What could the forthcoming budget mean for your taxes?

New taxes are on the horizon! That’s one of the major headlines that has been gripping the UK in recent weeks. Fears of rising taxes are increasing, while the new government seeks to plug the billion-pound holes in the fiscal framework left by the previous administration. Prime Minister Keir Starmer reiterated the possibility, explaining in a recent speech that the next budget would be ‘painful.’ How worried do you need to be? This article will seek to investigate that question, examining which taxes will be raised, whom this could impact, and what this will do fiscally for the government’s budget.

What’s the situation?

Giving a speech in the Downing Street Garden on the 27th of August, the Prime Minister further hinted at the implementation of tax rises in the Autumn Budget. In a sombre and bleak tone, he noted the ‘unforeseen ￡22 billion black hole’ left in the budget by the previous government, asking those with the ‘broadest shoulders’ to bear the brunt and weather the measures necessary to reset the government’s fiscal ability.

This reversal has come as a surprise to many. A major sticking point of the Starmer campaign was that their plans were fully funded, having checked once, twice and thrice to ensure that there wouldn’t be any major tax rises. Why then, are we talking about increasing tax? The reason for this appears to be, as the Prime Minister illustrated in his speech, the ￡22 billion black hole in public finances inherited from the Conservatives that was discovered during the first few weeks of the Labour government. Explaining how this arose, the Chancellor pointed towards overspending by the Conservatives, among other things in asylum-related matters such as the Rwanda Scheme, the transport budget, as well as unfunded military assistance to Ukraine. In fact, she explained that borrowing was almost ￡5 billion higher than the Office for Budget Responsibility had expected, in the first few months of the first financial year. As such, measures need to be taken to stem the rise of borrowing costs and reduce government debt.

Many of these measures will seek to eliminate bureaucratic and diplomatic waste, tossing out various programs from the previous government. There are a range of things being cut from transport programs gone, such as the Stonehenge tunnel, to a review of Boris Johnson’s hospital program. The latter program has been especially controversial, since despite a plan of building 40 new hospitals, only 11 of the planned sites were actually new builds, and since the announcement, only 1 has been built and only 6 more are under construction. Other programs such as the Rwanda Plan, the Illegal Migration Act 2023, as well as the ‘Advanced British Standard’, the A-Levels reform plans, which sought to ensure every student did English and Mathematics until age 18, are to be scrapped. Government departments are also going to be required to make around ￡3 billion in cuts. Nevertheless, ending these programs won’t cover the whole cost, and some sacrifices will need to be felt by the public.

In his speech, Starmer describes the approaching October Budget as painful, asking the country to ‘accept short-term pain for long-term good.’ One should note that several hypothetical tax rises have already been ruled out by the chancellor, with Labour having promised to ‘not increase taxes on working people’. This means there won’t be any increase in income tax rates, national insurance or value-added tax. Rather possible tax rises will more likely appear in the forms of capital gains, inheritance and large pensions / pension contributions, targeting those with the ‘broadest shoulders’.

Non-Doms

A crucial battle-cry of the Starmer and Reeves election campaign was that of non-dom taxation. Reeves has been vocal about wishing to better tax non-domiciled individuals since 2022, especially in light of the revelations of former Prime Minister Rishi Sunak’s wife holding this status. This rallying cry was somewhat muted by the Tories ‘getting there first’, with Jeremy Hunt setting out provisions for the abolition of the status.

The Tories, prior to the election unveiled their strategy for ending non-dom status, nevertheless this plan which is since being reworked by the new government. Details of this can be found on the Treasury website here.

Capital Gains Tax

Capital gains is one of the taxes that hasn’t yet been ruled out for an increase by Chancellor Rachel Reeves. This therefore may be a window that Labour will seek to utilise to raise funds. While we won’t know the exact rates until the 30th of October, many working in the City are fearing an equalisation of the maximum rate of capital gains tax with the highest rate of income tax, lifting the former from 28% to 45%. According to the Institute of Fiscal Studies, this could raise ￡16.7 billion. Note, however, that this is the most radical option.

Nevertheless, even HMRC has noted that that figure is presumptuous and unlikely. This is since such an increase may stifle investment, especially in higher risk venture-capitalist innovation. Many large companies, from Zoopla, to Airbnb to Netflix were created through high risk, high return investment opportunities which likely would be muted or at least significantly inhibited if capital gains tax is put in line with income tax. Fundamentally, according to AJ Bell, putting taxes up to such an extent may backfire and may actually work against the government plans.

Pensioners

Pension taxation is one area that may be an attractive opportunity for Reeves to make cuts and increase taxes. The cost of pensions income tax and national insurance relief sat at around ￡48.7 billion in the 2022-23. Thus, the chancellor may seek to use her government’s status as fresh-faced, with another election not to come for five years, to impose measures on pensions to reduce that liability and fill the black hole.

Keir Starmer, speaking with Laura Kuenssberg on BBC One, explained that his government is ‘prepared to be unpopular at the moment’. The new Labour government is now five years away from a next election campaign, as well as commanding a large majority in the Commons. This means they have a level of political stability that they can utilise to put through measures that appear unpopular without attracting too many repercussions.

There are a number of measures that may be potential options for the chancellor. These could include reintroducing the Lifetime Allowance on pension savings, a measure that Jeremy Hunt scrapped two years ago. Further, it will consider cutting the rate of tax relief on contributions, while also imposing a maximum on the national insurance contribution exemption from employer pension contributions.

One other speculated measure could be capping pension lump sum withdrawals. Once you have embarked on retirement, you are able to currently take 25% of your pension as a tax-free lump sum. Now, most likely this won’t change, as this would cause a national outcry, forcing many pensioners to completely revamp their retirement planning. What may be reduced is the maximum you can take tax-free. Currently, you can’t take as a tax-free lump sum, more than 25% of the former ￡1,073,100 Lifetime Allowance, so ￡268,275. The Chancellor may consider tightening the screws here, reducing this amount.

Inheritance Tax

There may be some changes coming to the inheritance tax regime. Importantly, the rate of tax presumably won’t change as, standing at 40%, it is already incredibly high. What is more likely is that the Chancellor will look to play with allowances and seek to close loopholes. In terms of how IHT currently works, there is a 40% tax rate which is applicable to anything inherited from an estate that is over the personal allowance. The personal allowance currently sits at ￡325,000. There are a number of exceptions. For instance, no tax is liable when leaving everything above the allowance to your spouse or a charity. Moreover, your threshold can increase to ￡500,000 if you are giving your home to your children or grandchildren. Notably, in part due to these exceptions, only 4.39% of estates incurred in an IHT liability in the 2021/22 tax year.

What the government may consider is to try and close loopholes in the inheritance tax. According to the AJ Bell’s personal finance director Laura Suter, this could include ‘cutting allowances or whittling away certain reliefs to increase the amount some estates pay.’ The Institute for Fiscal Studies has explained that such measure could raise around ￡4 billion.

Income Tax

The Prime Minister has ruled out an increase in income tax. What hasn’t been ruled out however, is an extended freeze in income tax thresholds. The reason this is important is that this may still lead to a bigger tax bill for many, even if the actual thresholds aren’t changed. This is due to a process called fiscal drag. Fiscal drag occurs where frozen thresholds increase a person’s taxable income without the tax rates actually increasing, as wages increase. This referred to by many as a ‘stealth tax’ i.e. a way of taxing people without actually increasing a tax. It ends up ‘dragging’ more people into higher tax brackets as their wages increase. It has been a very popular method in recent years.

According to a report in March by the Office of Budget Responsibility, continued tax freezes could create many more taxpayers as a result of fiscal drag. Namely, by the year 2028/29, there will be 3.7 million more taxpayers overall due to the effects of the phenomenon. There will be 2.7 million more higher rate band taxpayers and 600,000 more people in the additional rate bracket. If the tax thresholds were to stay frozen until 2028/29, this will have brought, since 2021, around ￡41 billion of revenue for the Treasury. One should note, however, that this line of reasoning is hypothetical, and the government has not yet released any plans to further freeze tax thresholds.

Stamp Duty

A potential tactic for the chancellor would be to change the Stamp Duty rules, i.e. the amount of tax you pay on the value of a property when buying it. Currently, this is between 5% and 12% depending on the value of the property, with a tax-free threshold of ￡250,000, or ￡450,000 for first time buyers. These were rates temporarily set by the previous Conservative government in 2022, however they are due to expire in April 2025 and fall back down to ￡150,000 and ￡300,000 respectively. Labour in its manifesto said it didn’t plan to extend the relief further. However, it is always possible that, now having discovered the public finance black hole, that these rates may come down sooner.

What will these changes mean for the country?

Naturally, we can’t be sure of which tax rises will and won’t be implemented until the Chancellor sets out her agenda in the Autumn Statement in October. Nevertheless, many are already worried about the proposed changes. Significant concern surrounds the impact the tax rises will have on investment in the UK. The UK is still suffering from the effects of various crises and political happenings, from the austerity policy agenda under George Osborne to Brexit, to the pandemic. Investment is down in the UK, with many worried that the tax rises will stifle this prospect. With CGT for instance, some advisers and accountants have notioned that a rise, put in place from the new tax year could attract some short-term revenue but may have the more detrimental income of stifling investments in the long term and disrupting market conditions.

In terms of public support, the picture is somewhat scrambled. While Britons show overall support for rises in the top rate of income tax (58%) and in corporation tax (56%), when asked about tax rises generally, only about 15% came out in favour.

To Conclude

Tax rises are going to be announced in the Autumn Budget, which will change much of our taxation landscape. How this will look in practice is still unclear, with the government still assessing its options and keeping their cards very close to their chest. However, it is most likely that higher earners or those with above-average assets that will be hit the hardest. The Prime Minister has asked those with the broadest shoulders to bear the brunt, raising fears about stifling investment especially in the context of a currently stagnating economy. A black hole of ￡22 billion in the government’s finances is worrying, yet the government needs to ensure it has voter’s interests at heart to prevent further hardship up and down the economic scale.