Shield your pension, savings and property NOW from Rachel Reeves’ Budget raid: Time’s running out and it’s going to be truly nasty, says money guru JEFF PRESTRIDGE… here’s what to do

The tax panic season has started in earnest.

Summer is far from over, yet speculation is rife as to what damage Chancellor of the Exchequer Rachel Reeves will inflict on our finances in the autumn Budget.

Despite assurances in the aftermath of last year’s job-destroying Budget that she would not come back and repeat the £40billion of tax hikes she had just inflicted on the nation, every signal suggests otherwise.

According to a swathe of financial experts, our household finances are going to take an almighty hit as the Chancellor attempts to balance her books, imbalanced by a welfare and public sector spending spree.

This time around, the tax take could be closer to £50billion with few components of our financial armoury – pensions, savings, investments, even our homes spared. Help!

In light of an almost daily stream of reports on what the Chancellor has up her sleeve, Money Mail looks at the nasty tax grabs possibly coming our way – and the action we can take (if any) to mitigate them.

PENSIONS

Although the Government acknowledges that collectively we are not saving enough for retirement, it doesn’t like the fact that the current pensions tax system favours ‘high’ earners: those paying 40pc or 45pc tax on their income.

This is because these people receive equivalent tax relief on the contributions they make into a work or self-invested pension. In contrast, basic-rate taxpayers only receive a 20pc tax relief boost.

According to official figures, gross pension tax relief ‘cost’ the Government close to £80billion in the tax year to April 2024. Nearly 70pc went to higher-rate taxpayers.

For a socialist government, this sticks in the craw. So, we could (not will) see an announcement from the Chancellor in the Budget paving the way for the introduction of a flat rate of tax relief on pension contributions.

For example, a universal 30pc rate of tax relief would give lower earners (those with annual earnings below £50,270) a pension boost while landing higher-rate taxpayers with tax bills. It would also raise the Government in the order of £2.7billion a year in revenue. So, a win for Labour – politically and revenue-wise.

If such a reshaping of the pension tax relief regime was announced in the Budget, it would unlikely be introduced until next April at the earliest.

So, boosting your pension now while the current tax relief regime remains in place makes great sense. For those in works pensions, any increase in your contribution may also be matched by your employer (check out the scheme details or ask human resources).

Even if Rachel From Accounts backs off from meddling with tax relief, any extra payments you make now will reap long-term rewards in the form of a bigger pension pot.

The other nasty pension change that the Chancellor could announce in the Budget is a clampdown on the amount of tax-free cash that can be taken from age 55 (57 from April 2028).

Currently, most people can take 25pc of their pension pot in tax-free cash, subject to a cap of £268,275. Yet Labour, and in particular pensions minister Torsten Bell, are keen to curb this sum.

Mr Bell keeps telling us that pension savers should not be ‘taxed twice’ on their retirement savings. Reassuring, but it leaves the door wide open for a crackdown on access to tax-free cash because he would argue that pension savers unfairly win twice over – receiving the bonus of tax relief on their pension journey, then a big chunk of tax-free cash when they retire.

Before Mr Bell became a politician, he argued for tax-free cash to be capped at £40,000. Such a move would prove controversial, but it wouldn’t deter the Chancellor, who has already announced retrospective changes to the taxation of pensions with regard to inheritance tax.

It would also be a tidy tax revenue generator, with a £100,000 cap earning the Government £2billion a year.

Ahead of last year’s Budget, rumours of a cut in the tax-free pension cash that savers can take also did the rounds, only for the Chancellor to decide to back off (primarily because of the negative impact on those with public sector pensions such as doctors).

The same could happen this autumn, but with every Budget that passes and with every confirmation that the country’s finances are going to hell in a handcart, the probability of a tax-free cash curb increases.

Will she stick or twist come the autumn? The smoke signals suggest a clampdown is ‘unlikely’ to be prioritised, but you can never say ‘never’ when it comes to Labour.

For those who qualify – or are about to qualify – for tax-free cash, twisting logically makes sense.

Yet experts sound caution. Yesterday, Nick Flynn, retirement income director at insurer Canada Life, told Money Mail: ‘Pension savers should avoid making hasty decisions based on speculation. Decisions about accessing pensions are best made with care and, where appropriate, professional advice.’

SAVINGS AND INVESTMENTS

The lot of savers and investors will become increasingly difficult under the watch of the incumbent Chancellor.

For savers who are basic rate taxpayers, the personal savings allowance is a godsend, enabling £1,000 of annual interest from savings accounts to escape the taxman’s clutches. For 40pc taxpayers, the allowance is worth £500.

Yet, despite steady and, at times, rampant inflation, it hasn’t been increased since its introduction nine years ago and it is a racing certainty that it won’t get an uplift next April. Indeed, as with other allowances, it looks as if it isn’t going anywhere soon while Rachel Reeves remains Chancellor.

The freezing of the savings allowance means more than 3.35million people are in line to pay tax on savings interest this year: up from just over three million five years ago.

Although the likes of Nottingham Building Society believe the Government should do more to reward and protect savers, such calls are falling on deaf ears. Ms Reeves isn’t a fan of the saver and believes too many people have been encouraged by the tax system to save rather than invest for the future.

Investing, she believes, is better for the economy even though she misses the point that without savers, banks and building societies (especially) wouldn’t be able to lend the finance necessary for people to buy the homes which Ms Reeves is keen to have built across swathes of the countryside.

It’s why savers are likely to face a Budget hit with confirmation of a cut in the annual amount that can be squirrelled away inside a tax-friendly Cash Isa.

Currently set at £20,000 (the same as for investment Isas), it could be reduced to as low as £4,000 from the start of the new tax year in April.

Ms Reeves was keen to announce a cut this summer but held off as a result of fierce lobbying from the Building Societies Association and Money Mail.

Many readers, especially the risk-averse and the elderly, prefer cash over investments and will never be swayed to change tack – even when interest rates are trending downwards.

So, ensure you use as much of this year’s £20,000 Cash Isa allowance as you possibly can – while also protecting as much of your other savings from tax by use of the personal savings allowance.

And, without wishing to be patronising, don’t forget that both the cash Isa and savings allowances are per adult. So, for married couples, that means £40,000 can be swept this tax year into the tax-free haven of a cash Isa while a combined £2,000 of interest from other savings can be enjoyed tax-free (assuming you are not higher-rate taxpayers). Use them while you can.

Although Ms Reeves may make changes to investing Isas – for example, encouraging investors to buy UK rather than overseas shares – the annual allowance is likely to stick at £20,000. So, use it if you want to accumulate long-term investment wealth.

This allowance may become more important if Ms Reeves listens to Deputy Prime Minister Angela ‘Thee Pads’ Rayner and aligns taxes on capital gains with those applying to income.

If this were to happen, it would mean a gentle hike in capital gains tax (CGT) for basic rate taxpayers from 18 pc to 20 pc. But for higher and additional rate taxpayers, it would result in CGT rates rising dramatically, from 24pc to 40 and 45pc, respectively. The only bit of relief for those taking profits from the sale of shares or a second property would be the use of a £3,000 annual tax-free allowance to offset against them.

The Chancellor signalled her intention on CGT last year when she pushed up rates from 10 and 20 pc respectively for basic and higher rate taxpayers. Not even Ms Rayner’s acquisition of an £800,000 home in Hove, East Sussex, (her second home to add to her grace-and-favour apartment in London’s Westminster) will hold the Chancellor back on her mission to equalise CGT and income tax rates.

Given changes to CGT last year came in straightaway (and not from the start of the tax year), the same could happen second time around.

As a result, a bit of shrewd investment planning ahead of the Budget could go a long way.

For example, if you have any unused Isa allowance this year, plus shares held outside of an Isa, consider transferring the latter into your tax-free account.

It’s a process called ‘bed and Isa’, and it results in your shares being sold and then immediately bought back inside your Isa. The amount that goes into the Isa counts towards your annual allowance – and crucially means all future gains (capital or dividends) are tax-free.

Investing platforms provide this service, although they will charge. Stamp duty of 0.5pc is also payable on the purchase – fund repurchases are exempt. Investors should also be aware that the bedding (selling) will incur a CGT charge if the gains exceed the £3,000 nil-rate allowance.

Another tax-efficient measure is to transfer investments to a spouse or civil partner if they are on a lower income tax rate.

Shares disposed of by a spouse who is a higher-rate taxpayer will potentially attract a bigger CGT bill than a partner who is a basic-rate taxpayer. So, it makes sense for the spouse who pays the lower rate of tax to own more of the family investments. Such interspousal transfers are tax-free and apply to any financial asset – not just shares.

Shareholdings standing at a loss should be left alone until Ms Reeves jacks up CGT rates. They can then be used to offset gains made elsewhere, reducing the size of any nasty tax bill.

INHERITANCES

This government despises inherited wealth. In last year’s Budget, it announced a curtailment in the inheritance tax reliefs available to those who pass on assets such as farms and private businesses.

It also confirmed the inclusion of unspent pension assets in estates from April 2027, a move which will drag tens of thousands more households into the IHT net.

Yet Labour hasn’t finished with IHT. On the cards is a clampdown on the amount you can give away during your lifetime through the use of so-called ‘potentially exempt transfers’.

Currently, such gifts become exempt from IHT provided you live for at least seven years. But Ms Reeves may tighten the IHT noose around such gifts – either by extending the waiting time for the exemption to kick in (say to ten years) or by imposing a lifetime cap (£100,000 is a figure widely bandied about).

Of course, most estates currently escape IHT, which is levied at 40 pc. This is because of the existence of the ‘nil rate band’. This means a person’s estate escapes IHT if it is worth less than £325,000. There is a further ‘residence nil rate band’ of £175,000 for those who leave their home to a child or grandchild – the full amount available for estates below £2million.

For those who are married or in a civil partnership, this potentially means a combined IHT threshold of £1million. But financial experts say Labour’s IHT assault last year has triggered an uptick in gifting.

Currently, there are numerous allowances that can be used to pass on wealth before you die.

These include an annual gift allowance of £3,000 that can be made to one person or several people. Also, if you didn’t use the allowance in the tax year ending April 5 this year, you can utilise that too. This means a couple could pass on £12,000 to friends and relatives.

Annual ‘small’ gifts of £250 can also be made to any number of other people.

Such gifting is straightforward, but you must keep records of when they were made, to whom and their amount.

There are other ways to mitigate IHT – for example, by using trusts or making potentially exempt transfers. But if you go down this route, it is best to seek professional advice so you do everything by the book.

YOUR HOME

Finally, Labour’s tax-grabbing tentacles could at some stage extend to our biggest financial asset, our cherished home.

Reports over the past week indicate that Ms Reeves is contemplating whether to charge capital gains tax on the profit we make when we come to sell our home.

This would result in an 18 pc tax charge for homeowners who are basic rate taxpayers and 24 pc for higher rate taxpayers: potentially much more if Ms Reeves aligns CGT rates with income tax. Only £3,000 of the profit would be tax-free under current CGT rules.

Nothing has yet been confirmed or denied, as is the way with this Government. And it seems that even if it went down this controversial path, it would start by imposing the tax only on high value homes (above £1.5million).

My view is that the idea will be tossed aside. Prime Minister Keir Starmer categorically ruled out such a tax charge in June last year, ahead of the General Election and he would rightly be panned if he went back on his word. Such a tax would also clog up the housing market with homeowners staying put rather than moving.

As Lance Corporal Jack Jones of Dad’s Army fame used to say: ‘Don’t panic.’

jeff.prestridge@dailymail.co.uk