Rachel Reeves’s first Budget will be on Wednesday 30 October.
“I have to tell the House [the] Budget will involve taking difficult decisions to meet our fiscal rules across spending, welfare and tax.” The Chancellor’s ‘Public Spending: Inheritance’ speech to parliament at the end of July was designed to prepare taxpayers for changes to come. To make sure the message was clear, she also revealed “A £22bn hole in the public finances now – not in the future.” The new Chancellor took immediate action to start filling the hole, including cancellation of road and rail projects and ordering departments to stop all non-essential spending on consultants. There were also two notable expenditure-saving measures:
The next stage of strengthening the government’s finances will be unveiled in the Budget on 30 October. Even before Ms Reeves had discovered the £22 billion hole, think tanks such as the Institute for Fiscal Studies had forecast the first post-election Budget would see taxes rise (as they normally do). The not so usual suspects? So where might the Chancellor look for some much-needed cash? Her party’s manifesto said, “Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.” However, as the previous government demonstrated, a ‘rates’ pledge leaves scope for creativity elsewhere, such as freezing or even reducing thresholds. In her July statement, the relevance of the manifesto’s reference to ‘working people’ was made clear by the surprising welfare cuts that primarily hit pensioners. At present Reeves’s most likely targets appear to be: Capital gains tax (CGT) The Labour manifesto made no mention of CGT. Several think tanks and the now defunct Office of Tax Simplification have floated the idea of bringing CGT rates in line with income tax, meaning that the maximum rate in most circumstances would rise from 20% (24% for residential property) to 45%. Inheritance tax (IHT) There are some obvious targets to add to Treasury receipts in this area. Business and Agricultural reliefs mean that the average effective tax rate on the largest estates is lower than that on more modest estates. Scrapping those reliefs, or capping their value, would affect only a few estates, but could produce meaningful extra revenue. Another exemption that could disappear – and affect many more people – is the current general exclusion of pension pots from IHT calculations. Tax relief on pension contributions Right now pension contributions attract income tax relief (within limits) at your marginal rate(s) of tax. That can be as high as 60% (67.5% in Scotland) in the income band where the personal allowance is tapered. Replacing the marginal rate relief with a flat rate relief is a commonly suggested reform. If Reeves were to choose a 30% flat rate, most taxpayers would be better-off and the Exchequer would gain an estimated £3 billion a year. If you think any of these potential changes could affect you or you are considering other areas of tax planning, do seek advice as soon as possible. In some circumstances pre-Budget action may be advisable, but in others (such as pension contributions if you are a basic rate taxpayer), procrastination could be the wisest option. The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change. Comments are closed.
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