Helping you prosper
"I have to tell the House [that the] Budget will involve taking difficult decisions to meet our fiscal rules across spending, welfare and tax.”
The Chancellor’s ‘Public Spending: Inheritance’ speech to parliament in late July was designed to prepare taxpayers for changes to come, revealing “A £22bn hole in the public finances.” The new Chancellor took immediate action to start filling the hole, including ending road and rail projects and all non-essential spending on consultants. There were also two notable expenditure-saving measures:
- An immediate end to Winter Fuel Payments in England and Wales, other than for pensioners receiving certain means-tested benefits. (Scotland subsequently followed suit.)
- The abandonment of the scheme to cap care home fees in England, previously due to start in October 2025. The next stage of strengthening the government’s finances will be unveiled in October’s Budget.
So where might the Chancellor find some cash?
The not so usual suspects?
Her party’s manifesto said “Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.” That sentence appears to rule out the main revenue sources although, as the previous government demonstrated, a ‘rates’ pledge leaves scope for creativity elsewhere. The relevance of the manifesto’s reference to ‘working people’ was made clear by the surprising welfare cuts that primarily hit pensioners. Reeves’s likely targets appear to be:
Capital gains tax (CGT)
The Labour manifesto made no mention of CGT. Several think tanks and the now defunct Office of Tax Simplification have floated the idea of bringing CGT rates in line with income tax, meaning that the maximum rate in most circumstances would rise from 20% (24% for residential property) to 45%.
Inheritance tax (IHT)
There are some obvious targets to add to Treasury receipts in this area. Business and agricultural reliefs mean that the average effective tax rate on the largest estates is lower than that on more modest estates. Scrapping those reliefs, or capping their value, is a possibility which would affect only a few estates, but could produce meaningful extra revenue. Another exemption that could disappear – and affect many more people – is the current general exclusion of pension pots from IHT calculations.
Tax relief on pension contributions
Right now pension contributions attract tax relief (within limits) at your marginal rate of tax. That can be as high as 60% (67.5% in Scotland) in the income band where the personal allowance is tapered. Replacing the marginal rate relief with a flat rate relief is a commonly suggested reform. If Reeves chose a 30% flat rate, most taxpayers would benefit and the Exchequer would gain an estimated £3 billion a year.
The next step
If you think any of these potential changes could affect you or you are considering other areas of tax planning, do take advice as soon as possible. In some circumstances pre-Budget action may be advisable, but in others (such as pension contributions if you are a basic rate taxpayer), procrastination could be the wisest option.
