Could Trump’s tariffs impact financial planning?

Theoretically, the markets don’t affect planning. However, the causes of market disruption often do. Although the overall and final impact of President Donald Trump’s tariffs is unknown, potential inflationary pressures and an economic slowdown could make it difficult for the UK government to meet their own “non-negotiable” economic targets.

In January this year HM Revenue and Customs (HMRC) published a bulletin providing ‘ready reckoners’, estimating the effects of illustrative changes on tax receipts over the next few years¹:

• A penny on the pound to basic rate income tax could raise more than £6.5 billion p.a., growing to over £7.8 billion by 2027/28. If the same increase is applied to the higher and additional income tax rate bands, this might only raise £1.4 - £2.0 billion and £135 - £235 million p.a. respectively over the same period
• With a 1% increase, the main rate of employee national insurance (NIC) could raise £5 billion p.a. As with income tax, increasing the additional rate is less effective and is projected to raise less than £2 billion p.a.
• A further 1% increase to employer NICs could raise in excess of £10.5 billion p.a.
• Increasing corporation tax by 1% could raise less than £4 billion p.a.
• Increasing the standard rate of VAT by 1% could raise £8.5 - £9.3 billion p.a.
• By contrast, 5% to 10% increases to capital gains tax (CGT) rates could see receipts fall

The numbers suggest the government would need to tax ‘working people’  to raise meaningful tax receipts. Having repeatedly ruled this out and stressed “no return to austerity” they could be forced to look elsewhere. Additionally, in their 2024 manifesto, the Labour Party pledged not to raise income tax, national insurance and VAT for at least five years if they won the general election. 

Having already targeted pension death benefits, the question arises whether further pension changes could be an option or a significant revenue raiser. Changes to tax-free cash are not considered effective. Like CGT, this would largely be a voluntary tax and could disproportionately affect relatively inflexible defined benefit pensions (also known as final salary pensions) compared to personal pensions that allow for greater flexibility and the deferment of the tax-free lump sum.

Pension tax relief, however, is more attractive in terms of revenue receipts. Due to the complexities of pension tax relief, it is difficult to pinpoint a single number for its cost to the Exchequer. MoneyWeek states that contribution relief stood at £48.7 billion in 2023, with “almost two-thirds of this sum” benefiting higher and additional-rate taxpayers². The FT Adviser reported that the net cost was £27 billion in 2023 when accounting for relief on contributions and investment returns, deducting income tax repaid on pension income in retirement³.

Clearly, these numbers represent a significant potential for savings and could be targeted at higher earners. However, changes to pensions are politically challenging. The government was forced to step back from plans to reintroduce the pension lifetime allowance before the election. Furthermore, unlike rate rises and allowance reductions, pension changes require legislative action, which is complex and slow to implement.

Considering the economic impact of Trump's tariffs, which have plunged the global economy into uncertainty, the UK government might consider changes to inheritance tax (IHT) as a viable option for increasing revenue. HMRC's January bulletin projected that a 1% increase to IHT would only raise £85 million p.a., growing to £245 million by 2027/28¹. More meaningful receipts would require substantial increases to the current 40% IHT rate.

Famously, former Labour Chancellor Roy Jenkins described IHT as "a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue," referencing the option to make potentially exempt transfers (PETs).These are lifetime gifts that are free of IHT after seven years. Could the current Chancellor legislate to prove her predecessor wrong?

Limiting tax-free lifetime gifts could be more profitable and palatable to the government. Making all PETs chargeable (similar to many trusts) could mean all gifts over £325,000 (the nil rate band) attract the IHT lifetime rate of 20%. Additionally, reducing the nil rate band and/or residence nil rate band (£175,000) could capture even more estates and increase revenue further.

Uncertainty can lead people to adopt a wait-and-see approach. However, I always say that the time to plan is yesterday. This doesn’t mean that sweeping changes should be made but waiting it out and ignoring planning is not the answer either. 

When making plans in the current climate it’s important to ask yourself:

• Are there smaller steps you could be taking now, or in future years?
• Could steps be taken to mitigate specific risks or risk more generally?
• Should any of your plans be brought forward or accelerated? For example, someone planning on giving their child a lump sum for a house deposit in six months’ time could give it to them now before any possible changes to IHT rules and in advance of the Autumn 2025 Budget

Although any possible changes to current tax regimes are all speculation at the time of writing, it is important to consider your future. 

At Evelyn Partners, our advisers work with you to ensure that you stay ahead of your financial plans in any economic climate. To find out more, speak to your usual Evelyn Partners contact or book an appointment online.

Sources:
¹ Gov.uk, Direct effects of illustrative tax changes bulletin, 28 January 2025

² MoneyWeek, Will Labour change the rules on pension tax relief?,  7 October 2024

³ FT Adviser, Pension tax relief 'cost' hits £27bn, 12 January 2023