Budget rumours are swirling with potential changes to inheritance tax, income tax and stamp duty all on the cards.
Many have the potential to help older people boost their long-term financial resilience and, potentially that of their loved ones too.
An income tax cut would put more money in pockets, but we’d likely also see a cut in basic-rate tax relief for pensions.
Changing inheritance tax could encourage more people to gift money to younger generations and stamp duty reform could cut the cost of downsizing.
Rumours of State Pension changes are eye-catching, but less likely. With a general election on the horizon, it’ would be brave to suggest the State Pension age should increase, especially given a recent review decided against it.
Here’s what’s being rumoured and how it could impact you.
This article isn't personal advice. ISA, pension and tax rules can change, and any benefits depend on your circumstances. Tax rates and bands are different for Scottish taxpayers. If you're not sure what's right for you, ask for financial advice.
1. Income tax cuts
One of the bigger rumours we’ve seen is the chancellor announcing a cut to income tax. This would be roundly cheered for putting more money back in people’s pockets in difficult times.
But it could also come with a corresponding cut in basic-rate tax relief on a pension. This will act as a dampener on people’s retirement savings.
2. Cut stamp duty for downsizing
Downsizing to a smaller home with less overheads can seem like the ideal way to plug gaps in your pension planning.
However, when you add up the cost of moving, you might not get as much from selling the family home as you might think.
A group of MPs have urged the chancellor to consider cutting stamp duty for downsizers in the Budget as a way of freeing up more homes for younger families.
We found that almost a quarter of people would consider downsizing in retirement. Of those who wouldn’t, over a fifth said moving was too expensive with a further 13% citing stamp duty as a particular cost that would stand in their way.
3. Inheritance tax reform
Reform to inheritance tax (IHT) was seen as a frontrunner in the lead up to the Autumn Statement before being quietly dropped.
However, rumours persist that change is on the cards – what form it will take is subject to debate.
Reducing the headline rate drew criticism as it’s seen as benefitting wealthier estates who’d have larger tax bills to pay.
Current gifting rules encourage people to hoard assets rather than pass them onto younger family members during their lifetime. A rethink on gifting or simply increasing thresholds would help.
Gifting allowances have been frozen for years and if increased, this would encourage more people to think about how their assets could be used to support their family members during their lifetime.
Other suggestions for reform include raising the long-standing £325,000 threshold over which you become liable for IHT. Increasing it to £500,000, or combining it with the residential nil rate band, would simplify as well as reducing the bill for larger estates. It would also lift lots of smaller estates out of having to pay IHT at all.
This change would cover people who’ve passed the threshold because of growing house prices. It would also help ease the burden that falls disproportionally on single people who don’t have the ability to benefit from a partner’s allowances.
4. Capital gains tax and dividend tax
We tend to build assets as we approach retirement, and then rely on them for income and lump sums after we stop working.
Older people who hold assets outside a pension or ISA run a particular risk of paying capital gains tax (CGT) and dividend tax.
Slashing both allowances last April has already hit this group hardest, and things aren’t going to get any better when the allowances are cut in half from 6 April.
The government has an opportunity to stop these cuts in their tracks – avoid the CGT allowance falling to £3,000 – something we haven’t seen for 40 years, and stop the dividend tax cut to £500 – a tenth of the original allowance.
It would help investors who’ve been doing the right thing for decades, to provide for themselves in retirement.
5. Care as we get older
As we live longer, we’re spending more of our lives in ill health, and now, just under half of people over 85 will have difficulty with daily activities.
Over a third of people in care homes pay for their own care, and this can come at an extraordinary cost. It’s alarmingly expensive and politically difficult for any government to wrestle with the cost of protecting people from catastrophic care costs.
While the can is kicked further down the road, the huge potential cost of care makes it impossible for any of us to plan our retirement spending with any real certainty.
The budget could be a good opportunity to offer something to help.
We’ll be keeping a close eye on what we want to see change in the 2024 Budget next week.
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