Labour will announce its first UK budget on October 30th and Keir Starmer has repeatedly stated how tough it will be. But what does this mean, what will they change, and how will it affect you?
This article will deliver a series of tips and predictions for the upcoming UK budget. Using our vast expertise, we’ll explore how your pension, investments, and tax liabilities might be affected by the new government and what the experts are predicting for the remainder of 2024 and beyond.
How Labour might change pensions
At seemingly every opportunity, Starmer and Rachel Reeves have told the public about the difficult decisions they’ll need to make in October’s Budget. This is largely due to a £22bn “black hole” in the nation’s finances which they blame on the previous leadership.
They’re standing by what they claim, too, and have already scrapped the winter fuel allowance for pensioners as their first major move in power.
There are many ways pensions may change after the budget, and the tax-free lump sum of 25%, in particular, has been controversial for Keir Starmer. Firstly, he said it should be reviewed before Labour took office, and while the party has downplayed this, changes aren’t completely off the table.
Experts predict that the tax-free cash limit could be reduced to £100,000 or replaced with an overhaul of pension withdrawals. These changes could help those paying no tax in retirement but could lead to higher tax-paying pensioners paying out more.
However, this hasn’t been confirmed by Labour and we’ll have to wait until October 30th to be sure.
IHT and pensions under Labour
Currently, pension cash outside of a person’s estate can be passed to beneficiaries without IHT (Inheritance Tax) applying. If death occurs before 75, there’s no tax to pay, and after 75, the beneficiary currently pays Income Tax at their marginal rate.
This has made pensions a great way to reduce IHT in the past, but Labour may subject all pensions to IHT come October. This will raise several hundred million pounds a year for the economy, which could rise to billions.
Of course, the move would be unpopular with higher earners and would mean changes to how their wealth is managed to mitigate tax liabilities.
National insurance pension changes
Labour could alter how NI (National Insurance) contributions work, and the IFS (Institute for Fiscal Studies) has suggested that applying NI to employer contributions could benefit the economy by up to £17bn a year.
Conversely, this would likely reduce the amount saved into pensions by that amount or more, so it’s a risky strategy and could be unpopular. Instead, Labour might change when employer NI applies when added to pension contributions, which could then be reduced via tax relief.
This move would be far less controversial and easier to navigate for those affected.
The pension personal allowance
Currently, the personal allowance stands at £12,570 a year, which is due to be frozen until April 2028. State Pension increases will mean that lots of pension pots will exceed the personal allowance, however, this means more tax will be due.
A few years ago, the Conservatives proposed a “Triple Lock Plus”, which was a promise to raise the personal allowance for pensioners. This would be so the allowance is never exceeded by the State Pension, which is something Labour are being urged to implement but haven’t agreed to yet.
How Labour might change CGT
Labour has promised not to raise Income Tax, National Insurance, or VAT, which probably means other taxes will increase. CGT (Capital Gains Tax) will probably be targeted, which is the tax levied on gains made when selling shares, property, and other assets.
Here are some of the CGT changes that could be announced in the budget:
- CGT could be raised.
- The amount needed for CGT to be payable could change.
- CGT exclusions may be removed, such as the exemption for spouses.
- The annual CGT allowance may be reduced or abolished.
- Which assets are subject to CGT could change.
Out of the above, raising CGT is the easiest and most likely. This would likely raise a lot of revenue for the Exchequer but put high earners in a tricky position with more tax due.
Dividend tax under Labour
The number of people paying dividend tax has doubled in the past three years, largely because the tax-free threshold has been reduced to £500 compared to £2,000 in April 2023.
As a result, more investors are put into higher tax brackets, and experts predict that Rachel Reeves will reduce the threshold to £250, which would be incredibly unpopular with investors.
Why? Because more of your investment earnings would be subject to taxation, and you may not make the kind of returns you would have in the past.
Conclusion
Of course, the above are all predictions and nobody fully knows what Labour will announce in their new budget. The best way to ensure your investments and pension aren’t negatively affected by tax changes is to speak with a wealth management expert like Cedar House.
With years of experience dealing with changes brought about under multiple governments, call 020 8366 4400 or email enquiries@cedarhfs.co.uk to get started.