What should we expect in the Autumn Budget?
Put this date in your diary: Wednesday, 30th October 2024, the first Labour government budget since 2009. While there is speculation and counter-speculation about what we can expect in the budget, the government will need to make some difficult decisions. These could impact the short-term popularity of Keir Starmer, but with a five-year term, the idea must be to improve the economy and personal finances by the next election.
At this moment in time, there hasn’t been any confirmation of policies to be announced in the budget, but slowly, the mist is starting to clear, and a degree of expectation is emerging. But how might this all impact personal finances?
Pre-election promises
Before we look at potential changes in the short to medium term, it’s interesting to look back at pre-election promises from the main political parties. In a means to deflect any obvious attacks from the Conservative party, Keir Starmer confirmed that his government in waiting would not increase:-
- Income tax
- National insurance
- Corporation tax
- VAT
However, an interesting proviso is emerging. The term "for the working class” is now being mentioned in tandem with a promise not to increase taxes. Does this mean that the government will be looking towards the middle class and more wealthy groups of society?
The Labour government was abundantly clear on one thing: much fairer wealth distribution, although how that might be achieved remains to be seen.
State of UK finances
It is fair to say that upon entering 10 Downing Street, Keir Starmer and his colleagues found a financial balance sheet that was “challenging”. Since day one, we have heard suggestions of a £22 billion budget black hole, which must now be wider after recent public sector pay awards. While we’re still some weeks from the budget, already, the government appears to be preparing the UK electorate for a tough and mostly unpopular budget.
To balance out the argument, many political observers are now questioning whether the constant reference to an inherited budget problem could be time better spent revitalising the economy. Whatever the “real” situation, we know that UK finances are not in the best of places at the moment.
Potential tax changes in the Autumn Budget
The recent adjustment to the winter fuel allowance will save a relatively modest £1.4 billion by reducing eligibility from 11.4 million to just 1.5 million people. Whatever your personal views on this action, it is confirmation that the Labour government is, even at this early stage, willing to make unpopular decisions. Was this a deliberate move to put more space between the current Labour government and the often criticised financial policies of years gone by?
Turning now to speculation regarding the contents of the Autumn Budget, we have listed four main topics below and summarised the impact of fiscal drag (the invisible tax rise).
Pension contribution tax relief
Pension contribution tax relief will likely be a major target of the new government at some point. While the tax relief goes into your pension fund, increasing your pension pot and benefiting the economy in the longer term, it comes at a cost. In the 2022/23 tax year, HMRC revealed that relief on pension contributions cost the government £48.7 billion. Even if the long-term benefits of this “investment” are impressive, it does come at a significant short-term cost.
Consequently, it is believed that the government is looking towards a flat rate for pension contribution tax relief and perhaps reducing the current £60,000 annual limit. While opinion is divided, with some suggesting a flat rate of 20%, the consensus is that it is more likely to be nearer 30% (if they go ahead). This should be sufficient to encourage high earners to continue saving for their retirement while reducing the cost to the government and taxpayers.
Tax-free cash entitlement
Pension tax-free cash, a flat 25% in the early days but later limited, is further complicated by a change of government mid-pension regulation adjustments. What used to be simply tax-free cash is now called the Lump Sum Allowance (LSA), with a maximum payout of £268,275. Interestingly, several experts have noticed that after the abolition of the lifetime allowance, the LSA is not directly linked to any existing pension legislation. Could this technicality open the door to a reduction in the maximum LSA or even the 25% rate?
While there is no concrete evidence of impending adjustments, we know that changes to pension taxation would produce a significant windfall, especially by focusing on high-income earners. Does this play into the wealth distribution agenda upon which any tax changes will likely be based?
Inheritance tax
The inheritance tax nil rate band was frozen at £325,000 in the 2009/10 tax year and has remained at this level ever since. Before the change in government, the freeze was extended to the 2027/28 tax year. Consequently, estates valued above £325,000 will see a tax of 40% on excess assets, proving to be a very useful source of income for the government. To put this into perspective, if the tax band had been increased in line with inflation, then today, it would stand at £502,433, a rise of £177,433.
While it’s important to appreciate that the previous government also brought in a residential nil rate band of £175,000, this does not apply to all estates. So how might the Labour government increase inheritance tax income?
They could reduce the nil rate band allowances, increase the tax rate, or change certain reliefs to increase tax liabilities. There has been speculation that we could see changes in inheritance tax relief on agricultural property, which currently stands at 100%, i.e., tax-free.
While many are concerned about potential moves by the Labour government, it's essential to recognise that inheritance tax income has already increased from circa £2.7 billion in 2010 to £7.1 billion in the tax year 2022/23 and is forecast to hit £9.7 billion by 2028/9. Ironically, these projections could be outdated, and the receipts could be even higher.
Capital gains tax
Even though the Conservative party is more associated with a capitalist approach to finance, recent changes to the capital gains tax (CGT) allowance have gone against that grain. We have seen the allowance reduced from £12,300 per annum to just £3000. While there has been a slight reduction in CGT rates for higher-rate taxpayers, more people are expected to pay CGT over the next few years.
Basic rate taxpayers currently pay 10% CGT on investment gains and 18% on the sale of additional residential properties, with higher rate taxpayers paying 20% and 24%, respectively. There is speculation that the government may abolish CGT and go back to the system of years ago, where gains were added to your income and charged at the relevant income tax rate. However, many experts believe this does not fit the Labour government’s central vision for economic growth and could impact private investment flow into UK companies.
Research also suggests that CGT is one of the most inefficient tax streams and is susceptible to manipulation. Consequently, a token gesture of abolishing CGT could be undermined by switching investments into pension funds and other tax-efficient investment vehicles.
Fiscal drag
In recent years, we have seen the former government using what is known as "fiscal drag" to increase tax revenues without increasing tax rates. In what some would describe as smoke and mirrors, the thresholds have been frozen, moving away from the traditional path of increasing tax bands in line with inflation. As this historical increase typically mirrored wage inflation, this maintained relative equilibrium, resulting in minimal changes in the income tax paid by individuals.
Fiscal drag, on the other hand, is a hidden danger for taxpayers, leading to:-
- An extra 4.4 million people being eligible for income tax compared to 2021/22
- Approaching 1.8 million pensioners being drawn into the tax threshold
- Circa 2 million extra people paying higher rate taxes
As demonstrated above, if the inheritance tax threshold had not been frozen, it would now be more than £500,000. While an estate worth £500,000 would avoid any taxation if the threshold had been increased by inflation, under the current threshold, the “lost” additional £175,000 allowance equates to a £70,000 tax charge.
While the focus is obviously on the Labour government as we approach the first Labour budget since 2009, it's important to appreciate the changes made by the previous government. The subtle but very effective nature of fiscal drag means that the new government is unlikely to make any notable changes in this area for the foreseeable future.
Summary
As we approach 30th October and the first budget under the new Labour government, there is speculation and counter-speculation about potential tax changes. While income tax, corporation tax, VAT and national insurance will likely remain unchanged due to pre-election promises, nothing is guaranteed.
We know the Labour government is committed to "fairer" wealth distribution and recently reiterated that those with the "broadest shoulders” should expect to pay more. Whether we will see any fundamental changes to CGT or inheritance tax remains to be seen. However, the recent change in winter fuel allowance eligibility shows that this government is willing to make difficult decisions, especially in the early days of a new tenure.
When it comes to finances and investments, we can speculate, but we only know the rates and thresholds today. It's essential to take professional financial advice and ensure you maximise your allowances and tax reliefs to protect your income and wealth going forward.
If you would like to discuss any concerns about potential tax changes and your finances, please get in touch today.
It costs nothing to have a conversation, and it could be one that changes your life.