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Financial advisers are feeling the effects of Rachel Reeves’ final Budget, as families brace for billions of pounds of tax rises regardless of what chancellor John Healey announces at the despatch box later this week.
From April next year, the sweeping shake up to the tax system announced by Reeves in 2025 will come into force. Financial advice firms say they have been hit by a deluge of requests and inquiries as Brits scramble to prepare.
Two thirds of firms said they had seen an increase in enquiries over inheritance tax (IHT) and estate planning, according to the Personal Investment Management & Financial Advice Association (PIMFA).
Under Reeves’ overhaul of IHT, pensions will be pulled into the tax’s scope, meaning families who inherit unspent pots will be required to pay tax on them. The Office for Budget Responsibility (OBR), estimates it to raise £1.5bn annually by 2030.
Advisers have previously warned the change, coupled with frozen tax thresholds, will subject ordinary working families to the death duty, despite not considering themselves wealthy.
Richard Paddle, director at Isio wealth planning, said: “The decision…has already fundamentally changed how many people need to think about passing wealth to future generations.
“What was previously a relatively straightforward approach to retirement planning has therefore become considerably more complex.”
Pension taxation
Elsewhere, firms have been hit by an influx of questions surrounding pension taxation, with nearly 60 per cent reporting an increase, according to the survey.
In her final Budget, Reeves capped salary sacrifice contributions and extended the freeze on national insurance and income tax thresholds, which is expected to generate £7bn annually, leaving many workers questioning how to avoid being pulled into higher bands.
While advisers have noted they have not seen the “panicked rush” to withdraw tax-free cash that took place last year following “unfounded leaks”, many are still worried about how their savings could further be impacted.
Healey’s Budget has heightened concerns on taxation, following reports he will implement Reeves’ plan to shield low-income retirees from paying income tax on the state pension as it is set to rise above the £12,570 allowance threshold in the 2027/28 tax year, costing taxpayers £200m per year.
Tom Selby, director of public policy at AJ Bell, said: “While details remain thin on the ground, there is a danger in attempting to fulfil his predecessor Rachel Reeves’ promise not to apply income tax to those who only receive state pension income, Healey creates a mess of complexity, odd incentives and obvious unfairness in the tax system.
“Those who have saved could understandably argue their diligent behaviour has effectively been punished.”
The cash ISA ceiling will also be cut from £20,000 to £12,000 for under 65s. Nearly 50 per cent of firms confirmed that clients have increased or maxed out their ISA contributions in a bid to beat the 2027 shakeup, while all taxpayers will experience a two percentage point rise to income tax.
Healey’s headache
Healey is facing a fiscal headache in his Budget, as he looks to raise revenue to offset the blow of rising interest rates and defence spending.
He is expected to slam the banking sector with a wave of hikes as his main-revenue raiser, but family businesses have also found themselves in the firing line.
The Chancellor is reportedly considering proposals to levy income tax when business owners hand down to their children, potentially almost doubling the bill.
Under current rules, transfers can be structured in a way that allows them to attract capital gains tax (CGT) which is charged at a lower rate, but Healey is debating a shake-up in a bid to increase revenue in his maiden Autumn Budget.
