In the wake of the Budget’s announcement of a staggering £40 billion tax increase, finance experts are now advising households on how to safeguard their wealth. The surge in taxes such as Capital Gains Tax, Inheritance Tax, and National Insurance for employers has underscored the importance of financial acumen.
Specialists at Hargreaves Lansdown have identified essential steps to enhance financial health. Sarah Coles, the company’s personal finance chief, said: “It’s easy to get overwhelmed by the endless post-Budget debate, but we need to cut through the noise, and do the right things for our finances right now.”
There is, however, a silver lining for certain workers in the current climate: those earning lower wages can expect a significant boost from the increased minimum wage, while public sector employees are set to receive salary increases. Forecasts from the Office for Budget Responsibility (OBR) suggest that, buoyed by the Budget, wages could rise more than previously expected in 2024 and 2025, with projected increases of 4.7 percent and 3.6 percent, respectively.
Nevertheless, this positive outlook may not be sustainable in the long term. The economic forecast appears less promising when considering the impact of higher National Insurance contributions on employers, which may ultimately lead to subdued wage growth in the future.
The OBR has projected that real wage growth will be positive, at 2.4 per cent this year and 1.2 per cent in 2025, but is expected to plateau in the following years. The forecast indicates no growth for 2026 and 2027 after inflation is taken into account, reports Cambridgeshire Live.
The financial advisory firm said: “It means it’s worth setting up a direct debit to go into a savings account on payday each month, so you do the right thing without thinking about it, and build an emergency savings safety net. That way, if your budget gets tighter in the coming months, you’ve prepared some wiggle room.”
They also provided advice on managing capital gains tax in light of the Budget’s increase from 10 per cent to 18 per cent for basic rate taxpayers and from 20 per cent to 24 per cent for higher rate taxpayers, suggesting: “Fortunately, there are still ways to reduce a potential capital gains tax bill. You can use your annual allowance of £3,000 to realise gains gradually over the years.”
In addition, they advised: “At the same time, you can use the Share Exchange (Bed and ISA) process to move the assets into a stocks and shares ISA, so you don’t have to worry about either dividend tax or CGT on these investments at any point.”
Additionally, they provided further guidance: “You can also offset any losses against your gains, give assets to a spouse or civil partner so they can use their annual allowance too, or defer income to next year so any capital gains tax you do pay is at a lower rate. You can hold assets for life, and the tax will reset to zero on death.”
They also highlighted the importance of planning for a remortgage, given the Office for Budget Responsibility’s warning that the Bank of England interest rate is expected to decrease from 5 percent to around 3.5 per cent in the final year of the forecast, which is not as steep a fall as previously anticipated in March, when a drop to 3 per cent was expected. This does not necessarily indicate an increase in fixed mortgage rates, as the OBR notes that the market had already anticipated this outcome, meaning it is largely accounted for in current pricing.
The firm cautioned: “If you have a remortgage looming, you’ll already be braced for a hike in your monthly payments. The average interest rates on all outstanding mortgages right now – including rates that have been fixed for years – is 3.7 percent. By 2027, this is expected to rise to 4.5 percent.
“Around two thirds of mortgage holders have already had to remortgage since rates started rising, but it still leaves around a third to come up for a remortgage between now and 2026. If you’re in this position, you’ll need to plan for higher payments.
“Given how rates have fluctuated with expectations in recent months, it’s also worth hedging your bets. You can lock in a rate up to six months before your mortgage expires. If rates drop between now and then you can go elsewhere for a better deal, but if they rise, you will have secured a cheaper mortgage.”
As the cost-of-living crisis has eased, those with higher incomes may have found some leeway in their household budgets, allowing for more discretionary spending. The Budget is not anticipated to cause a sudden spike in inflation, but forecasts suggest it will climb to 2.6 per cent by 2025 – influenced partly by rising energy bills and also due to increased wages and employer costs.
The firm commented: ” It means it’s worth drawing up a budget in advance, so that you’re not caught out by price rises this time. You could even implement it early, and build up a cash cushion before it hits.”
They added, “The positive news is that inflation is still expected to drop back to 2 per cent by the end of the forecast, so careful budgeting should help you keep on top of your spending in a way that was nigh-on impossible for so many people when inflation was in double digits.”
The Budget has shed light on the future of inheritance tax, revealing that money left in a defined contribution pension after death will now be included in estate valuations for inheritance tax purposes. This change is expected to generate a staggering £1.46 billion in the tax year 2029/30 and could affect 8 per cent of estates, highlighting the need for proactive financial planning.
The firm offered advice, saying: “It might encourage people to consider giving gifts during their lifetime to lower their overall tax liability. Sensible gifts can help support younger family members at a time when you’re still around to see your family enjoy the money. You can give up to £3,000 away each year, which will fall within your annual gift allowance.”
They added: “There’s a separate rule that means you can give away surplus income inheritance-tax free too. You need to pay it from your regular monthly income and have to be able to afford the payments after meeting your usual living costs.”
Furthermore, they explained: “If you give them a lump sum of more than the annual gifting limits, it becomes what’s known as a ‘potentially exempt transfer’, which falls out of your estate after seven years have passed. It also gives you more control over how the money is given. You could, for example, put it into a stocks and shares Junior ISA for a child under 18, so you know the money will be invested carefully, and tied up until they’re an adult.”
The way you draw a pension income is crucial, especially as more individuals could be hit by inheritance tax due to their defined contribution pension being included in their estate. This could lead to a rethink for those intending to pass on their pension pots tax-efficiently after death.
As a result, many might opt to deplete their pensions for retirement income, keeping their remaining estate below the IHT threshold. Some may even give part of this money to family members to support them during significant life events.
The trend could shift towards purchasing annuities, which offer a steady income for life and can help keep the estate value under the IHT limit. It’s vital to carefully consider withdrawing tax-free cash from pension pots.
Those who have recently accessed SIPP funds pre-Budget might look at reinvesting some of it. Hargreaves Lansdown suggests caution, noting: “Those who have only recently opened a drawdown account could be able to reverse their decision, and the money can continue to grow tax free within the pension, as they’d originally planned, without missing a beat.”
They went on to issue a warning, though. “However, if it has already left, there’s the potential to breach recycling rules aimed at preventing people exploiting the system for extra tax relief and be clobbered with a fine. If you’re not sure where you stand, this could be one of the times in life when financial advice can be most rewarding,” they said.