After 14 years of Conservative rule in the UK, Labour took over in July. There have been questions about potential changes to taxes since then.
Labour has ruled out increasing income tax, national insurance contributions (NICs), and VAT, but they haven’t said anything about pensions, Capital Gains Tax, and inheritance tax (IHT).
On the Monday after the general election, Rachel Reeves announced that she had instructed Treasury officials to assess the state of public finances. The results, promised by the summer recess starting on 31 July, revealed a projected overspend of £21.9bn for 2024/25, with offsetting measures amounting to £5.5bn, leaving a gap of £16.4bn. For 2025/26, the offsetting measures are forecast to deliver £8.1bn in savings, but the spending figures will have to await the first part of the Spending Review due alongside the Autumn Budget.
What Might Rachel Reeves’ Do?
On Monday, Rachel Reeves said that the Budget will involve making tough decisions about spending, welfare, and tax to meet our financial rules. She also confirmed that the Labour Party will keep their promise not to raise National Insurance, Income Tax, or VAT rates. However, in a later interview, Reeves mentioned that she thinks taxes will need to be increased in the Budget.
The Autumn Budget, scheduled for 30 October, will be crucial. Given Labour’s commitment to not increase direct rates for income tax, NICs, and VAT, other measures might include:
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Freezing or reducing thresholds: Fiscal drag remains a possibility. For example, ignoring 2% inflation on the personal allowance and basic rate limit for two additional years could yield £3.4bn by 2029/30.
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Income tax on non-earnings income: This could include aligning dividend tax rates more closely with earnings tax rates.
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Changes to the personal savings allowance (PSA): Scrapping it and reinstating a 20% tax deduction at source could be a potential measure, given its current cost of £810m.
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Capping ISA investments: Although Rachel Reeves previously expressed support for the UK ISA, a cap on total investment might be introduced.
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Adjustments to VAT thresholds: Lowering the threshold, as suggested by the Resolution Foundation, could also be a revenue-raising move.
Capital Gains Tax
Speculations about potential increases in capital gains tax (CGT) rates have been circulating in the media. However, it is believed that these changes might lead to behavioural shifts among investors, resulting in a reduction in tax revenue, according to HMRC projections. Some experts, such as the Resolution Foundation, suggest that aligning CGT rates with income tax rates could lead to a significant increase in revenue.
Additionally, there are proposals to save £1.5 billion annually by scrapping Business Asset Disposal Relief (BADR). Another potential reform involves applying CGT on death or removing the uplift in value on inheritance, which could impact a larger number of estates compared to the current inheritance tax system.
Inheritance Tax
The inheritance tax (IHT), which was not mentioned in Labour’s manifesto, could be a potential target for reforms. It is projected to yield £7.5bn in 2024/25. Making changes to business and agricultural reliefs could lead to significant revenue, for example, stopping business relief for AIM shares could save £1.1bn every year. Limiting reliefs to a transferable £500,000 per person could initially raise £1.4bn, with the potential to increase over time.
Pensions
The Institute for Fiscal Studies (IFS) recommends including pension death benefits in the inheritance tax (IHT) and taxing funds withdrawn by dependents at least at the basic tax rate. These measures could initially generate small revenue, but that revenue could increase over time.
Housekeeping Tips
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Inheritance Tax (IHT): Labour might adjust IHT rates or reliefs. Make decisions based on your circumstances and seek appropriate advice.
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Gifting: If you’re planning to make significant gifts to your family, now might be a good time.
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ISA Allowances: Keep funding your ISAs before the Budget, as Labour might reduce or withdraw allowances.
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Pension Contributions: With the potential for changes to pension tax relief, consider making contributions soon. Labour might restrict tax relief to the basic rate.
Labour has also announced that VAT on private school fees will apply from January 2025, including pre-paid fees from July 2024.
Patience Pays