What could the Budget mean for your personal taxes? Coalesco looks at the possible changes
Questions about how potential tax reforms in the upcoming Budget could affect personal finances are increasingly on people’s minds.
And with good reason.
With talk of adjustments to Capital Gains Tax (CGT), Inheritance Tax (IHT), and pensions, individuals are left wondering how these changes might reshape their wealth management and future planning.
Capital Gains Tax
One of the more prominent concerns ahead of the Budget is whether changes to Capital Gains Tax will be introduced.
Some reports suggest that Labour may align CGT rates with Income Tax rates. This could hit higher earners particularly hard, leading to much larger tax bills.
“At present, people in the higher tax income threshold pay 24 per cent on gains from residential properties and 20 per cent on other assets,” explains Linda, Coalesco’s tax expert. “An increase to the scale of matching or coming close to Income Tax rates would raise the tax burden for many of the country’s higher earners.”
Capital Gains Tax is charged on the profit from selling assets like second homes, shares, and business interests, as well as personal possessions worth over £6,000 (excluding cars).
Currently, individuals benefit from a £3,000 exemption (£1,500 for trusts), but there are rumours that this exemption may be scrapped altogether, expanding the tax’s reach and increasing liabilities for a broader range of taxpayers.
Another potential change is linked to the way assets are valued at death for CGT purposes.
Currently, assets not subject to IHT can be ‘reset’ to their market value at death, reducing CGT when inherited assets are sold.
However, if this reset policy is reversed, heirs may face higher tax bills when selling inherited assets.
As Linda points out: “This could force people to rethink their estate planning strategies, especially for those passing on assets that are not liable for Inheritance Tax.”
Inheritance Tax
Inheritance Tax is another area that could see reforms. There is a possibility that Chancellor Rachel Reeves may consider raising the 40 per cent rate or lowering the current £325,000 threshold, as part of Labour’s broader strategy to tackle the nation’s financial difficulties.
“A lower threshold or higher rate could pull more estates into the tax net, leaving beneficiaries with a heftier bill,” notes Linda. “This could have serious implications for financial security, particularly for those who were expecting to inherit a larger portion of an estate.”
There are also whispers that existing exemptions – such as those on agricultural land or family-run businesses – could be reduced or eliminated.
If such measures are introduced, families with deep ties to farms or small businesses might face increased pressure to sell assets to cover the IHT bill.
“Removing exemptions could have a disproportionately heavy impact on these families, forcing them to make tough decisions about land or business assets they’ve held for generations,” adds Linda.
Pensions
Pensions remain a contentious issue, with potential changes to tax relief a frequent subject of debate.
At present, pension tax relief is offered at marginal tax rates. 20 per cent for basic-rate taxpayers, 40 per cent for higher-rate, and 45 per cent for additional-rate taxpayers.
However, proposals to introduce a flat rate of tax relief, perhaps around 30 per cent, have gained traction.
“This would be welcomed by those on lower incomes who could benefit from higher pension tax relief,” says Linda. “But for higher earners, this would be a reduction in the incentives to use pensions as a key element of wealth building.”
Rachel Reeves has previously backed a flat rate of 33 per cent, so any reforms in this area could change how the wealthiest approach their pension contributions.
For many, it might mean contributing less and seeking alternative ways to invest for retirement.
The annual pension allowance – currently set at £60,000 – could also be under review. A reduction here would limit how much individuals can contribute to their pensions while still benefiting from tax relief.
“Reducing the annual allowance would restrict the ability to shelter savings from tax, potentially increasing liabilities for those who max out their pension contributions,” explains Linda.
Additionally, the 25 per cent tax-free lump sum, which retirees currently enjoy when accessing their pensions, is another area attracting attention.
Speculation suggests that this could be reduced or capped, which would mean retirees face greater tax obligations when drawing from their pensions.
“Capping the tax-free lump sum could be an unpopular move but may be seen by the Government as a less direct way of raising revenues without touching Income Tax or National Insurance,” says Linda.
Preparing for changes
While these potential reforms remain speculative, they highlight the possible changes on the horizon in personal taxation.
For detailed advice on managing your taxes in light of the upcoming Budget, don’t hesitate to contact us for expert guidance.
