Pre Budget Bingo 2.0 - The Revenge

Last year I don’t think I did too badly with the old predictions. I’ll give myself a 7/10, maybe an 8 at a push.

With this year’s fevered speculation making last year’s look relatively sane by comparison, there is no lack of nonsense to filter through ahead of the 26th.

Usual rules apply - no one can really know what is coming down the pipe. So none of the below can ever be relied upon as gospel, and certainly none of it is intended to represent advice to any specific individual.

It is usually a really bad idea to take irreversible action for the sole purpose of trying to front run government decision making. If you are planning to I would urge you to put down the newspaper, and consult with a regulated financial adviser.

Now that the requisite backside covering is out of the way, let’s get to it.

What has been confirmed or ruled out already?

No new changes have been confirmed as being set in stone so far. The government have however consistently promised not to raise the headline rates of National Insurance, Income Tax, VAT or corporation tax.

But the fiscal position has been worsening of late. The OBR are expected to downgrade the UK’s productivity performance and this will only add to the government’s fiscal shortfall. I guess this could be used as an “excuse” to revisit some of these past promises, but it would be pretty politically unpalatable.

In recent months Rachel Reeves also appears to have ruled out a general “wealth tax”, describing calls for one during the Labour Deputy Leadership campaign as a “mistake”.

Can’t be ruled out conclusively - but I think that is a pretty clear message and given how the idea of a wealth tax dissolves on first contact with reality, I would regard this is a positive.

So what might be coming then?

Although a distinct tax on wealth looks very unlikely, I would expect the theme of increasing taxation on assets, rather than income, to continue into this Budget.

The (unhelpful, I think) language of “working people” remains, so the obvious implication is that any tax rises will continue to fall on business owners, businesses and those who own assets.

Reduction or removal of the pension tax free cash entitlement.

This is the big one that has been clogging up my DM’s of late.

Under current rules¹ anyone aged 55 or over can draw 25% of their pension tax free, up to a maximum of £268,275. There has been fairly intense speculation that this allowance may be reduced or even removed at this next Budget.

Cooking this maximum tax free cash entitlement would mean one has a pension of £1,073,000 - which is not an insubstantial amount of money. And folk with this level of wealth would probably fall into Labour’s definition of having “broad shoulders”.

But I think the government need to be very careful here. Pensions have been consistently messed about with for years, and any measure that could dissuade the populace from saving for their retirements needs to be considered very carefully.

The days of “gold plated” final salary pensions seem to be (mostly) behind us and if we are expecting people to take the risk of funding their retirements onto their own balance sheet, then governments must incentivise responsible saving. Pensions have a bad enough rep already without taking away the tax breaks.

The alternative will be to create a much larger problem down the line for the state. But then again, politicians probably don’t think that far ahead.

Here’s where I am with this. I think a reduction or removal is less likely than a continued freezing of the allowance - so called “fiscal drag”. This is a less obvious revenue raiser and wouldn’t attract the same press attention.

I think if you have a specific use for the money earmarked now, to pay down your mortgage or to make a gift for example, then I can see why you would want to lift your tax free cash now. And in some cases it makes sense to do just that.

But if you are doing it solely to try and front run any changes to the rules then I would really caution against that.

In a similar vein, if you are justifying the decision to take tax free cash by re-investing the withdrawn funds into lower return assets just because the tax treatment is better, I would politely suggest you give your head a wobble.

Likelihood: 4/10. I don’t think a reduction (in nominal terms) or removal will happen. But it is close to a coin flip I reckon.

If you want a far more detailed (better) review of the situation I would recommend this piece from The Monevator. But you’ll need a sit down in a dark room after reading it.

Image credit: Shutterstock.

Cutting the Cash ISA allowance.

Again, this one has been in the press a fair bit. At the moment the Cash ISA allowance is the same as the Stocks & Shares ISA allowance - £20,000. The current chatter is that the Cash ISA allowance will be reduced and that this will somehow encourage people to invest their money more.

If this is the government’s genuine rationale for making these changes (and I’m not sure it is) then it is pretty misguided I think.

Comparing Cash ISAs with Stocks & Shares ISAs is like comparing apples and sponges - they are two entirely different things. Folks who hold Cash ISAs hold them as part of their cash allocation, that money isn’t there to be invested.

There are also a certain cohort of people holding Cash ISAs who will never be convinced to invest any of their savings, no matter what the tax break.

If this does go ahead, what will actually happen is that more cash savings will end up being held in taxable accounts rather than ISAs, increasing take for the Revenue. A move like this could even be pared with a reduction in the Savings Allowance.

Likelihood: 7/10. Gimmicky, but the government can spin this as being part of a “growth agenda” even though it’s just a good old fashioned revenue raiser.

A cap on lifetime gifts.

Under current rules, assets gifted to AN Other party fall outside of the Inheritance Tax calculation after seven years. This is one of the simplest ways of reducing one’s potential Inheritance Tax liability, and many wealthy families avail of this opportunity.

Fidelity have plucked a figure of £100,000 out of the sky for the cap. Which isn’t very high at all in the grand scheme of things. But I’m sure the government would point to the fact that a married couple can pass £1 million of assets to their beneficiaries tax free on death at the moment, if they structure things correctly.

Where clients have had plans to make gifts already, I have been encouraging them to bring these gifts forward and make them now.

If a lifetime cap is introduced in October, I reckon it would be very unlikely to be “backdated” to catch gifts made before the Budget. Even if it was though, by making the gift today a donor would be in no worse a position than if they chose to make the gift post Budget.

The main argument I can see against this one is that when assets are gifted, they are gifted from savings and often spent on property or in the real economy by the beneficiary. This spending creates its own tax take, which would be largely lost if lifetime caps were disincentivised.

Without the incentive to gift, people would just sit on their assets until death. And we are all living longer, so the government would therefore have to wait a while for their cut.

Likelihood: 8/10. Despite the flawed logic I think this is going to happen. This government have shown a willingness to go after “wealth transfer”, and in this context it makes sense to pair this change with the introduction of IHT on pensions.

An increase in Income Tax.

Clean, simple and a big revenue raiser. A one point increase is estimated to raise £8 billion a year.

But that’s kind of where the good news ends.

This would unequivocally break a Labour manifesto promise, and antagonise their core support at a time when the government is under political pressure.

I’m on the record as saying I feel that income is still taxed too aggressively relative to assets, and taking this step would undo some of the work Labour have done to address this since they took office. I just can’t see it.

Likelihood: 3/10. A couple points more likely following Tuesday’s press conference - but I’m going to stick my neck out here and say no chance.

National Insurance on rental income.

Private landlords have been given a kicking by successive governments, so why would they stop now?

Net property income reported in the UK for tax year 2022-23 was £27 billion, so a flat 8% levy would have raised approximately £2.2 billion. This assumes a flat 8%, without the same tiering that earnings benefit from - if such tiering was introduced it would reduce the take.

A change like this would surely only accelerate the loss of the private landlord from the rental sector - driving rents up further, or freeing up stock for first time buyers depending on who you believe.

Likelihood: 7/10. Again, I reckon this is a goer.

Introduction of an exit tax.

A fairly recent rumour this. The proposal being a tax charge of 20% levied on assets held by people who leave the UK. As yet unconfirmed whether there is an exemption for those who announce their departure in a fit of pique on LinkedIn beforehand.

At the moment, expats are subject to Capital Gains Tax where they sell property in the UK - however, the sale of other assets like shareholdings are not subject to tax.

The idea, as I read it, seems to be that the 20% charge would be applied to gains on these assets when an individual leaves the UK, rather than the full value of the assets. Although details on the ground are pretty skinny still.

Introducing this change would bring us in line with several other G7 countries, but the timing is everything. If the rules were only changed at the end of the tax year for example, it would likely hasten the departure of a number of wealthy individuals before then.

Likelihood: 6/10. Plays well politically for the government, an “easy win”. Devil is in the detail.

Why would you want to leave!? Image credit: Shutterstock.

Change tax treatment of LLP’s and partnerships.

Many legal, accountancy and investment firms as well as GP practices are partnerships, or the more modern equivalent - Limited Liability Partnerships.

There are legal reasons why some of these entities are structured this way, but for many the primary driver will be tax efficiency.

For partnerships are not subject to Employers’ National Insurance in the way that companies are. And that means that partners can draw a (potentially significantly) higher net income from the business.

Equalising the National Insurance treatment of partnerships with companies would make sense on a number of fronts. Again this tax would largely fall on those with “the broadest shoulders” – around 0.1% of taxpayers receive 46% of all partnership income, and 98% of the tax raised from this change would come from the highest earning 10% of taxpayers.

The main challenge politically is managing the messaging around GP’s - many of whom are paid a fraction of what others on the list are. There might be some kind of carve out, or as Dan points out in his post there could be a commitment to use some of the funds raised to increase GP pay.

Likelihood: 9/10. I reckon this is a slam dunk. Dan Neidle has a great piece here if you want to check it out, for those of you who would be affected there is a calculator included too.

Good financial management is good emotional management. We know this to be true when we think about managing our investments, but it is every bit as important when it comes to how we structure our affairs.

In the same way that we must resist the siren song of disaster every time there is a market drawdown, we cannot be buffeted into making irreversible decisions by a media who are playing a different game to us.

Not to state the obvious, but the papers couldn’t care less about your situation - only about your engagement.

I’ll leave you with my usual pre Budget advice:

1. The government can do what they like.

2. It isn’t personal.