With only a week remaining before the Budget, households are preparing for another round of measures that could put further pressure on already stretched finances.
Investors may at least take some comfort from reports that one widely feared tax increase has been taken off the table. Chancellor John Healey is said to have rejected proposals to raise capital gains tax, which would otherwise have increased the bill on profits from selling assets including second homes and shares.
That is no reason to switch off completely. The Chancellor is still expected to raise taxes in some areas to fund spending elsewhere, although lower-income households may receive support alongside those increases.
And even if the Budget contains no fresh tax rises, taxpayers face a series of measures already scheduled to take effect between now and 2031. These delayed changes could prove just as painful when they eventually arrive.
By the time the final measure takes effect, Rachel Reeves’ two Budgets and Spring Statements — when many of the policies were announced — may be little more than a distant memory.
There was a practical argument for building in several years between announcing a tax change and implementing it. Households, businesses and HMRC all need time to prepare.
However, the long wait also allows the political responsibility to fade. By the time taxpayers feel the full consequences, the Budget that introduced the measure — and potentially the Chancellor behind it — may have slipped from public attention.
The first financial blow is scheduled for April next year, when the cash Isa allowance is cut. Savers under 65 will then be able to place only £12,000 of their £20,000 annual Isa allowance into cash Isas. The reform risks bringing unnecessary complexity to a product that has long been valued for its straightforward rules.
The Chancellor is expected to raise some taxes to help fund spending elsewhere
Whatever the Budget brings, making full use of tax-free allowances will be crucial. Put as much as possible into a pension and use a tax-free Isa
The next major change arrives in April 2027, when unspent pension funds are brought into the inheritance tax net for the first time. Wealth planners have warned that many families remain poorly prepared for what could be a fundamental shift in estate planning.
On the surface, the policy appears to impose a 40 per cent inheritance tax charge on unused pensions for people who have already exhausted their tax-free allowances. But technical aspects of the rules mean some estates could face a far higher effective rate — reaching as much as 91 per cent in the most severe cases.
Families may therefore have to reconsider how they transfer wealth to the next generation. Even estates with no tax liability are likely to face additional administration, placing a heavy burden on relatives at an already difficult time.
In April 2028, the next measure is due to take effect: a new charge on properties worth £2million or more. Formally known as the high-value council tax surcharge, the levy will cost between £2,500 and £7,500 a year and is already influencing the housing market. Money Mail has heard from homeowners with valuable family properties but limited cash income who are concerned about meeting the bill.
Then, in 2029, a change that has attracted far less attention will limit salary sacrifice to £2,000 a year. The arrangement currently allows employees to exchange part of their pay for an equivalent pension contribution, reducing national insurance costs for both the worker and the employer. From 2029, that tax-saving opportunity will be capped.
The Office for Budget Responsibility estimates that the measure could raise £2.6billion a year by the early 2030s.
Employers are already dealing with the impact of Reeves’ first national insurance increase, introduced last year. The salary sacrifice restriction will add to the cost of employing people, while the Institute for Fiscal Studies has warned that workers could ultimately suffer through lower wages. It remains to be seen whether living costs and unemployment will have eased enough by 2029 to absorb the pressure. That seems far from certain.
The tax increases set in motion by Reeves’ Budgets will continue to affect households until 2031, when the freeze on income tax thresholds is finally due to end.
By then, taxpayers are expected to be paying £12billion more each year than they would have done if the thresholds had risen in line with inflation since the freeze began in 2021. Around 5.2million additional workers and pensioners will have been drawn into the tax system, while almost five million more people are expected to pay the 40 per cent higher rate.
So how can households limit the damage? Whatever the Budget brings, making full use of tax-free allowances will be essential. Consider paying as much as possible into a pension, use a tax-free Isa to reduce future tax bills and keep track of policy changes so you understand exactly how they affect you.
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