Can you prepare your finances for the Budget?

The upcoming Budget has left many people feeling antsy about their finances, and fearful of impending taxes. As the day draws closer, investors are making decisions based on rumours in a process rivalling the Traitor's roundtable.

It’s an understandable phenomenon, even if we don’t have Alan Carr pulling the strings. No one wants to be blindsided by a tax that you could have avoided by just making a different call a month before. But there’s an obvious fallacy in this strategy: unfortunately, we have no idea what the changes in the Budget are going to be until they are announced. And while there’s no shortage of speculation, there’s no way to know what the actual policies will be ahead of time, or the details for how they will end up affecting you.

The other important factor to consider is that in some cases, the impact of the speculation ends up warping the markets more than the policy itself. We are starting to see the impact of this in the property market. October is usually a month for a strong bounce in property prices, with the ten-year average running at 1.1%. But according to Rightmove, prices have risen just 0.3% so far, and have declined slightly from October last year, by 0.1%.

Should you wait to buy or sell your home?

There could be a few factors that are leading towards this price slump. But one area many analysts are pointing to is the discussion around stamp duty and possible property taxes. Currently, stamp duty is paid upon the purchase of a home, which can add to the burden of buyers, including people who might be looking to downsize. Some may be hoping that it is abolished in the Budget, making their purchase cheaper.

But buyers will also need to consider how this will affect the housing market as a whole. If there is suddenly a rush of buyers ready to take the dive because there’s no stamp duty, bids on houses could increase, and the prices may inflate. So, while waiting for the possibility that stamp duty is abolished could mean a layer of fees is removed, it could also mean that the base price rises. Or, it could not happen altogether.

This pattern was seen on a large scale following the Covid-19 lockdown. During the lockdown, there was a sharp decrease in demand, as people held off on making a large purchase without knowing what the future held. But as the UK began to reopen, buyers hit the market all at once and made the most of stamp duty holiday in 2022. According to Lloyds, UK house prices to rose by 20.4% from January 2020 to December 2022, near tripling the rate of 7.8% rise in the three years prior.

Is it time to take your tax-free cash?

Another rumour that has been swirling around (not for the first time) ahead of the Budget is if the amount of tax-free cash allowed from pensions will be reduced. Currently, pensioners can withdraw 25% tax-free, up to an overall lump sum allowance of £268,275. This £268,275 limit is what many pensioners fear will be cut in the upcoming Budget.

For most people, this figure will not be a problem. The median pension pot for people between 56 to 65 is £86,800 according to the Office for National Statistics. For this limit to start to impact you, your pension would usually have to be worth over £1,000,000. But for those who have diligently saved into their pensions and amassed large pots, a cut would have an impact, subjecting more of their money to income tax.

However, it’s worth running the numbers and considering the chances of this change actually being made before making decisions. You can read more about the ins and outs of tax-free cash. One of the most important things to keep in mind is that once you take that tax-free cash out, you can’t just put it back in. If you’ve taken your tax-free lump sum, new contributions back into your pension can’t increase significantly from what you’ve paid in before. You cannot intentionally withdraw money with the aim of putting it back in.

So, assuming you can’t put that lump sum back in your pension once it’s removed, what can you do with it? You can put £20,000 into an ISA each year, but if you are in the bracket of needing to worry about this policy influencing you, your withdrawal is likely much more than that. If you keep this amount in cash in the bank, it will be likely subject to tax you earn on interest above the your personal savings allowance. You can also choose to invest it outside an ISA, but dividends above the £500 dividend allowance could be taxed, as well as any gains you make. Currently, there is a capital gains allowance of £3,000. If you’re a higher rate income taxpayer, you’ll be taxed 24% on the gains above this, with a lower rate of 18% for basic rate taxpayers.

If you do choose to withdraw your tax-free lump sum, there’s a good chance it will face other taxes if you don’t have a plan to spend it. Considering how much withdrawing could save if the limit was decreased can help you make an informed decision. Remember, there’s a big chance that there is no reduction, and your money would have been better off remaining in your pension where it can continue to grow tax-free.

Will more investments just mean more tax?

Some retirees trying to avoid extra income tax may opt to take their money out and bite the bullet of capital gains tax instead.

The tax-free allowance for capital gains has shrunk from £12,300 to just £3,000 in recent years. This is no guarantee that capital gains will make its way into the Budget again this year. Some have argued that the large cuts already made have left little more to offer, and the messaging could be confusing coming from a government that is promoting investing. HMRC’s own analysis also shows that raising the rates of capital gains tax would lead to a lower tax take. But some argue reform could still be on the table.

Again, for most investors, this will not be a problem. Few of us overrun our ISA allowance of £20,000, which is shielded from capital gains. Gains made on pension investments are also protected.

For those that could be caught in the crosshairs, opting to keep the money in cash to avoid further tax is likely not the best route. If your cash is earning interest, it will eat into your personal savings allowance as well, and after personal allowance, be taxed as income. And if it is not earning interest, the value it loses against inflation will likely outpace the pain you’d feel from capital gains tax. However, there are some investments that can give you breaks on capital gains.

Sticking to your plan

There’s a lot of speculation when it comes to investing, whether it be market movements or expected policy. Ultimately, some speculation will come to fruition, and other bits we will forget about completely. It leaves investors in a tricky spot, but being comfortable in your investment decisions, and remembering why you made those choices in the first place, can be important reassurance. Often, when policy changes are announced, they don’t come into effect right away. So there’s a good chance you could have time to make informed decisions about your finances, instead of guessing now.