Another budget has come and gone.
You’ve no doubt received numerous updates from various parties on tweaks to personal and corporate taxes, most of which take effect from April 2027. Overall, it was relatively low-key with few significant announcements, and most policy changes were leaked in advance of the statement itself.
Other than the often poorly publicised but significant effect of stealth taxes running until 2031 (the freezing of income tax bands, which pulls more people into higher rates each year), you might be left thinking there isn’t much to consider for the new tax year. On the contrary. There are several quite significant changes coming in just five months’ time.
Pensions
One of the biggest forecast tax increases comes from bringing pension assets into an individual’s estate for inheritance tax (IHT) purposes. Pensions currently fall outside your estate, but for deaths on or after 6 April 2027 pension assets will be added to your other assets. Unless they pass to your spouse, they will be liable to IHT at 40% above the nil-rate band of £325,000 (plus the £175,000 residence nil-rate band, if you qualify).
For prudent savers who have built up significant pension assets and may not need to spend them all in retirement, this is a major new liability. Worse, despite statements suggesting otherwise, the new rules do result in double taxation. If you die after 75 and don’t leave your pension to your spouse, the pot is liable to IHT at 40%, and what remains is then taxed as income at the recipient’s marginal rate. If your children are already higher-rate taxpayers (especially given the stealth taxes above), they can face 40% IHT and up to 45% income tax, or an effective 60% on income between £100,000 and £125,140. That means tax of 67%, or more, on the pot as a whole.
This is a difficult problem to plan for, as we need to allow for longevity, investment returns, inflation, the cost of care, changing income needs and unknown future tax bands. The answer is to review your pension withdrawals closely year on year. If you are taking relatively little or nothing, you may want to reconsider that strategy, both before 6 April 2027 and afterwards.
The most popular approach we’ve seen in recent months is whole-of-life insurance. Subject to underwriting, you can obtain a guaranteed premium for life for a fixed sum payout. You can run the numbers to give you a known break-even point, which in good health and at current pricing is often well into your 100s. If you can increase pension withdrawals to fund the premiums, this can be a cost-effective solution with a guaranteed payout. Pricing is currently surprisingly competitive, but we are concerned it could change if demand keeps rising, especially as April 2027 approaches. If you’re considering it, look into it sooner rather than later.
Savings
The Budget added a further 2% to tax on savings income. This is on top of the 2% rise announced previously. Interest above your personal savings allowance will be taxed at 24%, 44% or 49%, depending on your marginal rate, from 6 April 2027.
This hasn’t been widely reported, but savings income will now be taxed more heavily than earned income or dividends. For those with larger sums on deposit outside tax wrappers, this is a major cost, and there is a strong case for reviewing your overall saving and investment strategy now.
Pleasingly, the cash ISA allowance has been restored to £20,000, avoiding what would have been a pointless complication. ISAs are probably the simplest and most effective way to minimise this tax, but you can only pay in £20,000 a year across all ISAs, so plan year on year to use the allowance fully.
Property
Property income has also been hit with a further 2% increase, so the same 24%, 44% and 49% rates will apply to rental income from April. That may sound bad enough in isolation, but you also need to factor in rising compliance costs (the new landlord legislation, property registration and associated fees) and higher borrowing costs.
Buy-to-let and commercial property can still be attractive long-term investments, but major tax increases over the last five years, together with much higher borrowing costs, are leading many people to reconsider their holdings. Holding property in a company gives you more control over taxation, but held personally, buy-to-let and commercial property look far less attractive than they once did, particularly compared with ISAs and their tax allowances.
Business Assets
The Budget delivered another hit to business owners. The lifetime limit for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) falls from £1 million to £500,000, and the rate is now 18%. Effectively, the first £500,000 of gain is taxed at 18% and everything above it at the standard 24% rate of capital gains tax. There is now very little tax benefit in selling a business you’ve built versus selling any other readily tradable shares.
A new relief taxes up to £10 million of gains at 10%, but only for founders of qualifying high-growth businesses. It remains to be seen how many will qualify, and there are plenty of questions about why such a narrow group should receive a much better benefit while the wider group eligible for BADR is effectively penalised.
The action point is that anyone considering an exit in the coming years is likely to receive a lower net figure. If you can move quickly enough to complete a transaction before April, there are tax savings to be had. Otherwise, consider your long-term withdrawal strategy well in advance of a sale.
What to Do Now
With all the changes happening, speaking to a qualified independent financial adviser would be a strong next step. Though this article outlines some of the changes and mentioned things we’ve seen clients doing to address them, it is not personal financial advice. It’s important that you speak to someone who can review and discuss your personal circumstance.
At Bigmore Financial Planning our approach is fully client led. Our advice and recommendations are always in the best interest of our clients, helping you align your money with their life goals. We offer a free initial discovery call where we can get to understand your wants and needs a bit better, and you can learn more about us and what drives the team at Bigmores.
Article by Adam Nettleship
Chartered Financial Planner, CEO Bigmore Associates
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