Susannah Streeter, head of money and markets, Hargreaves Lansdown: “A year after becoming Chancellor, Rachel Reeves’ fiscal juggling act has become even more of a challenge. The government’s welfare reform plans have become mired in controversy, forcing concessions before the bill received its second reading in parliament. The government won’t be able to make as many savings as it hoped from its welfare bill, with up to £2 billion of the £5 billion worth of planned savings now in doubt.
The welfare furore has erupted just as Keir Starmer pledged to spend more on the defence of the nation. The deals made at the NATO Summit to increase funding to 3.5% of GDP with another 1.5% spent on security and infrastructure to bolster the UK’s preparedness by 2035, is another hefty commitment. Then there’s the promise to give public sector workers in England a pay hike of 3-5% in 2025/26, rather than 2.8% as the Chancellor had originally planned for – and that’s set to cost an extra £2-3 billion. The government is also grappling with the costs of restoring more winter fuel payments to pensioners and is also under political pressure to remove the two-child cap on benefits.
Even though the path looks precarious, the Chancellor remains committed to maintaining stability and prudence with borrowing to avoid a bond market strop out. So, given big cuts in other departments would be politically difficult, it is not surprising given the choices in the Spending Review that speculation is mounting about potential tax rises in the autumn and Number 10 has not ruled this out.’’
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “The government’s decision to backtrack on its decision to restrict Winter Fuel Payments to pensioners on Pension Credit was greeted with a sigh of relief by many. Having such a strict cut off meant many pensioners struggled over the winter months because their incomes were just a few pounds over the Pension Credit limit – receiving this payment will make next winter that little bit easier.
However, with gaps in public finances still looming this is one less avenue that the government can go down to save money. This will become more difficult given government has continued to pledge its commitment to the triple lock.”
Sarah Coles, head of personal finance, Hargreaves Lansdown: “Plans to cut spending to balance the books have been fraught with difficulty, and as we enter a tough week for the government, they’re not going to relish the thought of trying again in the autumn Budget. It means tax rises are even more likely to be in the frame.
We’ve already seen speculation kick off, with questions around the future of salary sacrifice, the potential return of a pension lifetime allowance and even dividend tax – again. The possibility of extending the freeze to income tax remains. Plus the government has the option of U-turning on its election pledges, and making a small change to a big tax – like income tax, National Insurance or VAT. This would be politically incredibly difficult, but the government might decide in a world with no good options, it could be worth it.
What can you do?
1. Bring your taxable income down with pensions and cash ISAs
Check if your employer operates a salary sacrifice scheme, where you give up a portion of your salary, and spend it on certain things free of tax – including pensions. If not, you can still pay into a pension and receive tax relief at your highest marginal rate. If you’re making income from savings interest, you can use a cash ISA to protect as much as possible from tax.
2. Take advantage of all your ISA allowances while you know where you stand
The consultation on the future of ISAs holds the potential for positive reforms, prioritising improvements to the current regime rather than removing incentives to support investing and saving. However, it still makes sense to make the most of the system as it stands, ahead of any changes.
3. Protect your investments
The ISA isn’t just a great tax-free option for new investments, you can also move existing assets into ISAs using this year’s allowance, through the Bed & ISA or share exchange process, which will ensure these investments are protected from capital gains tax.
4. Cut your costs and build a savings safety net in case things are squeezed
Wages have been rising ahead of prices for a while now, so more people have cash to put aside for emergencies. While you’re working age, you should be building an emergency savings safety net big enough to cover 3-6 months’ worth of essential spending in a competitive easy access account.
5. Use your pension allowance in plenty of time
Pensions are an incredibly tax-efficient way to save for the long term. The annual allowance allows you to contribute whatever is the lowest of your annual income and £60,000 to your pension and receive tax relief at your marginal rate.
6. Consider gifts
If inheritance tax is a concern, you can give gifts now. You have an annual allowance of £3,000 per year, which falls out of your estate for inheritance tax purposes immediately, plus a small gift allowance and extra rules for wedding presents. You can also give regular gifts from your surplus income, and larger one-off gifts, which will pass out of your estate after seven years.”
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