Tick-tock, tick-tock. The countdown is under way, and in little more than a month we will once again be bracing for what many fear could be another blow to their wealth and financial independence.
This time, Rachel Reeves will not be the Chancellor delivering the bad news. That responsibility will fall to John Healey, who is expected to present Labour’s third deeply unpopular Budget in as many years – with potentially serious consequences for household finances and retirement plans.
In truth, the identity of the Chancellor may make little difference. It could be Ken Dodd, were he still alive, because socialist Labour appears determined to target investments, personal wealth and property.
If only the clock could be stopped – or, better still, turned back to the days when Labour was no more than a weak opposition party.
Healey has already signalled that the Government is preparing for difficult decisions, describing next month’s Budget as a ‘tough’ one and fuelling concerns about possible tax rises.
He is also likely to rely on the familiar Labour explanations for why those measures are supposedly unavoidable.
It’s coming: In just over a month we will brace ourselves for yet another assault on our wealth and financial independence
The continuing conflict in the Middle East may be blamed for the country’s precarious finances, rather than the Government’s hostile approach to business. Critics argue that this stance has increased costs for employers and left the economy struggling to move forward.
There is unlikely to be much discussion of Labour’s unwillingness to confront the rapidly rising welfare bill, even as defence spending remains under pressure and Government borrowing costs continue to climb.
Prime Minister Andy Burnham’s suggestion that social security spending should take precedence over national security is not only naïve, but potentially dangerous.
God help us.
The result is likely to be further tax increases designed to shore up the Government’s finances. Once again, however, it will be ordinary taxpayers – particularly Middle England – who are expected to carry much of the burden.
That includes the young and the old, the ambitious and the comfortably established, and everyone in between. It means people who work, own their homes and save for the future, as well as those who have spent a lifetime making prudent financial decisions and are now in retirement or semi-retirement.
Healey has so far revealed little about the tax increases he may be considering. But I would expect the Treasury’s advisers to start leaking hints before the Budget on Wednesday, October 28 – or what some taxpayers may regard as doomsday.
That would be consistent with the speculation and political tittle-tattle that has emerged from the Treasury over the past two years.
Once again, rumours are likely to circulate about restricting the amount of tax-free cash people can withdraw from their pension. Similar fears were raised ahead of the previous two Budgets.
Before the 2024 Budget, investors withdrew about £10billion in ‘excess’ tax-free cash because they feared the Government was about to impose a crackdown.
No such restriction followed. That left tens of thousands of savers holding money that might have been better kept invested inside their pensions, where it would not have been immediately exposed to tax. The same pattern was repeated last year.
Investing platform AJ Bell has urged Healey to make a clear pre-Budget promise that he will not reduce people’s right to take tax-free cash from their pension. Whether he listens remains uncertain.
If I were a betting man, I would put my garden shed on the Chancellor increasing capital gains tax on profits from second homes, buy-to-let properties and investments. The aim would be to bring those rates into line with income tax rates.
It’s a move that most Left-leaning think tanks have been calling for since I wore shorts to school.
I am sure its announcement in the Budget would result in many Labour MPs partying late into the night. Negronis all round (nice and red).
For diehard socialists, utopia. For us, yet another spiteful attack on thrift.
What we do know for certain, because Healey has already said it, is that there will be no breaking of Labour’s 2024 manifesto which pledged not to increase ‘National Insurance, the basic, higher or additional rates of income tax, or VAT.’ Thank you for small mercies.
But there’s far more we know about what lies ahead taxation-wise as we march towards the end of Labour’s term in office in 2029 (of course Burnham could call a snap election before then).
There are a myriad of tax rises coming that are set in stone, but which we can plan for and, in most cases, take action to mitigate – with the aid, of course, of our brilliant Money team at Our News Outlet and This is Money.
These tax rises were of Reeves’ creation and come in the form of a series of tax bombs with in-built detonators designed to go off at specific times.
The tax raids coming from April 2027
The first batch of these detonators goes off in April, when the new tax year kicks off.
So, from April 6, tax on savings interest will jump by two percentage points, resulting in new tax rates for basic, higher and additional rate taxpayers of 22, 42 and 47 per cent.
Savage? Yes, but basic and higher rate taxpayers should still be able to shield, respectively, £1,000 and £500 of annual savings interest from these new tax rates through use of their personal savings allowance.
I say this in the expectation (no, hope) that these allowances won’t be chipped away at or removed altogether by Healey (don’t rule it out).
These same higher tax rates will also apply to rental income earned by landlords (Labour truly hates landlords).
Saving into a cash Isa will be restricted at the same time – with only those aged 65 or over still being able to squirrel away up to £20,000 in any one tax year.
For all other adults, they will be allowed to put only a maximum £12,000 a tax year into a cash Isa. If they want to maximise their £20,000 allowance, they will have to run a stocks & shares Isa alongside their cash Isa.
While stocks & shares Isas and Junior Isas will keep their respective maximum annual allowances of £20,000 and £9,000, managing the former will become far more challenging for investors.
This is because Labour has decided to introduce a flat 22 per cent tax charge on all interest earned from cash held inside a stocks and shares Isa.
Both a bewildering move and a dent in the tax-free label that makes Isas so attractive.
Yet probably the most damaging tax ‘bomb’ that will ignite in the next tax year will be that affecting on any unused pensions when people die. For the first time, they will fall into the inheritance tax (IHT) fishing net.
As I’ve said before, the taxation of such pension pots will be nothing short of egregious.
For some beneficiaries, it will result in the proceeds from an inherited pension fund (where the plan holder was aged 75 or more) being subject to both 40 per cent IHT and income tax.
In the most extreme of cases, 91 per cent of an inherited pension fund could be lost to tax.
Whatever happens in John Healey and Andy Burnham’s first Budget, there is already a painful series of tax raids coming that were orchestrated by Rachel Reeves
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How should hardworking families protect themselves from rising taxes on pensions, savings, and homes?
Finally, we now learn that staycations in England will become more expensive towards the end of this tax year as a result of mayors being free to impose an uncapped tax on visitors staying in their regions.
Where mayors don’t exist, new ‘foundation strategic authorities’ will be able to levy the tax.
Labour says the levy will not exceed 5 per cent, but the tax will still make holidays more expensive for hard-working families. Accommodation providers, especially independent B&Bs, could also be hit if holidaymakers are deterred from staying in the UK.
Similar tourist levies are already charged in Edinburgh and are set to be introduced in Wales just ahead of England.
In Reeves’s defence, this new tax will not be of her doing: the finger points at Burnham, Healey and Local Government Secretary Angela Rayner.
And a year later… more tax raids
Reeves’s detonators are far from spent when the tax year to April 2028 comes to an end.
A new mansion tax will then kick in, landing those with homes worth £2million or more with annual bills up to £7,500.
Then, a year later, a new stealth tax will be imposed on salary sacrifice pension plans offered by many employers. The upshot is that many employees and employers will end up paying more in NI. Yes, more bloody tax!
So what can you do?
All rather scary? Absolutely – I’ve got into a right old flap just writing this article.
And I’ve not even mentioned the tax consequences of Burnham’s wish to ‘fix’ the social care crisis through the creation of a ‘national care service’.
Reform of social care, the Prime Minister has already said, will require ‘difficult decisions’ – which is code for some form of tax rise. When it will all be decided is anyone’s guess.
But in the meantime, between 30,000 and 40,000 people a year will be forced to sell their home to fund their long-term care costs.
To the good news, dear readers. There is a lot you can do to protect your wealth from what is coming down the road in the weeks, months and years ahead.
Most of it is centred around good, old-fashioned financial planning. For example:
– Ensuring your family assets (everything from pensions, investments and savings) are set up in the most tax advantageous way possible and are best in class in terms of the deal (investment growth, interest rate) they give;
– Taking full advantage of saving and investment tax-breaks (for example, Isas and pensions). Not just for you and your spouse or partner, but for your children via Junior Isas and pensions (yes, pensions);
– Making sure your existing Isas are fit for purpose ahead of the rule changes in April;
– Having up-to-date wills and being aware of a multitude of gift allowances that can help mitigate IHT bills further down the line (especially given the inclusion of unused pension funds in IHT calculations from April);
– Maybe downsizing your home to mitigate the mansion tax – or releasing equity to support your retirement finances;
– And finding out how to plan for the possibility – not probability – of care costs in later life.
Our brilliant six-part newsletter series, written by my colleague Simon Lambert, in the weeks leading up to the Budget and in its immediate aftermath will cover all these areas: IHT, pensions, savings and investments, property, care costs and later-life planning, and what the Budget means for you.
It will be essential reading, drawing upon a mix of the country’s best Money team’s extensive personal finance knowledge and that of leading financial experts. It’s unmissable.
More importantly, it will put you in a better place to mitigate the impact of the tax detonators coming all our way.
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