As the new parliament begins, the Chancellor has a prime opportunity to introduce significant tax changes. The Labour government has signalled that the Budget will be challenging, so we should expect numerous tax adjustments.
With major tax rates (income tax, NIC, VAT, and corporation tax) off the table, attention turns to smaller measures aimed at addressing the claimed £22bn deficit. However, with a government focus on growth, businesses might fare better than private taxpayers on 30 October.
We’re here to help you understand and navigate the implications of the upcoming Budget. Subscribe to receive our analysis as announcements are made.
Economic Outlook
The new government faces familiar fiscal challenges: elevated public debt, a high tax burden, and strained public services. Tough decisions are needed to set the economy on a sustainable path.
The main question is how much funding is required to fill the fiscal gap and which policies will achieve that. The £22bn figure refers to this year’s overspend, but actual needs may be greater, depending on the OBR’s forecasts.
Having ruled out increases to income tax, employee NIC, and VAT, the Chancellor may consider options like employer NIC, capital gains tax, inheritance tax, and duties including fuel. However, with taxes already at post-WWII highs, further hikes risk diminishing returns due to reduced activity. Supporting economic growth and productivity is crucial. Reforms to the planning system could help, but it’s important not to hinder momentum with sharp tax increases.
In 2024, the UK economy has performed better than expected, with Q2 growth at 0.6% following 0.7% in Q1. Inflation is nearing target, though services inflation remains sticky due to labour market tightness and rising wages.
Households and businesses should start to see relief from lower interest rates. CEBR expects a further rate cut to 4.75% in November, reaching 3.75% by the end of next year.
Despite a strong start, growth is expected to reach just 1.2% this year, rising to 1.5% in 2025. Higher growth requires decisive action on productivity in both public and private sectors. We hope this focus, rather than a speculative fiscal ‘black hole’, guides the government’s decisions on 30 October.
Personal Taxes in the Budget
Capital Gains Tax Changes
With capital gains tax (CGT) rates at historic lows, increases seem likely. Options for the Chancellor include:
- Taxing all capital gains at income tax rates (up to 45% for high earners)
- Introducing a fixed CGT rate below the top income tax rate
- Reintroducing tapering for longer-term gains and taxing short-term gains more heavily
- Reducing exemptions, such as setting a cap on private residence relief
- Introducing CGT on disposals at death, possibly at lower rates than lifetime gains
Timing is paramount. Announcing changes effective from April 2025 could prompt asset disposals to save tax, boosting short-term revenues.
Business owners might see mitigations. For example, the lifetime limit for Business Asset Disposal Relief (BADR) could increase if CGT rates rise sharply, though the effective rate may also change.
If you’re concerned about potential CGT changes, discuss your options with our experts before the announcement.
Pension Tax Relief
Pension tax relief costs the government around £50bn annually, making it an attractive target. Possible changes include:
- Removing the inheritance tax exemption for residual pension funds on death
- Reintroducing the Lifetime Allowance on total pension savings
- Reducing the income tax relief rate on contributions
- Imposing a cap on employer NIC exemptions for high contributions
Implementing substantial changes requires political courage, especially if public sector pensions are affected.
Inheritance Tax Changes
The Chancellor might overhaul inheritance tax (IHT). Abolishing the Residence Nil Rate Band and increasing the main Nil Rate Band could simplify the system. Other potential adjustments:
- Removing the IHT exemption for residual pension funds on death
- Introducing progressive IHT rates, starting at 25% and rising to 50% for larger estates
- Reducing or capping Business Relief (BR) and Agricultural Relief (AR)
- Tightening qualification criteria for BR and AR
- Consolidating and reducing gift reliefs
Business owners could be significantly impacted by changes to BR and AR. While total withdrawal is unlikely, restrictions may be introduced.
If you’re concerned about potential IHT changes, consult our experts to understand your position and options.
Reducing Tax Reliefs
Rather than introducing a new wealth tax, the Chancellor may reduce existing tax reliefs. This could involve:
- Capping the value of funds held in ISAs
- Capping the private residence relief from CGT, perhaps at £1m of gain
Taxation of Private Equity Carried Interest
Reforms are expected for the taxation of private equity carried interest. Currently taxed at 28%, it may be affected by changes to CGT rates. Further qualifying conditions might apply if capital gains are taxed at income rates.
Non-Dom Reforms
Details on abolishing the UK’s non-domiciled tax regime are anticipated, particularly regarding inheritance tax. Reforms are expected to take effect from April 2025.
Extending Fiscal Drag
Freezing income tax and other thresholds beyond 2028 could help balance the books, though it increases the tax burden through fiscal drag.
Fuel Duty
Reinstating the fuel duty escalator could encourage a switch to electric vehicles. Increases in benefit-in-kind rates for company cars with combustion engines might also be considered.
Property Taxes
An increase in the SDLT supplement for overseas buyers is likely. A revaluation of properties for council tax purposes might also be announced, updating valuations from 1991.
VAT on School Fees
Further guidance on the VAT charge for private school boarding from 1 January 2025 is expected, clarifying implementation details.
Business Tax Changes
Roadmap for Business Taxation
A roadmap for business taxation will be published, confirming commitments like freezing corporation tax at 25% and retaining full expensing capital allowances. Additional measures might include replacing business rates and providing timelines for planning system reforms.
Sector-specific measures could involve increased windfall taxes on oil and gas companies or adjustments to bank tax surcharges. Restrictions on water company dividends until environmental issues are addressed may also feature.
Government Industrial Strategy
An outline of the government’s industrial strategy will be released, focusing on growth and net-zero goals. This may include details on the National Wealth Fund, investments in key industries, and updates on Great British Energy.
Employment
An increase in the National Minimum Wage (NMW) to a genuine living wage is expected. Employers should prepare for changes including:
- Significant NMW increases
- Actions on zero-hour contracts
- New day-one rights for employees
Consultations on replacing the Apprenticeship Levy with a more flexible “growth and skills levy” may also be announced.
If you’re concerned about how these changes might impact your business, our experts can help you understand your position and mitigate risks.
Devolution
More powers may be devolved to local authorities and regional bodies. This could include replacing business rates with a local business tax to level the playing field between high street and online businesses.
Tackling Tax Avoidance
Anti-avoidance measures are expected, targeting schemes previously challenged by HMRC. Increased investment in HMRC aims to close the tax gap and collect additional revenue.
As we approach the Autumn Budget, it’s important to consider how potential changes might impact your finances. Please get in touch so we can discuss the best strategies to navigate any new developments that may affect your business
