Five steps to soften blow of Chancellor’s wrecking ball: Jeremy Hunt’s Budget statement paints bleak picture of the nation’s finances
Bleak outlook: Chancellor Jeremy Hunt
Chancellor of the Exchequer Jeremy Hunt’s Budget statement painted a bleak picture of the nation’s finances, including higher taxes for millions and energy and council tax bill rises to come.
Here are five steps you can take to soften the blow.
1) Use your tax-free allowances
We are set to pay billions more in taxes thanks to freezes and cuts to allowances and thresholds announced in the Budget, including to the personal allowance, income tax bands, capital gains and dividend taxes. Therefore, it is more vital than ever to use the tax-free perks available.
You can put up to £20,000 into a stocks and shares or cash Individual Savings Account every year, where all interest payments and investment returns remain tax free. You can also save up to £40,000 a year into a pension, obtaining tax relief on the contributions you make.
2) Make gifts to loved ones
The freeze on inheritance tax allowances has been extended by another two years until 2028. That means that the maximum that an individual can pass on tax-free will not have budged from £325,000 since 2009.
If you think your estate may attract an inheritance tax bill on your death, you can take steps to reduce it by making gifts in your lifetime.
You can give away up to £3,000 a year without incurring inheritance tax. You can also give tax-free gifts to loved ones when they get married or form a civil partnership. You can give up to £5,000 to a child, £2,500 to a grandchild or £1,000 to any other person.
You can make regular payments to another person’s living costs as long as you make them from your monthly income and can afford them without eroding your own standard of living. Be sure to keep good records.
3) Sell assets before April
If you make a profit when you sell an asset, such as on an investment or buy-to-let property, you have to pay tax on the gain.
However, everyone has an annual capital gains tax-free allowance of £12,300. This amount is set to drop to £6,000 from April and £3,000 the year after.
Therefore, if you are planning to sell something substantial in the next few years, it might be worth doing it before April.
4) Watch pension contributions
The state pension is set to rise by 10.1 per cent next April, the Chancellor confirmed, but future rises may not be so large. Therefore, for most workers it makes sense to shovel as much money into your workplace or personal pension as you possibly can.
But, if you are a high earner, keep a check on your contributions. The lifetime allowance on pensions has been frozen again at £1,073,000 until 2026 – and it is not just the wealthiest who will be caught out.
Exclusive analysis by Investec Wealth & Investment reveals someone with a pension pot of £512,000 today could exceed the limit by 2026 if they contribute the maximum annual allowance of £40,000, assuming seven per cent growth.
5) Prepare to work for longer
A review into the state pension age will be published next year, the Chancellor confirmed. The state pension age is set to rise over the next 25 years, and this review will consider whether the current timetable is appropriate.
Should it be revised, some workers may have to wait longer until they can claim it. Younger workers who can afford to may want to increase their personal pension contributions now so they are less reliant on the state pension.
…but don’t rush to buy a home
The stamp duty cut, introduced by former Chancellor Kwasi Kwarteng, will be reversed in 2025. From this date, no stamp duty will be payable on the first £125,000 of a property purchase, down from the current £250,000 threshold. First-time buyers will pay no tax on the first £300,000 of a property purchase – down from the current level of £425,000.
If you are planning to buy a property in the next few years, you may be tempted to do it before this date to save on stamp duty. However, many experts are predicting a cooling in the housing market, so the argument for bringing forward a purchase is not so clear cut.
Sarah Coles, senior personal finance analyst for investment platform Hargreaves Lansdown, says: ‘Right now, the market is sending out every possible signal that buyers might want to hang fire.’