It’s confession time. Yesterday’s Budget wasn’t as awful as I thought it would be.
Maybe, looking back, Chancellor of the Exchequer Rachel Reeves played an extraordinarily clever game in the near four months between Labour winning the election and her debut Budget – by putting the fear of God into us all that she was gunning for every bit of our wealth.
Then she confounded and somewhat surprised us by delivering a package of tax hikes that, in total, seemed large (£40billion), but not as pernicious on our family finance as we thought they would be. Maybe, she was just rattled by the growing backlash at her initially avaricious plans.
So, yesterday, Ms Reeves became more a pussy cat of a Chancellor than the hawk we had been led to believe she was.
Indeed, advance notes I had written yesterday morning for an article responding to her gruelling Budget speech ended up in my bin.
Its message – ‘tax, tax, tax,’ not ‘invest, invest, invest’ (the Chancellor’s mantra) – didn’t feel quite right. Rather than a full-blown assault on our pensions and savings, she used the tactic of raiding businesses to fund her ‘spend, spend, spend’.
Yes, it seems at first glance that Middle England got off quite lightly after all in yesterday’s Budget. Some of the horrible things we expected to happen failed to materialise.
There were no nasty tax raids on our beloved pensions and tax-friendly Individuals Savings Accounts – the bedrocks of most households’ long-term wealth.
Inherited pensions, though, got a thorough tax beating. We were even told that the long-term freeze on our personal allowance and income tax thresholds would melt away in 2028 – and not be extended as expected by another two years.
Hurrah. Relief (nearly) all round. Thank you, Ms Reeves – although let’s not underestimate the pain of hikes in capital gains tax and a widening of the inheritance tax net: more on these very soon.
Yet – and it’s a big yet – I believe that now is not the time for complacency. Make no mistake, Ms Reeves has far from finished with her tax raids on our family wealth. This is the relative calm before the storm. A stay of execution.
Yesterday’s tax grab on Middle England was no more than an opening salvo – a raiding party.
Ms Reeves will be back for more of our wealth, for sure. You have been warned.
Why do I say this? Well, having clobbered businesses with £25billion of extra National Insurance costs, it is less likely that Ms Reeves will go back to them in future Budgets and ask them to pay even more taxes.
Many businesses are already going to struggle with the extra tax burden she has heaped on them.
Some will pass on the extra costs to customers through higher prices (not good for inflation and Ms Reeves’s desire to get it down to as close to 2 pc as she possibly can) while others will trim workforces or keep a lid on pay rises.
Any more business taxes from the court of Ms Reeves will simply tip companies over the proverbial edge – and surely sink the Chancellor’s ambitious plan to ‘rebuild’ Britain and embark upon a ‘decade of national renewal’.
Ms Reeves can pump billions of pounds into public services but a rebooting of the economy will not happen without the full involvement of a bristling, bustling and vibrant UK plc.
So having bled businesses for as much tax as she can get away with for the time being, there is every chance that she will at some stage have to come back for more tax – sooner rather than later, I fear – from our family wealth.
So, as much as I hate to say this, further attacks on our ability to build wealth – and leave it to loved ones when we die – are as sure as night follows day.
So, today, armed with this special Money Mail report, I implore you – if you haven’t done so already – to sit down and ensure you have adequate financial defences in place to withstand whatever Ms Reeves throws at us in the Budgets to come.
That means using all the available allowances to protect your family’s wealth from tax – be it capital gains tax, tax on dividends and savings interest and inheritance tax. It’s not rocket science.
Honestly, it’s not as difficult as it may seem. The best starting point for most people to protect their wealth is to take full advantage of the tax friendliness of pensions and Individual Savings Accounts (Isas). If you are in a financial position to do so, you must use these tax-wrappers as much as you can afford to in order to build your own financial fortress.
Most experts thought that pensions would be at the top of Reeves’s list for raiding. But she backed down – not once but twice.
First, she let it be known before the Budget that a major revamping of the tax relief available on pension contributions would be far too complicated to introduce quickly.
So, the plan to replace the current system of tax relief – based on what rate of tax someone pays – with a flat rate was abandoned.
We were then led to believe that she might restrict the right to access 25 pc tax-free cash from our pensions once we hit the age of 55.
Yet she resisted the move to impose a cap (a figure of £100,000 was much mooted). Again, probably because it would have been too complicated to introduce quickly.
The result is that for the time being, our pension tax breaks remain as they were. So, use them at every possible opportunity.
If your employer offers to increase its contributions into your pension fund if you increase yours, take them up on the offer. As my late dad would have said: ‘Don’t look a gift horse in the mouth.’
If you have a self-invested personal pension, use every opportunity to put money into it.
The maximum annual amount you can put in is a generous £60,000 a year – so try to use as much of it as you can.
If you’ve got children, set up a pension for them. Squirrel away £2,880 a year and 20 pc tax relief will boost the pension contribution to £3,600. In later life, your children will thank you for being so savvy (and generous) on their behalf.
I am sure that in the next five years, Ms Reeves will take another hard look at pensions – and see whether she can raise more tax from them or cut the cost of tax relief.
Yes, it might mean her resurrecting the ideas that she mulled over recently and rejected (limits on tax-free cash and a flat rate of relief). But in the meantime, you shouldn’t be deflected from piling money into your pension.
The same goes for Isas. The current (adult) annual allowance of £20,000 is extremely generous – and yesterday Ms Reeves said it would remain at this level until April 2030.
So again, I urge you to utilise it as much as you can – £40,000 per married couple per tax year.
If you’re retired or like the idea of having a tax-free cash buffer that you can draw upon when financial emergencies come along, use an Isa wrapper to shield cash savings from tax.
Of all the hundreds of Budget Press releases that hit my email account yesterday, one from Coventry Building Society particularly caught my eye.
It said that savers are currently paying ‘billions [of pounds] in income tax on their savings every year’ because they are earning interest in excess of their annual tax-free personal savings allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers).
If these savings were instead sitting inside an Isa, it went on to say, tax would not be an issue.
If time is on your side and your retirement not on the immediate horizon, then use part or all of your Isa allowance to build an investment portfolio. Investing inside an Isa has now become even more attractive in light of Ms Reeves’s decision to raise CGT tax rates on share disposals.
These have now risen from 10 pc to 18 pc for basic-rate taxpayers and from 20 to 24 pc for higher and additional-rate taxpayers.
Although the annual CGT tax-free exemption of £3,000 remains intact, this harsher CGT regime strengthens the case for Isa investing.
Indeed, I wouldn’t be surprised if these new CGT rates have crept up even higher by the time 2029 comes along.
Finally, as with pensions, don’t forget that you can invest in Isas (Junior Isas) for your children subject to an annual allowance of £9,000.
The final piece of the jigsaw is inheritance tax planning. Never has such planning become more important given the Chancellor’s decision to freeze the nil-rate band at £325,000 until 2030 – and her decision to bring pensions into the IHT net from 2027.
The significance of this IHT attack on pensions cannot be under-estimated.
Andrew Tully, a tax expert at financial services company Nucleus, says IHT receipts will resultingly swell to nearly £14 billion in the next few years – a near doubling on the current tax take.
The key is to use the various gifting allowances available to take money out of IHT territory. These include the annual gift exemption (£3,000) and the ‘small’ gifts exemption of up to £250 per recipient. Wedding or civil ceremony gifts can also be made.
Larger IHT-friendly gifts can also be made under the so-called seven-year rule. This means that provided you survive seven years after making the gift, the money will be immune from IHT.
Regular gifts can also be made, but they must not compromise your lifestyle.
There is every possibility that Ms Reeves will seek to clamp down on gifting in future Budgets.
So, use them while they are still available. And if needs be, seek professional tax advice to ensure any gifts you make are watertight.
Ms Reeves may have been a pussy cat yesterday. But I am sure the hawk in her will ultimately prevail. Protect your family wealth – NOW.
