How the Autumn Budget 2024 Could Impact Your Clients
The upcoming Autumn Budget, scheduled for 30 October, is expected to introduce significant changes to the UK tax system, particularly in the areas of capital gains tax (CGT), inheritance tax (IHT), and pensions. While taxes on VAT, income tax, and national insurance are off the table, the government is likely to target wealth through investments, pensions, and the transfer of assets between generations.
For financial advisers, these potential changes could significantly affect the advice you give to your clients. Below, we outline the key areas to watch and the considerations to bear in mind as you help your clients navigate these developments.
Capital Gains Tax (CGT)
One of the most likely targets for tax increases is capital gains tax. Currently, CGT rates are lower than income tax rates, which has long made it an attractive area for tax planning. However, the government may seek to align CGT rates with income tax—a move that would significantly increase the tax burden on asset sales.
For clients planning to sell investments, second homes, or other taxable assets, the alignment of CGT with income tax could mean doubling the tax on gains. This is a particularly important consideration for high-net-worth clients or those approaching retirement who may be relying on capital gains as part of their income strategy.
Key Considerations:
- Clients may be prompted to consider realising gains sooner rather than later to take advantage of the current lower rates.
- Reviewing tax-efficient investment structures, such as ISAs and pensions, can help mitigate future CGT liabilities.
Inheritance Tax (IHT)
Inheritance tax remains another key focus, with thresholds frozen since 2009 and rising property values pushing more estates into the taxable bracket. Even without any immediate changes to IHT rates, the frozen nil-rate band and residential nil-rate band will continue to draw more estates into the tax net due to the growth in asset prices.
In addition, the government could review existing IHT exemptions, including those for pensions, business relief, and agricultural land. Any tightening of these exemptions could increase the need for more detailed estate planning discussions with clients.
Key Considerations:
- Clients approaching the IHT threshold may need to revisit their estate planning strategies, particularly in light of the frozen bands.
- Revising gifting strategies could be essential, especially if clients are considering transferring assets to the next generation.
Pensions
Pensions are another area that could see significant reforms. While pension tax-free lump sums will remain untouched, the government has hinted at a possible move towards a flat rate of tax relief. Currently, higher earners benefit from 40% or 45% tax relief on pension contributions, but a shift to a flat 30% rate would reduce the incentives for higher earners to contribute to their pensions.
This could lead to a change in pension contribution strategies for some clients, particularly those who have been maximising contributions to take advantage of the higher relief.
Key Considerations:
- Higher-rate taxpayers may want to maximise contributions before any changes to tax relief take effect.
- Pensions remain a tax-efficient vehicle for long-term savings, but clients may need to consider alternative retirement savings options if the pension landscape becomes less attractive.
ISA Allowances and Income Tax Thresholds
While ISA allowances have not been specifically targeted, some speculation exists that they could be reduced or capped. ISAs have long been a cornerstone of tax-efficient savings strategies, so any reduction in allowances could prompt clients to revisit their savings and investment plans.
Meanwhile, the freeze on income tax thresholds will continue to push more clients into higher tax brackets due to fiscal drag, increasing the overall tax burden without any direct changes to rates.
Key Considerations:
- Ensuring clients are fully utilising their ISA allowances remains crucial, especially if any changes are introduced.
- Income tax management will become increasingly important as more clients are affected by the frozen thresholds.
The Importance of Long-Term Planning
While the specific details of the Autumn Budget remain uncertain, it is clear that the government will be looking to increase tax revenues from wealth, particularly in the areas of capital gains, inheritance, and pensions. For financial advisers, this is a key opportunity to revisit client plans and ensure they are prepared for potential changes.
Encouraging clients to focus on long-term planning rather than making decisions based on short-term speculation is essential. Ensuring that portfolios are tax-efficient and adaptable will help clients meet their financial goals, regardless of the changes ahead.
Conclusion
As the Autumn Budget approaches, it’s important to stay informed and prepared for potential changes that could affect your clients’ financial plans. While the government is unlikely to raise taxes on income or consumption, the focus on capital gains, inheritance, and pensions could lead to significant shifts in the financial landscape. By keeping an eye on these areas and remaining proactive in your discussions with clients, you’ll be well-positioned to guide them through any upcoming changes.