officer at Evelyn Partners, said households should focus on the changes they already know are coming, rather than trying to predict the new chancellor. “Some of the upcoming changes have flown under the radar of even the most financially astute households, particularly measures that have not yet come into force.” So what awaits us?
The biggest change for many families, Sterland said, will be Reeves’ decision to roll over most unused pension funds and death benefits to family estates for estate tax purposes beginning April 6, 2027. “This is a big beast on the horizon, the most significant development in both retirement and estate planning in recent memory.”
Currently, unused defined contribution pension funds can be transferred without IHT. Many wealthy families have deliberately saved more money for retirement to reduce their exposure to IHT, but that strategy could now be turned on its head.
Pensions may soon be subject to both personal income tax and income tax. If the policyholder dies at age 75, the beneficiary must pay income tax on withdrawals at a rate of 20%, 40%, or 45%, depending on his or her tax bracket. Sterland said: “This could mean the effective tax charge would be 52% for basic rate taxpayers, 64% for higher rate taxpayers and 67% for those on the supplementary rate.”
Many are responding by spending, gifting or reinvesting their tax-free retirement money before the new rules take effect. “Others are looking to use the ‘ordinary expense against income’ exemption by removing unnecessary income from their pensions and spreading it out gradually over time,” she said.
People aged 75 and over are even more likely to take a pension cut given the risk of double taxation on earnings at death. However, Sterland warned that savers need to save enough money to cover pensions and potential care costs. The right approach will vary from family to family.
Investors are in for another tax hit. From April, tax rates on savings income will rise by two percentage points to 22%, 42% and 47%. The personal savings allowance will remain at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, while additional rate taxpayers will not receive a top-up.
Four years ago, savers paid £1.2 billion in tax on their interest. Last year they paid £8.4 billion. “Investors should track all of their interest payments to make the most of their PSA,” Sterland said.
From April, the ISA cash allowance for under 65s will be reduced from £20,000 to £12,000, although the total ISA allowance will remain £20,000. For those aged 65 and over, the £20,000 Cash ISA limit will remain.
This may prompt some savers to consider putting more money into a higher risk, but potentially higher return, stocks and shares ISA.
Sterland said they can still invest in assets with less volatility, such as short-term bond funds or multi-asset defensive funds. “Low-risk money market funds will retain the right to use a stocks and shares ISA, provided they do not make up 100% of the account.”
The freeze on income tax thresholds looks set to last until 2031, pushing more taxpayers into the higher brackets and increasing income tax bills. Pension contributions can help higher and additional rate taxpayers reduce their taxable income, while workplace pay reduction schemes can also be helpful where available. “The £2,000 Reeves pension contribution cap is due to come into force in April 2029, so take advantage of it while you can,” Sterland said. Just remember that you won’t be able to access your pension until you’re 55, and that will increase to 57 from 2028.
From April, rental landlords will also face a 2% income tax surcharge, so rental income will be taxed at rates of 22%, 42% and 47%. Finance cost relief for landlords will also be calculated at a base rate of 22%. “In some cases, options such as transferring property between spouses or incorporating portfolios into company structures may help. Others will be sold,” Sterland said.
The Tories have cut the annual capital gains tax exemption to just £3,000. Reeves increased CGT rates to 18% for basic rate taxpayers and 24% for higher rate taxpayers. Sterland said investors should use tax-efficient wrappers such as ISAs and pensions where needed, while married couples could use two sets of benefits by transferring assets between them.
Dividends are also subject to higher taxes as of April this year, again due to Reeves. Income over £500 a year is now taxed at 10.75% for basic rate taxpayers and 35.75% for higher rate taxpayers, while the additional rate remains 39.35%. ISAs can help here. There will be a lot of noise around the upcoming budget, but don’t let it drown out the tax hikes already in effect. Something to shout about.