Rachel Reeves will deliver the first UK Budget by a Labour Chancellor for 14 years on 30 October. In this, she will set out the financial priorities for the new government that was elected in July.
The first Budget statement of any incoming government is often impactful, and it’s unlikely this one will be any different.
For one thing, much of the publicity around this Budget has centred around the £22 billion “black hole” Labour has accused the previous government of leaving.
As a result, it is already likely that Reeves’ statement will reference spending cuts and tax rises to plug this gap. This will be in in addition to the measures already announced, such as the cancellation of some infrastructure projects, and the means-testing of the Winter Fuel Payment.
Then there are the government’s own spending plans, with the clear pledges they have made to reform and rebuild public services.
In their manifesto, the Labour Party pledged that there would be no increases in:
- National Insurance contributions (NICs)
- Income Tax
- VAT.
However, they have made no such commitments with regard to many other taxes.
While we don’t know what changes will be announced when the Chancellor delivers her speech, in this article, you can read about three potential changes, and how each of these could affect your financial planning.
1. The new Chancellor may make changes to Inheritance Tax
Statista confirms that £15.4 billion was raised through Inheritance Tax (IHT) in the 2023/24 tax year. Although this was down on the 2022/23 figure, it was still the second-highest amount ever.
Despite it being seen as an emotive issue, with references to “death tax” common, IHT is one area where the new Chancellor may look to raise revenue.
This is especially the case given that, according to a report published by the Institute for Fiscal Studies, (IFS) only 4% of estates had an IHT liability in 2022/23.
There are several changes that the government could make from increasing the current IHT rate of 40% or reducing the current threshold of £325,000.
According to IFS, even simply removing some exemptions such as pensions and homes passed to direct descendants could raise as much as £4.5 billion in additional revenue.
The likelihood of changes being made highlights the importance of your legacy planning and taking steps to mitigate the IHT liability on the value of your estate.
2. Capital Gains Tax rates could be equalised with Income Tax
Capital Gains Tax (CGT) is charged on the profit you make on the sale of assets such as additional properties to your main residence, and shares and funds outside an ISA.
Equalising CGT and Income Tax rates would appear to be one potential option the Chancellor could be considering. Indeed, The Guardian suggests such a move could raise over £10 billion, and the Daily Telegraph believe it could be even higher at £16.7 billion.
For example, if you are a higher-rate taxpayer, your current CGT rates are 20% for profits above £3,000 from investments, or 24% for additional property sales. So, raising both of these to 40% would certainly appear to be a lucrative source of revenue.
For the Chancellor, there is a political precedent to do this, as a previous Conservative Chancellor, Nigel Lawson, did the same in 1988. As with IHT, it could also be seen as a low-impact move as, according to the government website, only 369,000 people paid CGT in 2022/23.
However, the danger inherent in such a move is that behaviours may change, and the increased revenue to the Treasury may not be anywhere near as much as expected.
For example, you may be tempted to hold on to assets rather than actually sell them and make better use of tax-efficient wrappers such as ISAs.
In the event of tax rates being equalised, you may want to consider changing your income and investment strategies to mitigate the effect of higher rates of tax.
3. Pension tax relief could be adjusted to reduce the cost to HMRC
The only references to pensions in the Labour Party manifesto were a pledge to maintain the annual “triple lock” increase in the State Pension, and a commitment to carry out a pension review to “improve outcomes”.
Despite the current lack of stated intentions, the new government have some big decisions to make regarding pensions policy.
Furthermore, the Chancellor may well see pension tax relief as fertile ground on which to look to reduce expenditure, with Corporate Adviser reporting that it cost the government over £48 billion last year.
One option widely rumoured, is to create a single rate of tax relief of 30%, rather than the current situation where you can claim relief at your marginal rate of tax. The Week suggest this move could save the treasury £2.7 billion a year.
It would certainly make pensions a highly attractive long-term savings and investment option if you are a basic-rate taxpayer. However, if you pay a higher rate of Income Tax, it may act as a disincentive to make pension savings, as you would effectively be penalised both when contributing and on withdrawal.
Given this potential change, if you are considering making a substantial pension contribution as a higher- or additional-rate taxpayer you may want to prioritise this to ensure you maximise the tax relief you are eligible for.
It will be important to keep a close eye on what measures are announced in the Budget
This could be one of the most impactful Budgets for some time, with big potential changes that could affect your finances and financial planning.
You should also be aware of when any change or new proposal that could affect you will come into force.
Traditionally, most Budget changes relating to taxation usually apply from the start of the following tax year. However, with this Budget being at the end of October, rather than in March, you may see some measures take effect immediately.
As a result of this, you may not have much notice and may need to react quickly to mitigate the effect changes could have on your future plans.
Get in touch
If you have any questions, or concerns, about how the Budget could affect you, please get in touch with us.
Please note
The value of your investments 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.
This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.
All contents are based on our understanding of HMRC, which is subject to change.
