As the Budget looms, many Britons are wondering if they’ll be considered “wealthy” enough to face potential tax increases.
The top 20 per cent of households have a median net income of £78,394 annually, however wealth isn’t just about income experts explain.
In terms of age, those aged 60-64 hold the most assets, with nine times more than their 30-34-year-old counterparts. For individual asset holders, the top 10 per cent possess £90,000 in the bank, £310,000 in property, and £627,000 in pensions.
With Chancellor Rachel Reeves set to address a £22bn hole in public finances, these groups may find themselves in the crosshairs of new tax measures.
The top 20 per cent of earners, while comfortable, may not be the primary target for wealth taxes. According to Sarah Coles, head of personal finance at Hargreaves Lansdown, these households have a median net income of £78,394 and save 13 per cent of their income, data from the HL Savings & Resilience Barometer, July 2024 has shown.
They typically hold £35,804 in cash, including nearly £10,000 in current accounts. Their collective pension savings average £293,994, with an additional £39,445 in stocks and shares ISAs.
However, Coles noted that this group tends to be younger and still building wealth. Targeting them might not be as lucrative for the government as focusing on those who have already accumulated substantial assets.
The 60-64 age group, with average wealth of £380,100, represents the peak of asset accumulation. But Coles warned that targeting this demographic could be problematic.
She said: “If you’re in this position, and have been carefully building assets to fund your retirement, the idea of losing it to tax at an age where you have fewer options to rebuild wealth could be particularly worrying.
“The Government must tread carefully, as damaging the wealth of recent retirees could lead to increased reliance on state support in later years, potentially offsetting any short-term gains from tax increases.”
Rather than targeting specific age groups, the Government might opt for broader tax strategies. Coles suggested they could increase capital gains tax rates across the board, as well as consider changes to inheritance tax rules.
She explained the Government might “take a bigger slice from everyone as they grow their wealth” by hiking CGT rates. This could lead to unintended consequences, with some individuals potentially holding onto assets until death to avoid the tax.
Cole said: “They might accompany this with rules that mean capital gains tax doesn’t reset to zero after you die, and your estate may need to pay it on top of any inheritance tax.”
Ian Dyall, head of estate planning at Evelyn Partners, also warned that the nil rate bands could be on the chopping block. These currently provide a frozen inheritance tax-free sum of £325,000 for assets and £175,000 for property.
There are also concerns about the treatment of defined contribution pension pots, which may lose their IHT exemption. Dyall said: “This could take the form of the full fund being subject to IHT or just the excess over the current death benefit limit of £1,073,100.”
Such changes could significantly impact families and businesses, with fears that even “modest family-owned small and medium-sized enterprises could get caught up in measures intended to target the very wealthiest families.
Reeves could target inheritance tax as it’s not money that individuals will need in their current lives, but any change could disrupt family plans, particularly for those counting on inheritances for major life events like home purchases or retirement.
The Government’s challenge lies in balancing revenue generation with the potential impact on individuals’ long-term financial planning.
For those concerned about potential tax changes, there are strategies to mitigate the impact.
Coles explained Britons should take advantage of the capital gains tax annual allowance by selling and repurchasing assets strategically. They can also use stocks and shares ISAs for investments which can protect against both capital gains and dividend taxes.
To address inheritance tax worries, making gifts is a “sensible approach”. Up to £3,000 can be given away annually without tax implications, while larger sums fall outside the estate after seven years.
Coles said: “If you have children in your life who are under the age of 18, you could consider paying into a Junior ISA for them each year.”
This counts as an immediate gift for inheritance tax purposes but remains inaccessible until the child turns 18.
Additionally, surplus income can be gifted tax-free if it comes from regular monthly income and doesn’t affect usual living costs.
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While the Government may target those considered “wealthy”, the definition is complex, encompassing high earners, asset-rich older groups, and those with substantial savings and investments.
Proposed changes to inheritance tax and capital gains tax could affect a broader range of people than initially anticipated. Individuals must understand their financial position concerning these potential changes.
By utilising strategies such as ISAs, gift allowances, and careful management of capital gains, many can mitigate some of the impacts.
However, as Chris Etherington of RSM explained some are already “re-evaluating their lifestyles and whether this is the [right] place to live.”
As the Budget approaches, staying informed and prepared remains key for all levels of wealth.
