What to think about ahead of the Budget

While it’s impossible to predict the actual outcomes of November’s Autumn Budget, challenging financial conditions mean it is likely to affect many of us. Certain measures may be imposed by the government to alleviate the economic situation, and they are worth considering in case they impact your financial situation. It’s too early to make any plans, but it could be useful to know you may need to adapt how you prepare for the future.

Reduce the pension tax-free lump sum

This one crops up again and again before a Budget. Currently, 25% of a pension pot can usually be taken tax free. Cutting this to, say, 15% would mean that someone with a £400,000 pot could take only £60,000 tax-free instead of £100,000. The rest would be taxed at their marginal rate.

Potential impact: Retirees would have less immediate flexibility, as they could no longer take a large sum tax-free for major expenses like paying off a mortgage. Over time, total tax bills would rise. It may also discourage saving into pensions if people feel the rules are unreliable.

Implement a national property tax

Instead of a one-off Stamp Duty when buying property, owners would pay an annual tax based on the property’s market value. For example, a £500,000 house might face an annual charge of 0.5% (£2,500). This could either supplement or replace existing property-related taxes like council tax or Stamp Duty.

Potential impact: Homeowners would face continuous annual bills instead of a large lump sum at purchase. Long-term owners, particularly pensioners in valuable homes but with limited cash, could struggle with affordability. Frequent movers would benefit, since they wouldn’t be penalised with repeated Stamp Duty charges.

IHT reform (abolish PETs and gifts out of income)

Last year’s Budget targeted inheritance tax; this year further reforms could be implemented in the case of gifting. At present, gifts given more than seven years before death (Potentially Exempt Transfers – PETs) are exempt, and gifts out of income can also escape inheritance tax if they don’t reduce living standards. Abolishing these would mean all transfers are potentially taxable. For example, a £50,000 gift to children made 10 years before death would still count towards the estate and face 40% IHT.

Potential impact: Families would lose key tools for passing wealth on tax efficiently. More estates would be subject to IHT, increasing the burden on beneficiaries.

Remove or curb CGT exemption on main homes

Currently, when people sell their primary residence, any profit is fully exempt from Capital Gains Tax. A change could mean only part of that gain is exempt or that gains above a certain threshold are taxed. For instance, if someone bought a home for £300,000 and sold it for £500,000, today they owe no tax — but under new rules, the £200,000 gain might be partly taxable.

Potential impact: Families selling a home could face unexpected and significant tax bills, which may discourage moving or downsizing. It would hit retirees particularly hard if they are relying on housing equity for retirement plans. It could also dampen housing market activity overall.

Equalise CGT with income tax

At present, Capital Gains Tax is charged at 18%–28%, depending on the asset, compared to income tax rates of 20%–45%. Equalisation would mean, for example, that someone selling an investment property for a £100,000 gain could face 45% tax (£40,000) rather than the current 28% (£28,000).

Potential impact: Investors, landlords, and business owners would see much larger tax bills when selling assets. It could discourage investment and reduce market transactions.

Extend National Insurance to rental income

Rental profits are currently subject to income tax but not National Insurance. NI could apply in the same way as for self-employed income — for example, at 8–9% on profits above a threshold. So, a landlord making £15,000 profit might face an additional £1,200 in NI on top of income tax.

Potential impact: Landlords’ tax bills would rise substantially, potentially pushing them to increase rents to offset the cost. Some may exit the rental market, reducing supply and making housing less affordable for tenants.

Change VAT threshold (to £30k)

The current VAT registration threshold is £90,000 in turnover. Reducing this to £30,000 would bring many micro-businesses — tradespeople, freelancers, cafés, hairdressers — into the VAT system. For instance, a self-employed decorator earning £40,000 would need to charge VAT, increasing their admin burden and possibly making them less competitive if customers cannot reclaim VAT.

Potential impact: Small businesses would face higher administrative costs and either raise their prices or absorb the VAT (hurting profits). Some may restructure or split businesses to avoid the threshold. Consumers could end up paying more for everyday services which could feed into inflation.

Freeze on income tax thresholds

Income tax bands would be held at current levels, even while wages rise with inflation. This means someone getting a pay rise just to keep pace with the cost of living could end up paying a higher rate of tax. For example, if the higher-rate threshold remains at £50,270 while average salaries move above that level, more people are dragged into paying 40% tax.

Potential impact: Workers gradually pay more tax, even when their real purchasing power has not improved. Middle earners are particularly affected, with significant extra revenue collected during high-inflation periods.

Summary

There is a lot to weigh up in the scenarios outlined above, and a number of them could affect anyone in the UK who has accrued assets – in property, pensions and through saving and investing.

As a rule, we generally suggest not to plan for tax changes that haven’t happened yet – and it’s important not to do anything rash. We don’t know what the outcome of the Budget will be, and we don’t know how quickly any measures will be implemented.

If you do have concerns about the impact potential changes could have on your finances you could consider financial advice. We can advise you on the possible impact to your finances both inside and outside of tax wrappers – whether through changes to pensions or capital gains tax. 

If you were already considering financial changes, it may be worth reviewing your plans in light of potential Budget outcomes. However, we recommend waiting for confirmed measures before making any decisions. If you have any questions, or would like any help, please get in touch.

Please note, the value of your investments can go down as well as up.

Our advisers offer restricted advice that relates to Netwealth’s products and services and does not consider the whole market. Netwealth does not provide tax or legal advice and does not advise on transfers of pensions with safeguarded benefits.