Keir Starmer says ‘painful’ Budget is needed for ‘long-term good’
Brits have been issued a warning over ISAs as people race to find ways to protect their money against a potential tax raid in the Budget on October 30.
As speculation mounts over increases in capital gains tax (CGT), changes to inheritance tax, and new rules on pensions, including restrictions on tax relief on contributions and lump sums, workers have been casting around for ways to protect their cash.
Chancellor Rachel Reeves says she needs to find £22 billion to cover a black hole in funding for public services in the current year, while also raising cash through the rest of this parliament to head off austerity cuts.
Labour says drastic measures are needed due to the last Conservative government making public spending commitments without spelling out where they would find the money to pay for them.
Experts at investment giant Hargreaves Lansdown (HL) say it is important not to panic – however, they have identified six so-called “easy wins” that people can use to head off tax rises.
Labour says drastic measures are needed (Image: Getty)
Sarah Coles, head of personal finance at the firm, said: “People aren’t taking Budget threats lying down. They have the chance to make changes ahead of the announcement, that will help protect them from any tax threats that might be lying in wait, and they’re grabbing it with both hands.
“Up to one in five have been spurred into action, and among higher earners it’s closer to two in five. There are some sensible moves people are making ahead of the Budget, and it’s not too late for you to take advantage too.
“In most cases, people are taking steps they’ll be grateful for even if there’s no change to the rules. However, it’s vital not to let the rumours panic you into making a mistake.”
Importantly, Helen Morrissey, head of retirement analysis at HL, warned people against rushing to take lump sums from their pensions based on the Budget speculation.
She said: “Ripping tax free cash from your pension is a risky business. If you put it in a cash account, it could lose value after inflation. If you move it out of a tax-efficient environment and into one where you’ll pay tax, it will generate an ongoing tax headache.”
Stocks and Shares ISA
Pay into a stocks and shares ISA. Overall a third of people are set to do so this year (32 percent), and while 14 percent said they would do it irrespective of Budget threats, 18 percent have been specifically spurred into action by rumours of potential tax rises.
HL said: “Most notably, there has been speculation around hikes to capital gains tax, and investments in an ISA are protected from this. This is reflected in the fact that the number of HL clients maxing out their stocks and shares ISA is up a third this tax year.”
Move existing assets into a stocks and shares ISA
If you hold stocks and shares without any protection against paying CGT on gains, now is the time to shift them into a stocks and shares ISA.
HL said: “If you have assets outside a stocks and shares ISA, you can also take the opportunity to use the share exchange (Bed & ISA) process to sell assets outside an ISA – within your £3,000 capital gains tax allowance – and move them into the ISA wrapper. Twice as many HL clients have done this so far this tax year than a year earlier.”
Pension contributions
Pay extra into a pension. More than a quarter of people are doing this, with 17 percent of this group persuaded to do so by threats of changes to pension rules. This is reflected in the fact that the number of people maxing out their HL SIPP this year is up 71 percent from the same period a year earlier.
HL said: “At the moment, you get pensions tax relief at the highest rate of tax you pay. There was speculation that this could be swapped for a flat rate, which would make pension contributions less rewarding for higher and additional rate taxpayers.
“More recent reports have suggested this might not end up happening, but if you were planning to make contributions at some stage this year anyway, and have the money handy, it still makes sense to do so while you know where you stand.”
Junior ISA
Pay into a Junior ISA for a family member. This is reflected in the fact that the number of HL clients maxing out their Junior ISA has shot up by 40 percent in the current tax year.
HL said: “JISAs grow free of income tax, capital gains tax and dividend tax. They also fall outside the rule that money invested by parents for their child will be treated as theirs for tax purposes when it produces more than £100 of income a year.
“And they’re useful if you’re worried about inheritance tax. You may be keen to give money away, but not want to entrust it to someone at a young age. A stocks and shares Junior ISA for a child under 18 will count as being handed over immediately for inheritance tax purposes, but will be tied up until they’re old enough to make sensible choices with it.”
Open a cash ISA
This is an essential way for people to save income tax, especially at a time when frozen thresholds and higher savings rates are pushing more people into paying tax on their savings, so it was already something 23 percent of people were doing.
However, it has seen the biggest uplift ahead of the Budget (on the to-do list for 19 percent of people).
Take up of the HL cash ISA has doubled in the tax year starting in April compared to last year.
It said: “ There haven’t been any rumours around tax on savings, but people aren’t prepared to take any chances, and are taking advantage while they know where they stand.”
Gifts to family
Give money away to family members. Only 8 percent of people were going to do so this year anyway, but an extra 15 percent have been persuaded to by rumours of Budget tax hikes, changes to nil rate bands or tweaks to rules around exemptions.
HL said: “Gifts can be incredibly valuable – both for the recipient and the person giving the money away. You can give £3,000 under the annual gifting rules, and gifts of any size to anyone, which will fall out of your estate after seven years.”
