A most anticipated Budget!

Many will have read and heard the new Chancellor, Rachel Reeves, in her pre-election statements and interviews talk about the tax burden. Much was written about the Labour Party’s commitment to working people about not increasing the tax burden on them. In both the pre-election period and since then, the Chancellor has continued with this narrative. Therefore, it is reasonable to interpret that we do not expect Income Tax, National Insurance, or VAT to increase in the Budget on 30th October. However, in a recent podcast interview with the News Agents, the Chancellor stated that taxes will need to increase and this leads to the question of which taxes will have to rise.

Income Tax, National Insurance, and VAT generate around 60% of all tax revenue (£627 billion in 2023/24) and ring-fencing these from any increases puts a lot of emphasis on other taxes to make up the difference. There are a limited number of other taxes sufficiently large enough that any increase in them would make a meaningful difference to the total tax take. For example, these are Capital Gains Tax (CGT), Inheritance Tax (IHT), and pension tax relief.

Although other taxes could be changed, they are unlikely to make enough of a difference to the overall tax take to make worthwhile.

So, let’s look at what MIGHT happen in the budget and how any potential changes may impact you.

Capital Gains Tax

Currently, when anyone sells an asset for a profit, there will a tax charge (on the profit) at either 10% (for basic rate taxpayers), or 20% (for higher & additional rate taxpayers). There are special rates when someone disposes of property of 18% and 24%, respectively. There is an annual exemption of £3,000 per person, but this does not make much of a difference if the profit from the disposal is more than a very modest one. The Institute for Public Policy Research (IPPR) previously suggested that aligning CGT rates with Income Tax rates would raise an additional £12 billion a year. This would see a return to the position that prevailed between 1988 and 2008, where capital gains were taxed at the same rates as income. This was originally introduced by former Conservative Chancellor Nigel Lawson, and then revoked by former Labour Chancellor Gordon Brown.

If these changes were introduced, this would see the highest rate payable on capital gains increasing to 45%, and likely to impact anyone selling a buy-to-let property, significant quantities of shares or other taxable investments, or anyone selling a business once they had made full use of their Business Asset Disposal Relief, formerly known as Entrepreneur’s Relief.

Should this alteration go ahead, this would see capital gains and income would be taxed at the same rate for the first time in 16 years, which is a significant change. Even on present trends, CGT is expected by the Office of Budget Responsibility to raise around £24 billion a year by 2028/29, so whatever happens, this is big money.

Inheritance Tax

Inheritance Tax (IHT) is charged on all assets a person owns that are not exempt, and that are over the value of available allowances. Everyone is entitled to have up to £325,000 worth of value in their estate before paying the tax (£650,000 for a married couple), and there is also a further £175,000 per person (£350,000 for a married couple), where the family home is left to a child or grandchild. All assets above this level are taxed at 40%.

Whilst it does not seem likely the headline rate of IHT will change, exemptions are likely to remain frozen until 2028, meaning they will not have increased since 2009. This means an ever-increasing number of estates will become obliged to pay IHT as the average estate size increases, but the allowances remain unchanged.

In addition to the above, there is the possibility of some reform to Business Relief and Agricultural Relief. These allow businesses and farmland to pass down to beneficiaries free of IHT. The Institute for Fiscal Studies has proposed this, and this all points towards IHT becoming a greater share of overall taxation as time passes.

Pension Tax Relief

Pension contributions made by an individual (as opposed to being paid by their employer) benefit from tax relief at their marginal rate of income tax. In other words, if you contribute £10,000 into your pension from income that has been taxed at 40%, you get 40% income tax relief on the contribution. The net effect is to ensure any money placed into a pension has effectively entered the pension fund with no tax deducted. Income Tax is then levied when the money is later withdrawn and spent in retirement.

There are many reports the Chancellor is considering introducing a flat rate of pension tax relief for everyone at 30%. This would be a bonus for basic rate taxpayers who would normally only receive 20% relief but would penalise higher and additional rate taxpayers who had previously received 40% or 45%. When considering the Autumn Budget tax implications, this is a big area for reform, as pension tax relief results in £50 billion of tax rebates annually from the government to pension investors.

What Next?

Whilst there is not much anyone can do to change the course of events set by the Chancellor, it is always possible to react to them in a constructive manner. Financial planning is at the heart of this and allows an investor to plan ahead with confidence. If you would like to discuss any of this with your financial adviser, please get in touch. We will provide a comprehensive summary report of the Budget when it is announced at the end of October.