Article by Christina
As an Investment Planner Christina takes a look at the Budget and how it will affect clients.
This was the first Labour Budget for 14 years and the first delivered by a female Chancellor, Rachael Reeves. The new Government had made us wait nearly four months for the detail of their first Budget.
Along the way there had been lots of speculation about what might change. This was especially unhelpful as an Investment Planner because many clients became wrapped up in the rumours and started to make financial decisions based on speculation. This was particularly true in terms of the pension regulations. There had been rumours of cuts to tax free cash allowances, pension contribution rates and tax on contributions.
In the end none of these emerged from the Budget. It would have been helpful to the financial and advisor market generally if the Chancellor could have been clear about her intentions about pensions earlier on. Given that she didn’t make any changes to pensions, or even mention them in the budget. The same goes for ISA allowances and other investments rates. None of which were included in the Budget measures.
There was certainly a lot in the Budget however, with over £40 billion raised in tax. Primarily through increase in Employer National Insurance contribution rates. There was also the announcement of £100 billion to be invested in capital projects. But in terms of personal finance matters of interest to us as an Investment Planner and our clients. The main highlights included:
- Inherited pensions will now be subject to Inheritance Tax (IHT). That means that your beneficiaries will pay IHT on your pension if it is passed on to them. Previously inherited pensions were exempt from IHT.
- The reasoning is to stop pensions being used as tax free vehicle to pass on wealth.
- However, this won’t come into effect until 2027, and the Government has opened up a consultation with the Investment Planner industry on how best to implement the change. So, there will be more to come on this.
- This is likely to lead to a re-think of Inheritance Tax Planning strategies for many clients and their families.
- The IHT nil bands remained unchanged at £325,000 and the residence nil band at £175,000. This will still mean that IHT receipts will continue to increase year on year as the value of estates increases.
- IHT relief on Alternative Investment Market (AIM) investments was reduced from 40% to 20%.
- Capital Gains Tax (CGT) will increase from 10% to 18% for lower rate taxpayers and from 20% to 24% for higher rate taxpayers.
- But the CGT rates on residential property sales will remain at 18% and 28%.
- Stamp Duty on second homes was increased from 3% to 5% and that change took effect overnight on the 31st of
- ISA limits will be frozen at £20,000 until 2030.
- The British ISA introduction announced in the last Conservative Budget has been scrapped before it even got off the ground.
- From April 2026 anyone advising clients about their tax position will have to register with HMRC as a tax adviser if they want to be able to deal with HMRC on a client’s behalf. This is part of a push to “weed out” so called tax advisers who are harming clients by providing substandard advice and representation.
In the aftermath of the Budget announcement, the Office for Budget Responsibility (OBR) said that it expected the UK economy to grow by 1.1% this year as a result. That was forecast to increase to 2% growth next year, but that would fall back after that, with only 1.6% growth forecast by 2029.
Further update
Since the Budget, a number of pension providers have reported a “rush” of clients trying to cancel their tax-free cash drawdown. Lots of clients panicked prior to the Budget and initiated a draw down request for their tax-free cash fearing that the Chancellor was going to cut the limit from 25%. Most advisers told their clients to wait and see, but many ignored the advice. Providers are able to undo the drawdown requests if they are made within 30 days under the pension rules. It looks like many providers will be busy making these adjustments. This is what happens when rumours are allowed to get out of control.
Another post Budget example is the amount of money withdrawn from equity investments. Almost £2.5 billion was withdrawn in September in the UK. That follows net inflows of investment in both July and August. Massive outflows of money do not help market stability.
