Budget preview: the big issues on the agenda for savers and investors

With just days until Chancellor Rachel Reeves’ second Budget, we’ve rounded up the big issues relevant to savers and investors, and what might be on the agenda.

ISA reform

Having committed to simplification of ISAs in the run-up to the general election, the government now appears set on reducing the Cash ISA allowance.

Such a change which would make the landscape more complicated, harden the divide between holding cash and investing for the long term, and be hugely unpopular at the same time.

Reeves is also apparently keen on adding a UK element to her ISA reform.

Income tax

Reports suggest the chancellor has done a U-turn on manifesto-busting plans to increase income tax. It was previously suggested the chancellor was considering an increase in income tax by either 1p or 2p across the board.

Another option put forward was raising income tax but cutting the main rate of employee National Insurance by the same amount. That would raise tax rates for pensioners, landlords, savers and perhaps those with dividend income too, while offsetting the impact on workers.

It’s now been floated that rather than an increase across the board, only higher or additional rate bands may be increased.

Any change would be in addition to the almost nailed-on expectation that Reeves will extend the current freeze on tax thresholds beyond April 2028 for another two years.

The damage this policy has already wreaked is plain to see, with over 8.3 million people now paying higher or additional rate tax, up over 45% since the start of the freeze in 2021.

Extending this stealth tax further still will bring more working people and pensioners into paying higher rates of tax. According to the IFS, extending the freeze beyond 2028 would raise £8.3 billion in 2029-30.

National Insurance

One of the government’s key election pledges was not to increase National Insurance contributions, but at the last Budget Rachel Reeves found a way around that pledge by insisting it only meant employee contributions.

With every potential source of income evidently up for discussion, could Rachel Reeves and her team sell a return to pre-2024 levels of National Insurance?

One path might be to change the tax system to impose a new charge on those using limited liability partnerships (LLPs) – a designation which means they are taxed as if they are self-employed.

However, recent reports suggest the chancellor has moved away from this potential measure, as it risks alienating another tranche of doctors at a time the government is fighting to bring down NHS waiting lists.

It could also have a knock-on effect to the amount of capital available to invest in UK start-ups and scale-ups – innovative businesses that are vital for economic growth – for a relatively small amount of revenue gained for the Treasury.

But there is another group which could find themselves facing the prospect of paying NI, and that’s pensioners. No National Insurance is levied on any pension income and even those who continue to earn a salary after they reach state pension age are not subject to the tax, no matter how much they earn.

Pensions salary sacrifice

Thousands of employers currently use pensions salary sacrifice as a way of efficiently paying pension contributions while cutting National Insurance costs for them and their employees.

The dual tax and NI advantages mean pension salary sacrifice has frequently come under scrutiny, as the government searches for opportunities to reduce tax reliefs and boost revenue without explicitly raising rates.

Reports indicate that reform of salary sacrifice pension schemes could be one of the ways Reeves chooses to dance around Labour’s manifesto promises to boost the public finances.

Rather than an all-out ban on using salary sacrifice, one option on the table is a £2,000 cap on the amount of earnings that can be exchanged for pension contributions that benefit from a National Insurance exemption.

Introducing the cap could reportedly raise up to £2 billion a year, but it reduces take-home pay for pensions savers and runs the risk of them having less in their pension pots at retirement.

Any changes would be seen as another attack on employers. HMRC-commissioned research earlier this year presented employers with different scenarios for reforming pensions salary sacrifice. Employers reacted negatively to all of them, saying that removing reliefs would wipe away the financial benefits of salary sacrifice, and lead to lower pension savings and workers’ morale.

Pensions tax relief, tax-free cash and the case for a ‘Pension Tax Lock’

Reports that Reeves will not alter tax-free cash entitlements at this year’s Budget provides a degree of respite, but without a firm commitment from government these confidence-sapping rumours will inevitably keep bubbling to the surface.

This constant uncertainty has real world consequences, with the industry reporting significant spikes in contributions and tax-free cash withdrawals ahead of the last two Budgets.

AJ Bell analysis shows that someone who took out their tax-free cash and put the money in a savings account would be £63,000 worse off in 10 years’ time compared to if they had left the money in their pension, showing that knee-jerk decisions made off the back of speculation can be damaging to individuals’ long-term saving.

Instead of stumbling from Budget-to-Budget with constant speculation about pensions tax-free cash and tax relief on contributions, the chancellor should make a long-term commitment to a Pension Tax Lock – a pledge not to change tax-free cash entitlements or tax relief on contributions, at least for the rest of this Parliament.

This would very clearly put the government on the side of hard-working savers and would cost nothing to deliver. The level of public support for such a measure is clear, with over 20,000 people signing AJ Bell’s petition calling for a Pension Tax Lock in a matter of months.

State pension reform

For a chancellor desperately digging down the back of the sofa for spare cash, the £150 billion and growing cost of providing the state pension will always be a tempting target.

There are two obvious ways the government could reduce state pension spending – ditching the triple lock or accelerating planned increases in the state pension age.

A review of the framework to set the state pension age is currently underway, with the call for evidence ending on 24 October. This could pave the way for a faster increase in the state pension age to 68, currently pencilled in for the mid-2040s, and even further rises beyond that age.

The triple lock was noticeably absent from the terms of reference of that review and Prime Minister Keir Starmer has repeatedly pledged to keep it in place for the rest of this Parliament. However, at some point politicians will need to establish what the policy is aiming to achieve and set a trajectory to, at the very least, remove the 2.5% underpin.

Stamp duty exemption on UK shares

Reports suggest the government is considering making new UK stock listings exempt from stamp duty for their first three years on the market.

Investors currently pay 0.5% stamp duty on UK share purchases, which runs counter to Rachel Reeves’ aim to revive the UK stock market and encourage new listings.

Granting a stamp duty holiday on newly listed stocks for a period such as three years would reduce a significant barrier to investing in the UK and potentially attract a broader pool of investors. It would also encourage more companies to list.

The chancellor could be bolder and widen the exemption from stamp duty to all UK shares, as it’s a tax which explicitly deters investment in UK companies at a time when government policy is aimed at doing precisely the opposite.

Inheritance tax

Reports suggest the Treasury is considering tweaking the controversial inheritance tax (IHT) reforms for farmers, by increasing the tax threshold from £1 million to £5 million, which could result in smaller farms escaping the tax.

Any hopes of a similar U-turn for pension savers looks unlikely. However, unless the Revenue chooses to change the way IHT is applied to pension funds, thousands of families will in future be faced with a tax admin nightmare of the worst kind, at the worst possible time.

The impact of this policy is already being felt. Many advisers are working with their clients to mitigate IHT by gifting money from their pension to loved ones, in anticipation of pensions being subject to the tax from April 2027.

As she rifles around for ways to raise taxes, Reeves’ attention could be caught by the current rules on gifting, and she may change the rules on tapering relief, pushing the seven-year period out to ten or even 12 years.

The Treasury could also cast a beady eye over the rules for gifts from ‘normal expenditure out of income’, to see if tightening up this gifting allowance could reap them some additional tax revenue.

Mansion tax

There have been rumours the chancellor may look to levy an annual tax on high value properties, or charge the owner’s capital gains tax (CGT) upon sale.

Clearly the wealthiest would be hardest hit by CGT on high-value properties. But there would likely be a knock-on effect for middle income families because anyone with a big tax liability may opt to sit tight in their property, causing a log jam in the housing ladder below them.

Capital gains tax

Equalising capital gains tax rates with income tax rates has been widely touted for a while and may lead the OBR to forecast a few extra quid coming into the Treasury as asset prices rise.

By announcing the tax ahead of its implementation, the chancellor can almost certainly boost short-term tax receipts as investors crystallise gains before higher rates of tax come in. However, there is some doubt over whether raising capital gains tax is good for tax revenues in the long term.

Higher rates of CGT will encourage more people to shift money to vehicles where they don’t pay it, like ISAs, gilts, and primary residences. It also discourages entrepreneurship and investment in productive assets, something which cuts across the chancellor’s plans to boost economic growth and the UK stock market.

Capital gains tax also doesn’t currently apply on death, so higher rates will probably mean more people holding onto assets into their old age when they might otherwise sell them and pass them on to the next generation.

Wealth tax

As things have looked increasingly tight on the fiscal side of things, partly a result of Labour U-turns on the winter fuel allowance and welfare spending, the idea of a wealth tax has reared its head and been given some oxygen by former Labour leader Neil Kinnock.

Part of the problem rests in which assets to include. Family homes, pensions and private businesses aren’t always easy to value, and can’t easily be turned into cash to pay taxes. However, excluding certain assets from a wealth tax clearly creates a loophole and a strong incentive to store wealth in anything that’s not subject to the tax.

A wealth tax may be counter-productive by encouraging rich individuals to relocate elsewhere, taking their tax revenues and economic contribution with them. With a large portion of the tax falling on a small number of extremely wealthy individuals, it only takes a few tax whales to head for the horizon to deny the taxman a feast of blubber.

Questions of fairness also arise. Wealth that’s been accumulated may well have been already subjected to income tax, capital gains tax, inheritance tax, or a combination of all three, so adding a wealth tax creates a state of at least double taxation.

Some couples will have their financial affairs arranged so that the lion’s share of the wealth sits in the name of one individual, even though it supports both. Other wealthy individuals with close-knit and sizeable families may be able to split their assets up to avoid or mitigate the tax.

Dividend tax

There is chatter ahead of the Budget the chancellor might cut the amount of money individuals can earn from dividends before paying tax, as well as cutting the tax rate charged.

Anyone holding investments outside of an ISA or pension can earn £500 from dividends before a tiered tax rate comes into force, based on an individual’s tax band. The range is 8.75% for basic-rate taxpayers, 33.75% for higher rate and 39.35% for additional rate.

The dividend allowance has already been cut to the bone, so the nuclear option is to abolish it completely. That would be negative for investor sentiment, as would lifting the basic rate dividend tax to match the 20% lower rate of income tax.

There is also speculation the chancellor might consider charging National Insurance on dividend payments. The starting rate for National Insurance is 8% but employers pay 15% and there is a suggestion the latter rate could be used if Reeves presses the ‘go’ button on this dividend-related tax idea.