With less than a month until Rachel Reeves presents her first Budget, we’ve summarised what we expect, or could, see from a tax perspective.
Backdrop to the Budget
Since coming to power this summer, the Labour government has painted a gloomy picture of the country’s finances. This includes frequent mentions of an unexpected ‘£22 billion black-hole’, the decision to means-test winter fuel payments for pensioners, and warnings that the Budget ‘is going to be painful’. Understandably this has led to widespread speculation about tax rises and spending cuts.
At the Labour Party conference a more optimistic note was struck, with Reeves promising no return to austerity. She reiterated Labour’s manifesto commitments not to increase the basic, higher or additional rates of income tax, national insurance, or VAT and to cap corporation tax at the current rate. She also said that her Budget would have real ambition aiming to fix the foundations, deliver change, rebuild Britain, and promote economic growth and investment. With this slight change of emphasis, perhaps the anticipated tax rises won’t be as significant as initially expected.
What to expect in the Budget
Based on Labour’s manifesto, some or all of the following could be included in the Budget:
- Charge carried interest of private equity fund managers to income tax instead of capital gains tax (CGT) (see our response to HM Treasury’s call for evidence on this issue),
- Replace the tax regime for non-doms with a foreign income and gains (FIG) regime (see our policy update on non-UK doms, but also note that HM Treasury is reportedly looking at whether the proposed changes will bring in the money expected if the change results in wealthy non-doms leaving the UK),
- Stop the use of offshore trusts to avoid inheritance tax (IHT),
- Confirmation of the detail on the application of VAT to private school fees (see our guide to VAT on private school fees),
- Increase the Stamp Duty Land Tax (SDLT) surcharge paid by non-UK residents buying residential property in England or Northern Ireland to 3%,
- Increase the windfall tax on oil and gas producers, and
- Crack down on tax avoidance and evasion.
For more on these manifesto pledges see tax changes expected from the Labour government.
We also know that on Budget day the government will publish a business tax roadmap, which Reeves has said will “offer the certainty that encourages investment and gives business the confidence to grow”. It is to be aimed at companies and will include the commitment to cap corporation tax at 25% for this Parliament and to retain full expensing.
Budget predictions
Other potential revenue-raising options widely thought to be under consideration by the government are concerned with CGT, IHT, dividends and pensions.
Capital gains tax and Autumn Budget 2024
We’re expecting the Chancellor to announce changes to the CGT regime.
Possible changes include:
- Reducing or abolishing the £3,000 annual exempt amount,
- Changing CGT reliefs, such as Business Asset Disposal Relief (BADR), holdover relief and rollover relief,
- Removing the tax-free uplift of the cost of assets for CGT purposes on death for assets on which IHT isn’t payable, such as where an asset is transferred to a spouse or civil partner or where the assets qualify for IHT Business Property Relief (BPR) or Agricultural Property Relief (APR), and
- Increasing one or more of these current CGT rates:
*Excludes gains on sale of main home, which are subject to CGT exemption.
Example
If the annual exempt amount is abolished and all CGT rates are increased by 2%, a higher rate taxpayer who in a tax year only sells a property that is not their main home with a net gain of £100,000 on which no reliefs are due will pay CGT of £26,000 (26% × £100,000). Whereas under the current rules CGT would be payable of £23,280 (24% × (£100,000 – £3,000)).
It’s unclear what any changes to CGT will be, including potential rate increases and their effective dates. For instance, the government could implement changes immediately on Budget day, limiting planning opportunities. Alternatively, changes could be delayed until the start of the next tax year, encouraging asset disposals before 6 April 2025 to immediately boost government receipts.
Inheritance tax and Autumn Budget 2024
The planned abolition of the non-dom tax regime will have significant IHT implications for those affected.
Other possible changes to IHT include:
- Removing BPR on Alternative Investment Market (AIM) listed shares,
- Abolishing APR for let farms,
- Increasing the proportion of trading/investment activities for BPR from 51% trading/49% investment to perhaps 80% trading/20% investment,
- Reducing BPR or APR rates or capping the relief to a fixed value per person,
- Abolishing IHT relief for regular gifts out of income, and
- Abolishing IHT relief for pension funds on death.
Again, such changes could be immediate, or the Budget could be used to announce a period of consultation before changes are made.
Dividends and Autumn Budget 2024
The Chancellor could target income people receive from dividends through measures such as:
- Reducing the dividend nil rate band: Currently set at £500, this band has already been reduced twice in recent years from the £2,000 threshold that applied in 2022-23,
- Increasing the tax rates on dividend income: At the moment these rates are 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers, or
- Taxing dividends in the same way as earned income.
Pensions and Autumn Budget 2024
In respect of pensions, possible options for the government to raise more money include:
- Introducing a new flat rate of tax relief on pension contributions, at say 20% (the basic rate of income tax) or maybe 25 or 30%,
- Introducing employer National Insurance on pension contributions, and
- Reducing the amount a person can take from their pension pot tax-free.
Example
If a new flat rate 30% tax relief is introduced on pension contributions, for every £100 a taxpayer contributes to their pension HMRC will gross up the contribution to £143:
- Which for a basic rate taxpayer, will be more than the current £125, and
- Which for a higher rate or additional rate taxpayer, will be less than the current £167 or £182 respectively (these rates may be different for Scottish taxpayers and are already subject to possible restrictions).
Expect the unexpected
As with all Budgets, the Chancellor is likely to have a surprise or two up her sleeve. While we can’t predict what these will be, rest assured that once any announcements are made we will be analysing their effects for our clients.
How we can help
If you want to know more about how any of these possible changes will affect you or your business, and potential ways to limit their impact please contact us.
On Budget day (Wednesday 30 October) we will update our website with summaries of the main tax announcements. Also, on the morning of Thursday 31 October we will be hosting a post-budget webinar and several of our offices will be holding Budget Breakfast Seminars.
