To tax or not to tax

Rachel Reeves’ upcoming Budget on 30^th October, will be the Labour Party’s first since 2009. With a £22 billion fiscal deficit to address, it is expected the government will introduce tax reforms and spending cuts, some of which will impact personal finances. One key question will be when any new measures will take effect. While most tax and financial measures introduced in a UK Budget typically take effect from the start of the next tax year (April 6), there is precedent for changes to be implemented immediately from Budget Day itself.

The Labour manifesto pledge not to “increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT” leaves many of the taxation levers off-limits. This has led to high levels of speculation surrounding what the Chancellor might announce, and we have summarised below the most relevant expected changes.

Capital Gains Tax (CGT)

It is widely anticipated that capital gains tax rates will increase, potentially aligning with income tax rates, rising from 20% (24% for residential property) to as much as 45% for high earners. This would primarily affect individuals with significant investments outside of the main tax wrappers such as pensions and ISAs. Given that CGT is a transaction-based tax, such measures could have unpredictable effects on the property market.

There is speculation that the Business Asset Disposal Relief (BADR) lifetime limit may be increased if the main rate of CGT rises sharply. However, the effective rate of BADR, currently at 10%, is expected to remain unchanged, offering some relief to business owners despite broader tax increases.

Inheritance Tax (IHT)

Changes to inheritance tax are also likely, particularly targeting the reliefs which currently apply for business and agricultural property, including the IHT exemption applying to AIM-listed shares, which may be capped or restricted. Any such changes would naturally be a concern for business owners.

With the wider IHT tax rates and rules having been relatively stable for many years, there is also the potential for broader reform and/or simplification of the current rules.

There is also the possibility of broader IHT reforms, especially the removal of the IHT exemption for pension funds passed on as a death benefit. This change could prompt individuals to reconsider how they draw on their pension and other assets, as pension funds may become liable for IHT.

Pension Tax Relief and Tax-Free Cash

Pension tax relief is expected to be reformed, possibly introducing a flat relief rate of 30%, which would impact higher earners the most, while benefitting basic rate taxpayers. Another possibility is imposing a monetary cap on the amount of tax relief available, capping the national insurance exemption for employer pension contributions – a measure which might disproportionately impact small business owners.

There is some hope, in that limiting income tax relief on contributions to a fixed rate seems like a simple idea, but one that will be difficult for HMRC to implement, and doing so would likely make the tax system yet more complicated. On this basis, it seems unlikely that any change would take effect from 30^th October. Nevertheless, prudence suggests that anyone who is considering making a significant pension payment, should do so prior to the budget.

Concerns have also been raised about the future of the pension tax-free cash sum, which allows retirees to withdraw 25% of their pension pot tax-free, up to a maximum allowance. Although there has been speculation about reducing this percentage or capping the maximum sum, we believe that it is unlikely the government will make any sudden, drastic changes.

Any policy change that reduces the tax efficiency of pensions risks discouraging long-term savings and damaging the public’s trust in the pension system, a move which would be at odds with the government’s recently announced Pensions Review. Unexpected shifts in pension rules would also unfairly impact those who have planned their retirement in good faith under the current system, for example those relying on their pension lump sum to pay off a mortgage.

This would again suggest, at worst, a delayed implementation in tandem with some form of transitional protection for funds built up under the “old” rules, similar to what we saw with the introduction of the lifetime allowance in 2006 (coincidentally, also brought in by a Labour government).

Fiscal Drag and National Insurance Contributions (NICs)**

While Labour has committed not to raise NICs, income tax, or VAT, the freeze on income tax thresholds until 2028 will pull more taxpayers into higher tax brackets through fiscal drag. This is an effective, less controversial way to raise revenue without directly increasing tax rates. The government may choose to extend this freeze.

VAT on Private School Fees

Labour’s plan to impose VAT on private school fees, starting in January 2025, will increase costs for families using private education. The Independent Schools Council (ISC) reported last month that some members have already seen a 4.6% fall in Year 7 pupils enrolling for the new academic year. This remains an evolving story at the time of writing, with many parties currently calling for the implementation of VAT to be delayed, and we continue to watch with interest.

Property Taxes

Property taxes are also expected to rise, with Labour proposing a 1% increase in the stamp duty surcharge on overseas buyers of UK residential properties. Council tax revaluation, long overdue since the last update in 1991, may also be on the cards, a measure which could ease pressure on local government finances. However, the resulting higher council tax bills would be universally unpopular.

Potential Wealth Taxes

While Labour has ruled out a specific wealth tax, they may reduce the availability of existing tax reliefs. For instance, there has been speculation about applying a lifetime limit to ISA savings. More divisive would be any measure to restriction the CGT relief which applies to the sale of someone’s main residence – but applying a cap on this relief (e.g. at £1m of gain) could be a way for the chancellor to raise revenue, albeit at the cost of further distorting the property market.

Conclusion

Almost immediately following their election, the new government began to emphasise the need to strengthen the nation’s finances. The decision to delay the timing of their first Budget until after the autumn party conference season, with the message that tax rises are on the way, appears to have had the unintended effect of sending the rumour mill into overdrive.

The lack of any firm information means that taking pre-emptive action carries its own risks and should be carefully considered in the context of individual circumstances. When taxation rules change or are anticipated to change, Connor Broadley’s financial planners can help clarify any potential impact on your personal finances and provide insight into their long-term impact on your financial future.

We will be keeping an eye on the news on the 30^th for what could prove to be a more interesting budget day than normal and will report back soon afterwards when speculation has hopefully become fact. Watch this space.