How to prepare your finances for the 2024 Autumn Budget

With Chancellor Rachel Reeves forewarning of “difficult decisions” ahead of the 30 October Budget, some form of tax hike appears likely. So far, the government has ruled out increases to income tax, national insurance, VAT and the headline rate of corporation tax; but pensions, capital gains tax (CGT) and inheritance tax (IHT) remain in the firing line.

Although no concrete policies have been announced, there are some practical steps you can take to get your finances in order before any changes come into effect. But the first thing to remember is not to panic.

“Families or individuals shouldn’t be taking any course of action that doesn’t fit in with their long-term plans,” Christine Ross, client director at Handelsbanken Wealth & Asset Management, cautions. As speculation escalates, it is easy to feel pressured. However, not all actions are advisable or undoable. Making a hasty financial decision may put you in a worse position in the long run, particularly if the changes you fear do not materialise. 

Capital gains tax

One area that does look set for a change is CGT, although clarity on what that change will be remains elusive. The uncertainty may well push panicked investors to sell up assets, boosting this year’s CGT receipts in the process, but reducing the extra revenue HMRC could then collect from a hike. Any changes are likely to take the form of either a further cut to the tax-free allowance, currently worth £3,000 a year, or a change to CGT rates.

“It's very unlikely that the CGT regime will get more generous, and there's a high possibility that it will get less generous and become more aligned with income tax rates,” James Norton, Vanguard’s head of financial planners, says. At the moment, higher-rate taxpayers are charged CGT at 20 per cent on assets other than residential property, against the 40 per cent rate of income tax.

It may make sense to sell easy-to-dispose-of assets for which you have accumulated significant gains ahead of the Budget to pay CGT under the existing regime. If you want to keep those assets for the long term, you have the option of buying them back at a later date. But you will have to wait at least 30 days to reinvest, or the gains will not be crystallised. Think carefully about whether you will be able to complete the transaction with sufficient time before the Budget, and if you are happy to be out of the market on that investment for 30 days, Ross says. 

Similarly, consider gifting assets sooner rather than later if CGT would apply on those gifts, says Clare Moffat, head of technical and marketing compliance at Royal London. While gifts normally become exempt from IHT after seven years, CGT can apply if you are disposing of an asset that has increased in value since you acquired it. “If you were going to pass on assets at some point, especially items like classic cars, jewellery or shares, it may be a good idea to think about doing that.” However, Moffat warns against disposing of assets that you did not previously plan on selling or gifting, suggesting you instead use the Budget as a prompt to execute plans you may have been putting off.  

Making full use of the tax wrappers available to you is another sensible step. Norton describes the £20,000 individual savings account (Isa) allowance and the £60,000 pension annual allowance as “fantastic vehicles” and recommends realising investments in your general investment account and using the money to fund your tax wrappers ahead of the Budget. You can sell and buy back the same assets in your Isa or pension straight away, a task that some platforms such as Hargreaves Lansdown can automate for you, via so-called bed-and-Isa or bed-and-Sipp transactions.

If you are married or in a civil partnership, consider transferring some shares to your spouse before selling them. This will allow you to use both of your tax-free allowances, bringing the total available allowance to £6,000. Additionally, if your partner is a basic-rate taxpayer, some of the gains above the allowance will be subject to a lower CGT rate (10 per cent on assets other than residential property). 

Do not forget that you can crystallise losses as well as gains. If you have disappointing investments to sell, the losses can be used to mitigate your overall CGT bill. When you report a loss, the amount is deducted from the gains you made in the same tax year. Once your gains are reduced to the level of the CGT allowance, any further loss can then be carried forward to a future tax year. “Many investors forget about the power of using losses,” Norton says. “You can realise a capital loss and carry that forward. If you’ve got any in the bag already, they’re really powerful,” he explains. 

CGT gains are wiped out on death, and depending on your health and age this may be something to keep in mind. If it is likely that your estate will have to pay IHT, there is a risk of greatly increasing the overall tax bill if you sell assets without needing the cash and then pass away soon afterwards.

Pensions 

Pensions enjoy a very favourable tax treatment, and many wonder whether this will survive the Budget. Perhaps the most controversial measure would be for the government to reduce the rate of tax relief on pensions. Jason Hollands, managing director of corporate affairs at Evelyn Partners, explains that at the moment pensions are incredibly attractive because you get tax relief at your marginal tax rate. This is a particularly beneficial set-up if you are a 40 per cent taxpayer. “For years and years politicians have been staring at that and licking their lips, thinking: ‘Well, should we be giving you such generous tax relieves?’,” Hollands adds. The 25 per cent tax-free lump sum you can take from your pension, which is currently capped at £268,275, could also be reduced.

However, a tempering factor is that the government needs to encourage people to save as much money into their pensions as possible, Moffat argues. This is particularly relevant as we see a generational move from defined-benefit pensions as standard, to defined-contribution pensions being more commonplace. 

Pensions also sit outside of your estate for IHT purposes, so wealthier pensioners often defer drawing down their pots and spend other assets first to reduce their future IHT bill. But Hollands believes there is a “real risk” that this might change, with pensions being treated as part of your taxable estate in the future.

To prepare yourself for any upcoming changes, you can maximise your pension contributions for this year and then utilise pension carry forward for the past three years. The annual allowance, which is the maximum amount people can typically contribute to their pension every year while still receiving tax relief, is currently set at £60,000. “If you have sufficient earnings and surplus cash at your disposal this year, you could look to use up your previous years’ pension allowances,” Ross explains.

You should only use this strategy if you can afford to tie up that capital until you are at least 55. If you are approaching retirement and your pension pot is smaller than you would like, adding as much as possible to your pension could be an especially good idea, particularly if you are a higher-rate taxpayer.

However, we do not know for sure what will happen to pension tax relief, and there is a small possibility that basic-rate taxpayers will be better off after the Budget. This could be the case if the government opts to introduce a flat rate of tax relief for everyone, set higher than 20 per cent. For example, with a flat 30 per cent rate of pension tax relief, higher-rate taxpayers would be worse off but basic-rate taxpayers would get more from their pension contributions.

Advisers are reporting an increase in clients asking whether they should take their tax-free lump sum from their pensions ahead of any potential changes. Hollands warns against this course of action unless you have a set plan for the cash. “You have to have a really clear purpose for it, like paying off a mortgage,” he explains. If you do not, the money is likely to be better off in your pension, where it can stay invested and grow tax-free, rather than in a savings account where you’ll pay tax and get a lower return, Hollands adds. 

Inheritance tax

The government has not ruled out changes to IHT ahead of the Budget. There are several ways it could be tweaked to increase tax receipts, including bringing pensions under the IHT umbrella. “That could bring a lot more people into the web of IHT, because the last official statistics from the government showed that private pension monies had overtaken property as the biggest source of private wealth for the UK,” Hollands says. 

Another option would be to reduce allowances such as business relief and agricultural relief, which exempt certain assets from IHT. Hollands believes a cap on business relief may well be on the cards, but argues that it will need to be handled very carefully by the government, because "they need to be careful they don’t blow up the Aim market”. 

But if you are an investor who has built a portfolio of Aim shares based on the existing business relief allowance, selling these ahead of the Budget could be a bad move. For business relief to apply you must have held the asset for at least two years before passing away. If the government does not make any changes to business relief or if they put a cap on it that does not affect you, and you wish to repurchase the assets, you will have restarted the clock for nothing. 

Ross is fairly confident that the government will not change the headline rate of IHT, but she does believe it may make changes to lifetime giving. For example, it could group the various gifting allowances together and introduce one single annual limit. In the run-up to the Budget she has seen an increase in clients making gifts. 

Changes to IHT are trickier to plan for, but Moffat suggests using the Budget as an opportunity to ensure you have a good financial plan in place. For example, if you have an excess of disposable income, you could think about supporting your children and grandchildren utilising the current surplus income exemption. This allows you to give as much as you like free of IHT, as long as the gifts are from your income and not from capital, are made regularly, and you are able to make them while maintaining your standard of living. “We often talk about making pension contributions for others, and that's a really good way of helping out younger generations,” Moffat suggests.

Typically, families are not good at discussing money, but you could use the Budget as a prompt to start having those difficult but important conversations. This could be particularly beneficial if you have a family business and need to make succession planning decisions or if you are anticipating a high IHT burden.