Five things to expect in the October Budget

Key takeaways

• Capital gains, inheritance, and pensions could see tweaks to raise cash
• The Government is in a tricky position, balancing growth and strict fiscal rules
• Don’t expect any clarity until the Chancellor delivers her statement on 30 October

‍

“We’re lucky to have so much time to speculate,” said no one ever. 

As the nation gets itchy feet ahead of 30 October, Rachel Reeves has warned that taxes will increase, but has already promised not to raise income tax, national insurance, or VAT. With limited options left, your investments could be in the firing line.

Let’s unpack what to expect and some important tips to protect your hard-earned wealth. 

‍

1. Will Labour raise capital gains tax?

Speculation is growing that investors could be hit with a significant capital gains tax hike.

Currently, gains on investments are taxed at 10% for basic rate taxpayers and 20% for higher rate taxpayers, but these rates could increase in the upcoming Budget to bring them closer into line with income tax. 

Of course, capital gains tax is only charged on shares and investments held outside an ISA or pension, so tax changes would make protecting your wealth inside a tax-efficient wrapper even more crucial. 

‍

2. How could the tax on my pension change?

Labour has already announced a review of the pensions system, fueling rumours of possible changes to pension tax relief or the tax-free lump sum.

The good news is that any pension changes are probably a way off and may not end up happening at all. There is normally a formal consultation process before major changes, giving us all time to plan ahead.

A more immediate change could see employers being asked to pay National Insurance on pension contributions (which are currently exempt). 

Regardless of what may or may not change, it’s crucial to remain focused on your financial goals and not make a rushed decision with less than perfect information.  

‍

3. Will the government change inheritance tax rules?

Despite the fact that only about 4% of estates actually end up paying inheritance tax, any changes to these rules are a political minefield.  

With a dire fiscal backdrop, however, Rachel Reeves may decide to end the inheritance tax exemption on pensions. Any change could have a big impact if you have pension wealth to pass on to your family.

In the meantime, if you want to help out your family financially, there are annual exemptions available. You can currently give away £3,000 each year that won’t be subject to inheritance tax.

‍

4. Will the ISA limit be changed?

ISA reform was front and centre for Jeremy Hunt and the Tories but for Labour any dramatic changes in October feel less likely. 

There have been reports speculating about a cut to the annual ISA allowance of £20,000 and some commentators suggesting Labour may even go as far as imposing a lifetime cap on ISA contributions.

While these changes could cause an uproar amongst individual investors, it’s less likely that any changes would be implemented retrospectively. Investors should continue to make the most of current savings allowances while they can.  

‍

5. What’s a stealth tax?

Although Rachel Reeves has pledged not to increase income tax rates, frozen tax thresholds will lead to higher taxes over time, known as fiscal drag. The deep freeze until 2028, means we’ll gradually pay tax on more of our income as our wages rise with inflation, but tax thresholds don’t keep pace.

With income tax creeping up by stealth, paying more into your pension has never been more important. Contributions get an immediate boost from the taxman, making pensions one of the best ways to grow your long-term wealth. 

‍

Thinking of simplifying your pensions? Right now you can get 1% cashback when you transfer a pension to Freetrade.

Transfer at least £10,000 to qualify. Cashback capped at £2,000. Annual subscription required. Terms apply. Offer ends 31 December 2024.

‍

Important information