Tax rises are “inevitable”, a leading think tank has warned, just hours before chancellor Rachel Reeves is set to pave the way for a tough 26 November Budget.
This stark warning confirms the fears that are already compelling investors to take pre-emptive, and potentially “dangerous”, financial action, according to new research from Hargreaves Lansdown.
In a pre-Budget address today, the chancellor will pledge to make “important choices” as she sets out her three priorities for the fiscal event: cutting hospital waiting lists, the national debt and the cost of living.
This political framing comes against a grim fiscal backdrop. The Resolution Foundation has already warned that Reeves may need to announce £26bn in tax rises to stabilise public finances, blaming an anticipated OBR productivity downgrade, higher borrowing costs and recent policy U-turns.
The think-tank urged the chancellor to double her fiscal headroom to £20bn to “send a clear message to markets”.
This speculation has prompted investors to take action. A survey of 2,000 adults by Opinium for Hargreaves Lansdown found the most popular actions ahead of the Budget were paying into a Cash Isa, contributing to a pension and paying into a Stocks and Shares Isa.
With the threat of tax hikes looming, the data showed a clear flight to tax-efficient wrappers.
IFAs biggest challenge: clients wanting to make changes ahead of the Budget
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, described pension top-ups as a “real no-regrets move”, particularly for higher-rate taxpayers fearing a raid on tax relief.
The survey found 23% of higher-rate taxpayers had topped up their pension specifically in response to Budget rumours, compared to just 8% of people overall.
“With tax relief available at your highest marginal rate, it’s a compelling incentive,” Morrissey stated, noting that rumoured flat-rate relief would be “bad news for higher and additional rate taxpayers”.
However, the research revealed potentially knee-jerk reactions that could prove costly for clients.
Of greatest concern for advisers will be the finding that 6% of respondents over the age of 55 have taken their tax-free cash (TFC) ahead of the Budget. While 4% said this was part of their plan, 2% — one-third of that group — admitted they did so purely because of Budget worries.
Morrissey warned this reactive move could have “serious repercussions” for long-term retirement resilience.
“It’s a move that can rip money out of a very tax-efficient environment and leave it exposed to taxes such as capital gains or dividend tax,” she said.
“Taking the money with a view of reinvesting it back into your pension if the announcement is not made… is fraught with challenges and the potential to fall foul of pension recycling rules that could land you with a nasty tax bill.”
Concerns over inheritance tax (IHT) are also driving behaviour. Seven per cent of those surveyed said they were considering giving money away in response to rumours of a potential lifetime cap on gifts, a move Morrissey cautioned against.
“You run the risk of giving away too much and leaving yourself short of cash later on,” she warned.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said that while many steps are sensible, some are clearly driven by fear.
“Rumours around the changes… have been circulating for so long that some people are feeling compelled to act,” Coles said.
“The good news is that many of the things they’re doing will be the kinds of steps they’ll be grateful for, but some could come with a sting in the tail.”
