Fears of an imminent tax grab on the middle class has sent a wave of panic across the country.
Financial advisers have told Money that they have had a flood of calls from clients worried about how to protect their money and are calling for the government to restore calm.
The panic comes after pension savers last year rushed to withdraw their tax-free lump sums in the run-up to the chancellor’s maiden budget, only to find that she had not tinkered with the rules.
With economists now warning that Reeves will once again have to raise taxes significantly in the face of an even bigger multibillion-pound black hole, savers and homeowners are again rushing for help.
Treasury officials are reported to be looking at introducing a cap on the gifts you can make during your lifetime and other tweaks to inheritance tax reliefs. Some would be small measures on the face of it, but enough to trigger huge concerns for families who have been left wondering how their carefully laid plans could be upended.
For advisers and wealth managers, the phones have not stopped ringing. Gary Smith from Evelyn Partners said: “Last summer there was rush of enquiries, and our financial planners are experiencing something similar now.
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“Before the last budget, a significant number of savers decided to take their tax-free pension lump sum. Some who did so without a clear need scrambled in the days after the budget to reverse their decision, with mixed results.”
Smith said the same pattern could now repeat itself, with savers making panicked decisions they may well rue later: “The suspicion that the pension lump sum could be grabbed back in some way by the Treasury is a reason often cited for giving up on pension saving after a certain point.”
Families on edge
Inheritance tax is another area of concern, with the chancellor rumoured to be considering a range of changes. Scrapping or amending the seven-year rule — which allows unlimited inheritance tax-free gifts, even of property, so long as you live for seven years after making the gift — would be one change that would drive many families to take action.
“Many will now be looking to make gifts before October’s budget in the hope of beating a rule change,” said Duncan Miller from the London law firm Withers.
And it’s not just the ultra-wealthy who are fearful. The tax lawyer Chris Groves, also from Withers, said: “We’re seeing this spread right through the spectrum. The wealthiest clients have more tools to manage changes, but middle-class families are also worried — especially those sitting on properties that have crept into inheritance tax territory because of frozen allowances.”
Saddat Abid from the property buying firm Property Saviour said his clients have been spooked. “A couple in their sixties were planning to downsize from their £800,000 family home, but have now postponed the sale completely. They’re concerned that the residence nil-rate band that currently gives them an extra £175,000 inheritance tax allowance will be scrapped.
“On the buying side, a young family saved £50,000 for their first home deposit but are holding off because their parents, who were going to help with the purchase, don’t know if giving the money now might create tax issues later.”
A lifetime cap on financial gifts would prompt a sharp cultural change. Research by the wealth manager Quilter last week suggested that those in retirement typically give away about £2,500 a year to younger family members to help with education or living costs.
Abid said: “Take a typical scenario that I see often; grandparents helping with university fees over several years, parents assisting with house deposits, or regular support during cost of living pressures. Under a cap system, all these gifts would count toward a lifetime limit, potentially catching out families who never considered themselves wealthy enough for inheritance tax planning.”
Beyond the financial hit, there is the administrative challenge. Tracking decades’ worth of gifts would be a significant burden for HM Revenue & Customs and families, raising the risk of disputes if records are incomplete.
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The pensions trap
Speculation about potential raids on pensions has been just as fraught. Reeves has not ruled out changing the cherished 25 per cent tax-free lump sum or abolishing higher-rate pension tax relief. According to HMRC, gross pension tax reliefs were worth £78.2 billion in the 2023-24 tax year, with almost 70 per cent being used by higher and additional rate taxpayers.
At the moment you can usually take 25 per cent of your pension pot tax-free after the age of 55 (57 from April 2028) and up to a limit of £268,275. The pensions minister, Torsten Bell, an economist who became an MP last year, said in 2019 that capping the lump sum at £40,000 could raise more than £2 billion a year.
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While officials said that the plan was “unlikely” to be prioritised, industry experts fear that pension savings will be on the hook in some way or another as the chancellor searches for revenue.
“The Treasury will have noticed these numbers,” Smith said. “Pension tax relief at the two higher rates could just be cancelled, leaving a flat rate of 20 per cent for everyone. That would raise £15 billion a year, according to the Institute of Fiscal Studies.”
Drastic measures
RBC Brewin Dolphin said it had seen more pensioners taking extra taxable income from their retirement pots, sometimes up to the additional rate income tax threshold of £125,140, in the hope of starting the seven-year inheritance tax clock.
HMRC figures show that £5 billion of taxable payments was withdrawn from pensions in the first quarter of this year — a 24 per cent increase on last year.
“Ultimately, a lot of people would rather pay 20 per cent now than 40 per cent when they die,” said Daniel Hough at Brewin Dolphin. “But there is a fine line between passing down wealth as efficiently as possible and enjoying a comfortable retirement. Some people risk running out of money in their eighties or nineties.”
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Lessons from last year
Reeves described her October 2024 budget as one she “would not want to repeat” — a recognition, after the fact, that the £40 billion in tax rises risked harming wage growth.
Similarly, savers and homeowners may want to learn lessons from the panic of last autumn.
Groves said: “This is the repeating drama of the budget. The government refuses to rule out reforms, the rumours swirl, people panic, and then the actual measures are narrower, but still disruptive.”
Mike Ambery, an adviser at the savings firm Standard Life, said: “Our advice is the same now as it was then — it’s important not to make decisions based on speculation. Taking action too quickly can mean missing out on future investment growth, reducing income available in retirement, and in some cases even affecting entitlement to state benefits.”
Hough at Brewin Dolphin agreed: “If you’re considering withdrawing significant amounts from your pension pot, speak to a professional adviser about the long-term effect. Even a single percentage point change in assumptions can make a huge difference over 20 or 30 years.”
The same goes for inheritance tax fears. Abid said: “My advice is to focus on regular, documented gifts within exemptions while the rules remain unchanged. Keep records. Don’t panic into hasty decisions.”
Source: Why a tax panic is sweeping through the middle class
