My Budget wish list for personal finances

In just five days’ time, Rachel Reeves will deliver her first Budget as chancellor, in what’s set to be the most eagerly anticipated fiscal event in years.

Speculation about potential tax reforms is rife before every Budget, but the rumour mill has spun at an extraordinary pace this time around.

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The sheer volume and disparateness of the reported measures has made it tricky to determine which have weight and which are pure speculation. There’s been a rumour for almost every nook and cranny of the wealth and pension tax systems.

To remind ourselves about the sticky situation the government finds itself in, Reeves needs to fill a multi-billion-pound deficit in public finances but is hamstrung by its own election manifesto. Increasing the headline rates of income tax, national insurance (NI), VAT and corporation tax is off the table, posing challenges for the chancellor as these four account for a sizeable proportion of the Treasury’s annual revenues.

The rumours have subsequently settled on three areas of the system: capital gains tax (CGT), inheritance tax (IHT) and pension taxation. It seems inevitable that these three will be either jacked up or reformed in some way; we’ve all resigned ourselves to that. How and to what degree remains unknown.

But tax isn’t the only thing on Labour’s to-do list. There are other things to watch out for, too.

So, for what it’s worth, although I’m not - and will almost certainly never be - chancellor, here’s what I’d like to see Reeves reveal at 12:30pm on Wednesday.

Sensible changes to capital gains tax

It seems nailed on that CGT will be reformed, so wishing for no change here would be naively optimistic. But I hope that any tweaks are sensible.

Reports a couple of weeks ago suggested Labour was testing rates in the 33% to 39% ballpark – significantly higher than the standard current rates, which are 10% and 20%, respectively, at the basic and higher rates.

However, Keir Starmer has poured cold water on the idea that the top rate will increase to 39%, calling it “wide of the mark”. So, assuming he keeps his word, this also rules out the nuclear option of equalising rates with income tax.

Some reports indicate the government may raise the top rate on share sales from 20% to 24%, in-line with the rate on residential property. Clearly not ideal for investors with holdings outside tax wrappers, but somewhat palatable.

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But should CGT rates increase, it would be good to see some form of indexation applied to enable investors to eliminate or lessen the impact of inflation. Such a system has been in place previously. This may create a trade-off between complexity and fairness, but the latter should always come first in my view.

Shake up inheritance tax thresholds

Of the all the UK taxes, IHT is arguably the ripest for reform. According to the latest rumours, the government is weighing up extending the period for potentially exempt transfer (PET) from seven years to 10 years.

Personally, I’m not sure this would be a smart move. Namely, it might lead to people giving away assets or money too soon, running the risk of jeopardising their long-term futures. And such a policy wouldn’t beef up IHT receipts overnight.

Elsewhere, I hope the government doesn’t target reliefs for businesses and farms but fear it might.

Where a shake-up is truly needed, is in the arena of tax-free allowances. These have remained frozen for years, clawing more estates in the IHT net, and challenging the long-held assertion that IHT is a tax on the rich.

When it comes to unfairness in the IHT system, the residence nil rate band (RNRB) is a case in point. This allowance affords some homeowners up to £175,000 tax free on death, in addition to the £325,000 standard nil rate band. This means that for married couples and civil partners, the first £1 million of their estate could be IHT free.

However, not everyone gets this allowance and there are elements that aren’t particularly well understood. First, to qualify, the property must be left to direct descendants, such as children and grandchildren, which disqualifies those who choose to rent or don’t have children

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Second, the RNRB reduces by £1 for every £2 an estate exceeds £2 million. As a result, there's no RNRB if everything is worth more than £2.35 million on death, or £2.7 million if you’ve inherited an unused RNRB from a deceased spouse or civil partner. This complexity runs the risk of families being caught out.

To make things simpler and fairer, I hope Reeves abolishes the RNRB and transfers the figure to the standard NRB, giving everyone a tax-free allowance of £500,000.

Leave pension taxation alone

For many pension savers, this Budget is about what doesn’t change, rather than what does. 

Rumours have swirled for several months that the government might target pension taxation to plug some of its fiscal deficit.

The dominant rumours include:

• Introducing a universal rate of upfront tax relief around the 30% mark. This would benefit anyone who pays 20% tax but penalise those in the 40% or 45% brackets
• Reducing the maximum tax-free cash element, which is currently capped at £268,275
• Removing the IHT exemption
• Imposing NI on employer pension contributions

However, I would like to see the current regime left alone. It’s crucial that we provide consistency in the pensions framework to encourage savers to plan for retirement with confidence. If the goalposts are moved, especially if any changes prove detrimental, it could turn some people off.

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This is especially the case if any changes are brought in at short notice, such as the following day, which is the fear that’s prompted many savers to hook out their tax-free cash.

Such abrupt reform would be unusual, but not unprecedented. In the coalition government’s 2010 emergency Budget, then-Chancellor George Osborne hiked CGT rates, and this was imposed at midnight.

Other measures to consider….

Simplify the ISA landscape  

The government’s decision to scrap the idea of a British individual savings account (ISA) wasn’t a surprise. First, it wasn’t a Labour policy, and second, it was riddled with complexity. 

This may hopefully pave the way to create a simpler ISA landscape, one that savers and investors can make more sense of. As things stand, there are six ISAs in operation (five open to new subscribers), which may not sound a lot but can make it difficult for people to choose the most suitable type for their specific goals. 

Selecting the wrong ISA can harm your financial future, so it’s vital we create a landscape that helps savers to get this right.

Clarity on the state pension’s future 

Labour has committed to the triple lock, which is great news for those already in retirement or fast approaching it. Retirees can expect an inflation-beating 4.1% increase from April 2025, which Reeves is set to rubber-stamp next week.

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But the future of the state pension more broadly remains the subject of intense speculation. The government faces some big decisions over the coming Parliament, notably whether to accelerate the timetable to raise the claiming age to 68.  

The state pension alone may not be enough to rely on in old age, but it provides a valuable foundation to meet day-to-day expenditure. So, it would be great if Labour could use its first Budget to outline its future plans for the policy and offer some much-needed clarity to the working population.