2 months until the Budget: What to look out for

Chancellor Rachel Reeves is set to deliver her Budget on 26 November - and it could have a very real impact on you and your finances.

The government is facing a multi-billion pound financial black hole, so speculation is swirling about big spending cuts or raising taxes.

But either or both of these would be hugely unpopular.

So where will the money that the chancellor so desperately needs come from?

Will taxes go up?

The government has promised not to raise income tax, national insurance and VAT.

So if the chancellor sticks to this commitment, she might have to look somewhere else to make her sums add up.

One possibility that’s been floated is extending a freeze on the income tax threshold beyond April 2028.

This means that as wages go up, more people gradually get pulled into higher tax bands. 

Known as “fiscal drag”, it can quietly increase the tax you pay without rates actually being raised.

So if, for example, you earn £30,000 a year, you might end up paying a few hundred pounds extra in income tax over the year, even if your take-home pay hasn’t gone up in real terms.

Another possibility is reducing the amount you’re allowed to save tax-free into cash ISAs.

So even though you’d get the same tax benefits on money inside these accounts, less of your savings would qualify.

Inheritance rules could change

There’s also talk of changes to inheritance tax - the tax paid on someone’s estate after they’ve died if it’s worth more than £325,000.

While this doesn’t apply to most people, it’s still an area that could be politically sensitive for the chancellor.

Right now, gifts made more than seven years before death aren’t taxed. 

And if they’re made within three to seven years, they’re taxed on a sliding scale known as “taper relief”, where the rate gradually falls from 32% down to 8%.

The Treasury is understood to be looking at these rules and maybe introducing a lifetime cap on how much you can give away during your lifetime without incurring tax. 

It’s also believed to thinking about changing the taper relief system.

So if the value of what you leave behind is high enough to be taxed, your loved ones might end up receiving less tax-free.

What about wealth taxes?

The government has so far ruled out introducing a new wealth tax, as it believes inheritance tax, capital gains tax and the scrapping of non-dom tax status already target this group.

An extra tax on the super-rich would undoubtedly be very popular with voters and raise lots of money.

But it could be costly to administer and there are fears that it could prompt some wealthy people to leave the UK completely.

So at the moment, a new wealth tax looks unlikely.

Cost of living help

Although inflation is well down from its peak of 11.1% three years ago, that doesn’t mean prices have come down since then.

In fact, inflation held steady at 3.8% in August - the highest level since January last year and almost double the Bank of England’s target of 2%.

So it seems safe to predict that the chancellor will announce some targeted cost-of-living support for lower and middle-income families.

For example, there are rumours that the government plans to cut 5% VAT on energy bills, which could make a big difference to people struggling with the cost of gas and electricity right now.

A new push to invest in stocks and shares 

The government is on the record as saying it wants to encourage more investment in stocks and shares, so people’s savings deliver the best returns and drive more investment into the UK economy.

So it’s possible the chancellor might announce some incentives to get people taking up this option, rather than putting money in a cash ISA.

Any change could affect how you choose to save, so it might be an area to keep an eye on.

Housing a key focus for chancellor

Unaffordable house prices remain a big challenge for aspiring homeowners, forcing many to live with their parents for longer or pay expensive rents.

So it’s possible that support for first-time buyers could be a key element of this year’s Budget.

Reports suggest that the government plans to reform the stamp duty system, so payments would be spread over several years instead of being paid as a lump sum.

But some experts warn this could have knock-on effects such as pushing up house prices or prompting banks to lend more cautiously.

What about pensions?

At the moment, savers aged 55 or above can usually take up to 25% of their pension as a tax-free lump sum, up to a limit of £268,275.

But there’s speculation that the chancellor is considering reducing the tax-free amount, a move that could raise over £2 billion a year for the Treasury. 

Don’t act rashly

Of course, we don’t for sure what the chancellor will or won’t announce just yet.

So it’s important not to make any hasty financial decisions on the back of rumours and media reports.

But on November 26th, we’ll know what’s what.

And we’ll be here to talk you through what the chancellor has announced and what it means for you and your money.