Tax-reducing Strategies, Seven Days Before the Fall Budget Announcement

Tax-reducing Strategies, Seven Days Before the Fall Budget Announcement

Upcoming Autumn Budget to Address Significant Funding Gap

The UK Chancellor, Rachel Reeves, is preparing for a challenging Autumn Budget as she aims to address a reported £40 billion funding gap. This gap, which some economists suggest could be as high as £50 billion, is expected to lead to significant tax increases and spending cuts.

The likely areas for tax increases include changes to pension taxation, increases in indirect taxes and smaller levies, council tax hikes, and fiscal drag on income tax.

One specific measure under consideration is a reduction in the tax-free pension lump sum, potentially down from the current 25% or £268,000 to as low as £40,000. This would raise substantial revenue from pensioners without increasing headline income tax or VAT, which Labour promised not to hike in the election.

Indirect taxes and smaller levies are another potential source of revenue. Although Labour pledged not to raise major direct taxes like income tax or VAT, the government may rely on increases in smaller indirect taxes or levies to contribute towards closing the gap.

Council tax hikes are also being considered, particularly to fund policing. With concerns growing about underfunded police and justice services, local tax increases could help bridge the gap in policing budgets.

Fiscal drag, where inflation and wage growth push taxpayers into higher tax brackets, can also increase tax revenue without explicit hikes.

The Chancellor faces significant pressure from competing demands like the NHS, defence, and justice sectors, with some departments facing cuts which could also indirectly necessitate tax increases to avoid service collapse.

In addition to tax increases, the Chancellor is reportedly considering extending the freeze on the personal allowance and income tax thresholds until the end of the current parliament. She is also reportedly considering extending the period for 'potentially-exempt transfers' from 7 years to 10 years.

Pensions have been a focus in the lead-up to the Budget, with potential changes to the rules regarding tax-free cash. Prime minister Keir Starmer has predicted a "painful" Budget with "tough decisions", leading to speculation about tax hikes.

In the realm of personal finance, Myron Jobson advises that money withdrawn from a pension should have plans, and simply putting it in a savings account may not be the best option due to the potential tax bill on interest earned and the vulnerability of savings to inflation. Given the potential increase in Capital Gains Tax (CGT), it is worth thinking about the best time to realize capital gains if one is considering selling assets.

A 'Bed and ISA' transfer involves moving existing assets into an ISA wrapper to shelter future capital growth and income from the taxman. Using annual CGT allowances wisely will become even more important if the rate of CGT goes up. For example, selling half of an asset's holding on the final day of the tax year and half on the first day of the new tax year could help avoid paying CGT.

Sarah Coles suggests that considering giving gifts during one's lifetime could be beneficial in light of potential changes to inheritance tax rules. Under current rules, you are generally permitted to give away gifts worth up to £3,000 a year, with potential inheritance tax implications if you die within seven years. Coles also mentions a rule that allows giving away surplus income without paying inheritance tax, provided it is paid from regular monthly income and the giver can afford the payments after meeting usual living costs.

In terms of retirement planning, topping up one's pension is often a good idea due to retirement costs and the tax-efficient nature of pension savings. A comfortable retirement for an average two-person household costs £59,000 per year, while for a single person it is estimated to cost £43,100. Each year, adults can stash up to £20,000 in an individual savings account (ISA), which provides a tax-efficient wrapper for income and capital gains.

As the Autumn Budget approaches on 30 October, it is crucial for individuals to be aware of potential changes and plan accordingly to avoid potential pitfalls such as paying more income tax and capital gains tax than necessary, increasing inheritance tax bills, and harming the growth of money.

[1] BBC News. (2023, September 1). Autumn Budget: What to expect from Rachel Reeves. [online] Available at: https://www.bbc.co.uk/news/uk-politics-65164002

[2] The Guardian. (2023, September 5). Rachel Reeves to announce police funding deal as part of Autumn Budget. [online] Available at: https://www.theguardian.com/politics/2023/sep/05/rachel-reeves-to-announce-police-funding-deal-as-part-of-autumn-budget

[3] Sky News. (2023, September 1). Autumn Budget 2023: What to expect from Rachel Reeves' first Budget. [online] Available at: https://news.sky.com/story/autumn-budget-2023-what-to-expect-from-rachel-reeves-first-budget-12735669

[4] The Telegraph. (2023, September 4). Autumn Budget 2023: How will the tax system change? [online] Available at: https://www.telegraph.co.uk/personal-finance/personal-tax/autumn-budget-2023-how-will-the-tax-system-change/

1. The Autumn Budget, approaching on October 30th, may bring significant changes to personal finance, particularly regarding pension taxation, with potential reductions in tax-free pension lump sums and adjustments to the rules regarding tax-free cash.
2. In an effort to address the £40 billion funding gap, the Government is reportedly planning to impose increases in indirect taxes and smaller levies, along with potential council tax hikes and the extension of the freeze on the personal allowance and income tax thresholds until the end of the current parliament.
3. As the Chancellor considers extending the period for 'potentially-exempt transfers' from 7 years to 10 years, those in the realm of personal finance advise considering giving gifts during one's lifetime as a potential strategy to mitigate potential changes to inheritance tax rules.
4. In terms of investing and retirement planning, Myron Jobson suggests using an ISA wrapper for future capital growth and income, while Sarah Coles emphasizes topping up one's pension due to retirement costs being a comfortable £59,000 annually for an average two-person household, and £43,100 for a single person. Additionally, considering the potential increase in Capital Gains Tax (CGT), it is worth thinking about the best time to realize capital gains to avoid paying unnecessary CGT.

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