The Labour Party’s 2024 manifesto said, ‘We will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.’ The absence of any comment on CGT meant that Rachel Reeves received persistent questions during the election campaign about a possible increase. Unsurprisingly, there was no definitive answer.

At the beginning of August, HMRC published new data about how much CGT had raised. The figures were for 2022/23, when the annual exemption was £12,300 of gains, as opposed to the current £3,000. Nevertheless, they provide some interesting information about who pays how much:

• Only 348,000 people made enough capital gains to pay the tax. That is about 1% of the number of income taxpayers.
• The total amount of CGT paid by individuals was £13.63 billion, with trusts accounting for another £0.797 billion.
• 2,000 taxpayers – less than 1% of all CGT payers (who realised at least £5 million of gains) – paid 41% of all CGT collected from individuals. Another 4,000 taxpayers with gains between £2 million and £5 million paid 16% of the total.
• There was more tax paid in the previous two tax years. Between 2021/22 and 2022/23 the Exchequer’s receipts fell by 15%.

 
That final bullet point deserves an explanation, because it is unusual for tax receipts to fall year-on-year, yet alone for two years. In July 2020, the then chancellor Rishi Sunak, commissioned the now-defunct Office of Tax Simplification (OTS) to review CGT. The move prompted speculation that CGT would be increased, a sentiment that was reinforced when the OTS suggested aligning CGT rates with income tax and sharply reducing the annual exemption. The predictable result was a pre-emptive rush to realise gains, boosting CGT payments.

In the event, Mr Sunak ignored the OTS proposals, although subsequently one of his many successors did take up the idea of cutting the annual exemption. As we wait to see what will be in Rachel Reeves’ Budget on 30 October, the story of CGT receipts may have provided her with an interesting lesson: hints of raising the tax are enough in itself to generate extra revenue.

Since July, it has been illegal for employers to withhold tips from staff. The payment of tips will probably result in a national insurance contribution (NIC) cost for both employer and employees, but this extra cost can be circumvented if a tronc arrangement is used to distribute tips.

The new legislation applies mainly to those operating in the hospitality sector, and covers all tips, gratuities and service charges. It also brings the law into line with modern payment practices as it covers tips left via card payment.

NICs
Tips paid to employees are subject to both income tax and employee NICs. The NIC cost is at a rate of 8% where tips – when added to normal earnings – fall between £1,048 and £4,189 monthly. Employers pay NICs once a monthly threshold of £758 is reached, although their liability is normally reduced by the annual £5,000 employment allowance.

For example, if a restaurant pays out £25,000 worth of tips, the employer will probably be facing an additional NIC cost of nearly £3,500. The cost for the staff could be up to £2,000. This is where a tronc arrangement comes into play.

Troncs
A tronc is an arrangement used to distribute tips. It is run by a troncmaster.

Provided it is the troncmaster who decides how tips are to be distributed among staff, there are no employee or employer NICs on amounts paid out. It is still possible, however, for the tips to be included on the employer’s payroll.

The troncmaster will typically be a member of staff, although larger businesses might prefer to use the services of a specialist provider. There is no problem if the employer makes the decision on who to appoint as troncmaster; what is important is that the employer plays no part, directly or indirectly, in the allocation of tips.
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HMRC’s detailed guidance on tips, gratuities, service charges and troncs can be found here.

Unfortunately, scam warnings have become a regular occurrence. The latest scam highlighted by HMRC is rather ‘old school’, involving letters posted to companies instead of the more usual digital communication.

The scam letters being sent out are quite convincing. They come with a genuine-looking HMRC letterhead, and purport to come from the ‘Indv and Small Business Compliance’ team.

Targeted companies
The scam focuses on the claim that a targeted company is required to verify their income in order to identify any business not declaring their full income. They then request:

• business bank statements for the past 13 months;
• the latest set of filed accounts, including information which – for smaller companies – would not be available from Companies House;
• VAT returns for the last four quarters; and
• for each director, a copy of their passport or driving licence.

 
Scammers can easily use copies of a director’s passport or driving licence to steal their identity for fraudulent purposes, possibly even accessing the company’s bank account.
 
The scam letter uses intimidation tactics, threatening an investigation and a potential freeze on business activity if a response is not received.
 
Spotting the scam
 
These scam letters use correct technical legislation and avoid obvious spelling and most linguistic mistakes that are usually clear giveaways. Two things to bear in mind when looking out for such frauds:
 

• HMRC does usually request information from companies by letter or via a business tax account, rather than by email.However, HMRC email addresses end @hmrc.gov.uk, while the email address used in these fraudulent letters is: [email protected].
• A legitimate HMRC letter will include the company’s unique tax reference (UTR).

HMRC has published a list of their recent letters to help you confirm if a letter is genuine. The list can be found here.

​UK companies paid their investors bumper dividends of £36.7bn in the second quarter of 2024 — an 11.2% year-on-year rise. Take a closer look behind the positive headline, however, and there are some important caveats.
 
Rising dividend payments can reflect economic growth and improved corporate profitability, so should be good news for investors. But analysis of the figures suggests a degree of caution, as these figures include a significant jump in ‘special’ one-off dividends, made in exceptional circumstances.
 
In Q2, there were £4.1bn special dividends — including a whopping £3.1bn payment from HSBC following the sale of its Canadian subsidiary. Excluding these payments, regular dividends were up by just 1%.
 
Dividends aren’t just for income-seeking investors; they can, if reinvested, significantly boost overall returns. Over the last 20 years the FTSE 100 index has returned 65% to investors (or 2.6% a year.) But if this also includes reinvested dividends, total return is 239%, or 6.6% a year.
 
However not all companies pay regular dividends. These payments tend to be made by more mature, financially stable companies, or firms that can generate consistent cash flow. This might include utility companies, banks and oil and gas companies.
 
In contrast, less well-established companies, or those operating in rapidly evolving sectors, tend not to pay dividends. These firms may choose to reinvest profits into the business to drive further growth, rather than returning money to shareholders via a dividend.
 
In the UK almost 90% of the dividends paid are made by the largest listed companies that make up the FTSE 100, with banks making the strongest contribution to dividend growth during Q2. There was also strong growth in dividends from healthcare companies.
 
However, the figures also highlight where economic growth has stalled in recent years, with a significant drop in dividends paid by mining companies, and a fall in payouts from housebuilders.
 
In fact, if the relatively ‘weak’ mining sector is excluded from this year and last year’s figures, dividend growth across the rest of UK market stood at 8.6% — indicating that investors can still find income opportunities in the UK market, despite sector specific slowdowns. 

The student loan repayment threshold for England and Wales has been frozen at £25,000 until 2027, to the detriment of many new university students this September.

Increased numbers of UK students are going to university due to good A-level results and fewer international students, which means this freeze will now affect even more people. 

Repayment
Repayment starts the April after a graduate has left university. So, with a three-year course, this year’s cohort of students will not start repaying loans until 2028 at the earliest:

• Freezing the £25,000 threshold – rather than increasing it in line with inflation or wages – brings graduates into the repayment net earlier than would otherwise be the case.
• After 2027, the government may increase the threshold in line with inflation, but this will still mean a few years of fiscal drag.

 
Under the new repayment rules introduced in 2023, students do not start to repay their student loans until they are earning over £25,000 a year (£2,083 monthly).
 
Once earnings exceed £25,000, repayment is at the rate of 9% on the excess. Interest is added to the loan from day one, with the potential repayment term running to 40 years.
 
Self-funding
Wealthier parents will want to know whether they should be self-funding their child’s university fees and living costs, rather than taking out a student loan. However, the decision is far from straightforward given that the normal debt rules do not apply here.

For example, parents might pay the full cost of university education of approximately £60,000, but if their child never earns more than the repayment threshold then self-funding will have been a massive mistake. The problem, of course, is estimating earnings for up to 40 years into the future.

A compromise strategy is to take the full student loan, and then for parents to look at paying the loan off early after graduation. They would only do so if it looks like their child is going to have a high-earning career. However, this is complex area of pros and cons, depending very much on personal circumstance.
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Guidance on repaying student loans can be found here.

New data from HMRC show there are now more than a million people paying income tax at a rate of at least 45%.
Each year HMRC produces an extensive set of tables about income tax, the source of about 30% of all revenue flowing into the Exchequer. The stats that caught media attention show how many taxpayers are paying more than basic rate (see graph above).

Scotland complicated these tables several years ago by creating 19% and 21% rates alongside the 20% basic rate. In the current tax year, a further complication has been thrown into HMRC’s spreadsheets by the introduction of another Scottish tax rate, the 45% advanced rate. This applies to taxable income (excluding dividend and savings income) between £62,430 and £125,140, the starting point for Scotland’s top rate (increased to 48% for 2024/25). The rest of the UK applies additional rate tax (at 45%) from the same upper level.

Faced with multiplying tax bands, HMRC decided that it would class anyone in the UK paying tax at 45% or more as an additional-rate taxpayer. This pragmatic approach had two consequences just about detectable on the graph above:

• The number of Scottish higher-rate (42%, not 40%) taxpayers fell 11% because some became advanced-rate payers.
• Scottish additional-rate taxpayers increased by 253%.

 
Hike in numbers
The Scottish distortions were not sufficient to alter two clear trends in the graph: a sharp rise since the start of this decade in the number of UK taxpayers who pay higher rate or additional rate (as HMRC defined) tax. The boom in the higher-rate taxpayer population is a direct result of the freeze in the higher rate threshold at the 2021/22 level (throughout the UK), despite the 20%+ surge in inflation since April 2021.

The additional-rate tax story is worse because a £150,000 threshold freeze from 2010/11 was followed by a cut to £125,140 in 2023/24 (and the Scottish ‘advanced’ manoeuvre in the following tax year).

The higher-rate threshold freeze is currently due to end in April 2028, although it is possible that October’s Budget will extend the date – as previous Chancellors have found, threshold freezes are a useful stealth tax increase. The additional rate threshold is fixed, with no prospect of change until a Chancellor decides to act. Suffice to say, such generosity to those with the highest incomes is not top of anyone’s political agenda.

At the time of the last Budget, the Office for Budget Responsibility estimated that by 2028/29 nearly one in five income taxpayers would be paying higher rate and more than one in thirty would be subject to additional rate.
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If you find yourself in, or heading to, higher- or additional-rate tax, it is unlikely any Budget in the next few years will come to your assistance. If the proportion of your income lost to tax in the future reduces, it is much more likely to be the result of careful personal tax planning than any Chancellor’s largesse. To find out more about the range of those planning options and the tax savings you could make, please get in touch.    

With the dividend allowance now cut to just £500, the number of taxpayers paying tax on dividend income for 2024/25 is expected to be double what it was three years ago.

Previously set at £2,000, the dividend allowance was reduced to £1,000 for 2023/24, and to £500 from 2024/25 onwards. This reduction has had the biggest impact on basic rate taxpayers. Just under 700,000 basic rate taxpayers paid tax on dividend income for 2022/23, but this number will leap to nearly 1.7 million for the current tax year.

Tax liability
A modest share portfolio of just over £10,000 yielding 5% will now use up the dividend allowance, leaving the investor with a tax liability notifiable to HMRC. Consider this:

• Notification requires either contacting the HMRC helpline, asking HMRC to collect tax through a tax coding change (if employed), or completing a self-assessment tax return.

• With a basic rate of 8.75% on dividend income, the amount of tax due will often be frustratingly low given the inconvenience involved.

 
The average amount of tax due from basic rate taxpayers is estimated to be £385 for the current tax year; down from £780 three years ago.

Even worse will be where an investor opts for script dividends. These are still taxable despite no cash being received, so tax will have to be funded from other sources.

At the same time as the dividend allowance has been cut, the level of dividend payouts by companies has generally recovered to pre-Covid levels.

Mitigation
If dividend income exceeds the £500 allowance, some mitigating steps might be possible. The obvious move is to make full use of Independent Savings Account allowances for some current, and all future, share investments. Another approach would be to invest for capital growth rather than dividend income. Making use of the dividend allowance of a spouse, partner or an adult child by spreading a share portfolio across the family is another possibility.
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HMRC’s guide to tax on dividends can be found here.

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:

• An immediate end to Winter Fuel Payments in England and Wales, other than for pensioners receiving certain means-tested benefits. (Scotland subsequently followed suit.)

 

• The abandonment of the scheme to cap care home fees in England, previously due to start in October 2025.

 
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.
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 The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.

Promised adjustments to pension law are missing a key element: increasing minimum contribution levels.
The first King’s Speech of the new parliament in July contained proposals for 40 new bills, covering everything from football governance to cyber security. One familiar item on the list was a Pension Schemes Bill. The government’s briefing notes explained that this Bill would largely deal with administrative matters, such as automatic consolidation of pension pots on employment changes. There was one obvious omission, however, that could do more to improve retirement prospects than any of the Bill’s draft contents: increasing the minimum level of contributions under automatic enrolment
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At present, for an employee aged between 22 and State Pension Age and earning at least £10,000 a year, the minimum contribution is set at 8% (3% employer minimum/balance paid by employee) of annual earnings between £6,240 and £50,270 – an effective maximum of £3,522 a year. The earnings range has been unchanged since 2021/22 and the percentage rate fixed since 2019/20.

Levels too low
There is widespread agreement among pension experts that current contributions are too low to provide an adequate retirement income alongside the State pension. The last government accepted this and introduced legislation giving it powers to reduce both the minimum age and lower level of qualifying earnings. However the law has spent nearly a year on the statute book, unused.

Australia’s version of automatic enrolment has a contribution rate that will rise to 12% of earnings next year, all paid by the employer. The Financial Times recently reported that a group of “eight financial services veterans” had sent a letter to Rachel Reeves recommending that the minimum percentage rate should increase by 1% a year until it reaches 15%.

The Chancellor, like her predecessor, is in a bind on contribution increases. Someone will have to pay, which means annoying employers and/or employees when the impact of recent high inflation is still being felt. Raising contributions also hits the Exchequer’s coffers because of tax relief given to contributors.

Just because the government chooses masterly inaction, you do not have to. If you want a comfortable retirement, talk to us now about how much more you could be putting in your pension.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.