October Budget Predictions

 

As the Labour Party gears up for its inaugural budget presentation on October 30, the atmosphere is rife with speculation, particularly around their tax plans. With Chancellor Rachel Reeves staying tight-lipped about their strategy, the public is waiting to see how it follows through on its manifesto promises.

Several taxes could potentially be included in the changes; including capital gains tax, inheritance tax, tax on pensions, employer National Insurance contributions, stamp duty, savings tax, council tax, alcohol duty, and fuel duty. The suspense around potential changes has led to multiple debates.

When is Labour’s Budget?

Chancellor Rachel Reeves is all set to present the British Government’s first Budget to the Parliament on October 30th. Traditionally, the stage is set right after the Prime Minister’s Questions, with the Chancellor beginning the speech at around 12:30 pm.

What will the Budget contain?

There are some items already confirmed by The Chancellor, including:

  • Furnished holiday lettings tax regime abolition
  • Pillar Two: transitional country-by-country reporting safe harbour anti-arbitrage rule
  • VAT on private school fees and removing the charitable rates relief for private schools
  • Tax treatment of carried interest
  • Changes to the taxation of non-UK domiciled individuals
  • Energy profits levy reform
  • Closing the tax gap

Much of Labour’s plans are still relatively unknown. However, ministers have confirmed its manifesto pledge to help “working people”, and ruled out hikes to income tax rates, National Insurance and VAT.

Nevertheless, there’s no guarantee that these taxes will remain untouched. There is speculation implying that the existing income tax threshold freeze, initiated during Rishi Sunak’s tenure as Chancellor in 2021, might continue past 2028, likely up until the conclusion of the current Parliament in 2030.

This potential development could burden families with an excess of £16,500, as more and more employees find themselves falling into higher tax brackets.

Here are some of the taxes that could be in Labour’s sights.

  • Inheritance tax
  • Capital gains tax
  • Employer National Insurance contributions
  • Savings tax
  • Tax on pensions

Inheritance tax

Alterations to inheritance tax may involve changes to the headline rate or tax-free exceptions.

Currently, a “spousal exemption” permits civil partners and married couples to transfer unlimited assets free from the tax.

The Labour Party could potentially choose to cut or lower this exemption, thereby expanding the scope of the inheritance tax. There’s also the possibility of an attack on various relief measures that enable people to distribute their wealth earlier than their death, without the responsibility of paying death duties.

The UK already has one of the highest inheritance tax rates among OECD countries, standing at a substantial 40%. If your estate is worth more than £325,000 upon your death, your beneficiaries will be hit with a hefty charge on everything exceeding this threshold. This nil-rate band has been frozen at this rate since 2009, pulling thousands into the death duty net as house prices have risen.

Forecasts indicate a significant increase in the number of families paying the charge, rising from 33,000 this year, to almost 44,000 a year by 2028-29. In total, nearly 200,000 estates are predicted to pay the tax within the next five years.

Capital gains tax

Capital gains tax is looking more and more like it’s going to be included in Labour’s anticipated tax hikes.

Labour leader, Sir Keir Starmer, has confirmed he won’t levy capital gains tax on a person’s first home, a relief that currently exists. However, tax on any gains above that remains uncertain.

The Times suggests that high-earners selling a second property will continue to pay a 24pc tax, but the 20pc tax on selling shares or other high-value assets could see a rise of a few percentage points.

The uncertainty extends to whether basic-rate taxpayers, presently paying a 10pc rate, are also set for a hike.

Could the Government also revisit the £3,000 entry-level for the tax, which has seen decreases over consecutive tax years under the previous Conservative government? It’s dropped from £12,300 in 2022-23 to £6,000 in 2023-24. Watch this space.

Employers National Insurance contributions

While Labour has stated they won’t increase National Insurance contributions for employees but has left the door open for a rise that would impact employers.

Currently, employers contribute 13.8% in NICs on employee salaries. Imagine if this rate was hiked by just a single percentage point to 14.8% – it could generate an additional £8.5bn annually.

But there’s more. There are suggestions that employer NICs could extend to staff pension contributions, potentially adding another £17bn in revenue for the Treasury. While this cost wouldn’t directly fall on workers, industry consensus suggests that these increases might trickle down, manifesting as lower wages and reduced job benefits like salary sacrifice schemes and enhanced pension contributions.

Savings tax

Uncertainty about the future of the Isa allowance and personal savings allowance is causing a flurry of activity among savers. At present, there is no cap on lifetime contributions to an Isa, with annual deposits standing at £20,000. However, this might change as think-tank, Resolution Foundation, urges the Government to propose a lifetime cap of £100,000 for Isa savings. This proposal primarily affects those with higher disposable incomes.

In addition, interest earned on regular savings accounts can be taxed if it exceeds the personal savings allowance. The allowance stands at £1,000 for basic-rate taxpayers, £500 for those in the higher-rate bracket, while additional-rate taxpayers get no allowance at all. With escalating saving rates, a higher-rate taxpayer can now easily exceed their personal savings allowance with a savings pool of just £10,000.

The combination of these volatile conditions and a frozen tax threshold means that taxpayers are likely to pay a record-breaking £10.3bn in savings tax in 2024-25, according to HM Revenue and Customs, a dramatic rise from last year’s figure. Stay ahead of the curve and protect your savings by making strategic financial decisions today.

Tax on pensions

Labour’s potential changes to the 25% tax-free lump sum are concerning many. There is speculation around the reduction of the tax-free amount to £100,000, a significant drop from the current £268,275. Experts predict that such a move may spark legal challenges and might be operationally complex to implement.

Moreover, there’s a growing fear that Labour could make pensions part of your estate, which could be subject to an inheritance tax upon death. This change could potentially cost families tens of thousands of pounds and could also lower the maximum contribution to pensions without losing tax relief.

The good news is Labour remains committed to the triple lock on state pensions, ensuring it will continue to increase by inflation, wages, or 2.5%. But be warned, under current plans, by 2028, the state pension will exceed the personal allowance and become taxable, potentially leaving some on a fixed income with a significant tax bill.

Labour has yet to reveal plans to shield the state pension from tax, leaving over a million households, whose primary source of income is state pension and benefits, in a state of uncertainty. Stay updated with these potential developments to ensure you’re prepared for any changes.

Update on Private school VAT

Labour is committed to ushering in a new era of educational reform, with plans to remove the VAT and business rates exemption from private schools. This change, set to commence from January 1, 2025, implies that a 20% tax hike will apply to tuition and boarding fees. The seismic shift, announced by Ms Reeves, will also affect fees paid in advance post-July 29.

While it’s projected that most schools will shift these new costs onto fee-payers, which could potentially see some children withdrawn from private education, careful consideration is being given to this potential challenge. This could lead to a reshaping of the educational landscape, but rest assured, Labour is prepared to navigate these changes responsibly.

Moreover, in a strategic move to optimise public spending, Labour is discontinuing the planned Advanced British Standard qualification, a reform put forth by the Tories. This consolidation of A-levels and T-levels is projected to save a substantial £185m in the next year alone. Join us as we journey towards a more equitable education system.

Non-dom status abolished

The government is set to take aim at non-doms by abolishing the status “once and for all” – but perhaps in a more softened way than first planned.

The Tories scrapped non-doms’ special status in the Budget, but Labour had its intention to go one step further and close a “loophole” that allows non-doms to move their money into an offshore trust before the ban comes into place in April 2025.

However, after Treasury officials voiced fears that the measures would backfire if they forced non-doms to leave the country, government officials have said they would consider changing the details of the policy to make it less punishing to non-doms.

Reducing the amount of inheritance tax they would have to pay is one of the options under consideration.

With a convincing mandate and comfortable majority, Labour should find it easy to deliver on these quickly. The Salisbury Convention will also nullify any potential opposition in the House of Lords, as peers do not vote down Bills mentioned in a manifesto.

Can Labour afford all of its plans?

Amidst assertions from Labour that they’ve taken on a £22bn funding gap left by the former Conservative administration, it’s now revealed that the Chancellor is on a quest to generate £40bn to prevent concrete reductions across departments.

The task of bridging this gap will call for a strategic blend of expenditure reductions and tax augmentations.

We’ll keep you updated

As more announcements are revealed we will keep you up to date with the essential news. Look out for our take on the confirmed budget on the 30th of October.