How to guard YOUR financial savings, pension and investments from Rachel Reeves’ £40bn tax raid

Rachel Reeves delivered the first Labour Budget in 14 years this afternoon. 

The Chancellor announced a wide range of tax increases, including to capital gains tax and inheritance tax, with changes made to pensions too. 

Many people will be wondering what this means for their money.

It’s not advised to make any rash decisions and experts urge people not to panic and do something they might later regret. 

However, there are a few simple things you can consider to protect some of your cash from the tax grab – especially as many of the changes won’t be in place straight away. 

We look at some of the changes Reeves announced and some of the tweaks you can make ahead of them being implemented. 

Use your tax-free allowances

Reeves announced major changes to capital gains tax raid to boost the Treasury’s coffers, having repeatedly ruled out an increase to rates during the election.

CGT is levied on profits made when you sell investments, second properties, business assets and personal possessions worth more than £6,000, with profits above the annual tax-free allowance of £3,000 all falling within the tax net.

The rate someone pays depends on their whether they are a basic, higher or additional rate taxpayer, and the type of assets they are selling. 

Basic rate taxpayers with taxable income below £50,270 used to pay 10 per cent capital gains tax, while higher and additional rate taxpayers paid 20 per cent.

That is unless they were selling a second homes or buy-to-let, when they faced capital gains tax rates of 18 per cent for basic rate tax payers, and 24 per cent for higher and additional rate tax payers.

Now, Reeves has brought CGT on shares in line with property rates, meaning that the lower rate of CGT will increase from 10 to 18 per cent. The higher rate will rise to 24 per cent. 

These changes will be made immediately, meaning that you are limited in what you can do if you make any gains from today onwards. 

However, if you have used your tax-free allowance you should be able to shelter some of your savings. 

The tax-free allowance remains unchanged, meaning you can make gains up to £3,000 without paying tax.

Opening an Isa is another useful way to keep your savings or investments out the tax net. 

Thankfully, no changes were made to the Isa lifetime or annual allowances, meaning that savers should put their money into the tax-free wrapper where possible. You can save £20,000 per tax year into these accounts. 

Gary Smith, financial planning partner at Evelyn Partners said: ‘Higher CGT rates should focus everyone’s mind firstly on the importance of tax wrappers like Isas and pensions, which protect investments from tax on both capital gains and dividends, and secondly on the use of annual tax-exempt allowances.’

Gift money to friends and family

In today’s speech, Rachel Reeves announced that the inheritance tax threshold would be frozen until 2030, extending it from the 2028 limit set by the previous Government. 

If you are considering gifting some of your savings to reduce inheritance tax, it may be better to do it sooner rather than later.

But you shouldn’t necessarily worry unless inheritance tax might become a problem for your beneficiaries.

You need to be worth £325,000 if you are single, or £650,000 jointly if you are married or in a civil partnership, for your loved ones to have to stump up death duties.

And there is a further chunky allowance – known as the residence nil rate band – which increases the threshold to a joint £1million if you have a partner, own a property, and intend to leave money to your direct descendants.

If you do want to pass on money now to avoid potential taxation later on, you can currently gift up to £3,000, which falls under the annual gift allowance, but you can also give larger sums under a system called potentially exempt transfers (PETs). 

These will be outside of your estate after seven years, provided you do not die within that period – a rule put in place to stop people avoiding inheritance tax by giving large sums of money away in old age. 

There is currently no limit to how much you can gift as a PET, but it will only be exempt from inheritance tax if you survive for seven years after it’s made.

Hargreaves Lansdown says that more than one in seven of its customers said they had been spurred on to gift money to family.

Labour did not extend the rules on PETs but instead have brought in inherited pensions into people’s estates for inheritance tax calculation purposes. 

Russell Miles, senior personal finance commentator at Charles Stanley, said: ‘Turning pension savings into an income stream and giving gifts out of surplus income preserves the IHT benefits. 

‘Taking uncrystallised pension lump sums and gifting these to the next generation also has the potential to lift them out of the IHT trap provided you live for another seven years. But taking financial advice is essential before making any decisions.’ 

Find a home for any withdrawn retirement savings

There had been speculation that Labour might make changes to some of the pension tax reliefs available, including a change to the ability to take 25 per cent tax free.

Thankfully, this has been left alone by Reeves and her team – but this did not stop a rush of savers looking to access their cash ahead of the Budget.

Those savers should now consider where to put that money so as not to lose its value through inflation.

Mike Ambery, retirement savings director at Standard Life said: ‘When it comes to their pension itself, people should be aware that any further withdrawals will be taxed at their marginal tax rate and that future contributions into their pension will be subject to the Money Purchase Annual Allowance if they make withdrawals beyond their tax free cash, which reduces the amount they are able to pay into their pension to £10,000 a year.

‘This is a reasonable sum but those looking to make significant pension contributions over the coming years should look carefully at the rules at accessing any further pension savings and ideally speak to their pension provider or a financial adviser about their plans.’

Don’t panic

Reeves has made some broad changes which could see more of your savings fall under tax. 

But when it comes to making changes to your finances, the most important thing is to think long-term and not to make hasty decisions.

There are plenty of changes that will be implemented next April, giving you plenty of time to think about what you’d like to do with your cash. 

Any investments should be held with a view for the long-term and where possible, be kept in a tax-free wrapper like an Isa or pension.