With Labour’s inaugural Budget taking place on 30 October, Chancellor Rachel Reeves has set the tone by cautioning that “difficult decisions” need to be made on key areas such as spending, tax and welfare.

With an apparent £22bn “black hole” in the public finances, speculation is mounting over the taxes the Chancellor may choose to amend to plug the gap. We already know that school fees have been targeted, with the standard 20% VAT rate to be added to private school fees from 1 January 2025, but what could potential changes to pensions, Inheritance Tax (IHT), Capital Gains Tax (CGT) or Dividend Tax actually look like?

Pensions

There are some possible pensions related reforms on the horizon, including bringing pensions within the scope of IHT or reviewing the treatment of death benefits in drawdown.

Pensions can currently be passed to beneficiaries free from IHT, but they could be made taxable upon death. Where death occurs before age 75 no tax applies, while after age 75, beneficiaries pay Income Tax at their marginal rate on pension withdrawals. The government may consider introducing a more universal approach. Changes could be implemented which mean pensions are no longer inherited tax-free. If this change might affect you, it would be worth reviewing your situation and the way your overall portfolio is structured. Investment into other tax efficient wrappers offer different reliefs and allowances and can provide an alternative tax efficient strategy for retirement and estate planning. 

There may be plans to reintroduce the Lifetime Allowance, or to tighten controls on various limits. The Treasury could look to restrict people’s entitlement to tax-free cash when they access their pension pot. At present most people can take up to 25% of their fund tax-free from the age of 55, which is currently due to rise to 57 in 2028.

IHT

WithIHT receipts topping £7.5bn in the 2023/2024 financial year, and more middle-income families being impacted by the extended threshold freeze, certain tax reliefs could be in focus for the government. Reeves could raise the overall rate of IHT or curb the current relief available on certain inherited assets. Reliefs such as Agricultural Property Relief and Business Relief, which reduce a potential IHT liability, or amendments to potentially exempt transfer (PET) rules which requires seven years to elapse for the transfer to take full effect, could be targets at the end of October.

CGT

CGT rates could be increased, potentially bringing them in line with Income Tax rates or extending the regime of different CGT rates for residential property, investments and business assets. It is possible Reeves could consider charging CGT on second homes and businesses after the death of the owner, effectively removing the ‘uplift on death’ and charging CGT as if the assets had been disposed of.

Dividend Tax

The dividend tax-free threshold has been cut over recent years to just £500 for the current tax year, dragging more people into its net.Above this, Dividend Tax rates are payable at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.Could the Treasury cut this further or equalise the rates with Income Tax levels?

Plan and review

There’s plenty to consider. With indicators the government might make changes to tax and pensions rules, now is the time to assess your finances and overall strategy pre-Budget. For example, if you were considering maximising your pension contributions, now might be a good time to think about it.

We know that any information at this point is purely speculative, but indicators are strong that changes are afoot. Planning, as ever is the most important approach. Professional financial advice is essential to ensure the right course of action for you, it’s vital to have a full conversation about the right approach for you and your circumstances before acting in haste.

Any changes announced on 30 October could be implemented immediately or from the new tax year (starting 5 April 2025). Taking some time now to consider your options, could be prudent.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.