Gazing into the crystal ball – possible tax changes in the Autumn Budget

The upcoming Autumn Budget, scheduled for October 30th, is generating considerable speculation and anxiety.  The Prime Minister Sir Keir Starmer, and the chancellor Rachel Reeves certainly appear to be preparing the ground for significant tax rises. Recent comments about unexpected £22 billion budgetary black holes left by the previous government, and a difficult fiscal landscape, all point to major changes to the tax environment ahead.

Based on pre-election statements, and barring any politically damaging policy U-turns, I think we can probably rule out increases in the following areas –

Income Tax: The Labour government has explicitly committed to not raising income tax rates, ensuring the burden on individuals’ earnings remains unchanged. However, it is likely to continue with the current freeze on personal allowances which acts as an indirect or stealth tax increase over time.

National Insurance: Like income tax, employee National Insurance contributions are also pledged to stay at their current levels. However the government hasn’t made a similar committment to employer contributions so watch out for possible increases there.

VAT: The standard rate of VAT is expected to remain unchanged. There may however be further changes to exemptions in addition to private school fees. These will no longer be exempt from VAT from 1 January.

Corporation Tax: While there have been some discussions around potential changes, the government is prioritising economic growth. Therefore, I think it unlikely there will be increases to the main rates of corporation tax.

What options does that leave Rachel Reeves then, in terms of increasing tax receipts, given that these 4 make up around 75% of total tax revenue?

Capital Gains Tax (CGT) : Most commentators put CGT in the “very likely to be raised “category.  CGT is disproportionally paid by the well off so it’s an attractive target for a Labour government.Possible changes include:

Increased main rates – One possibility is raising CGT rates to align with Income Tax rates, meaning the highest CGT rate would go up from 28% to 45%.  Alternatively introducing a single flat rate for all asset classes in place of the current range of 10% to 28%. This could be sold as a tax simplification exercise, but could, depending on the flat rate chosen, also increase the tax take.

Reduced Exemptions: The annual exemption, currently at £3,000, could be reduced, or removed entirely, limiting the amount of tax-free gains individuals can make.

Restricted Business Relief: Reliefs such as Business Asset Disposal Relief (previously Entrepreneurs Relief) which offers a reduced rate on the sale of qualifying business assets, could be reduced or even abolished. Currently this allows gains from the sale of business assets to be taxed at just 10% for the first £1 million, with the rest at 20%.

Inheritance Tax (IHT) : Another on the one to watch list, IHT is levied on the value of an estate when someone dies. Again, IHT is paid by those with significant accumulated wealth so it’s another attractive target for Labour. Possible changes here could be –

Higher Rates: The current rate of 40% may be increased, making it more expensive to pass on wealth to the next generation.

Lower Thresholds: The nil-rate band, currently at £325,000, and the residence nil-rate band, at £175,000, could be frozen or reduced, potentially capturing more estates within the IHT net.

Removal or restriction of Reliefs: Reliefs on business and agricultural assets, which can currently be passed on tax-free, might be removed or restricted. Pensions are similarly exempt from IHT and could lose that exemption. Finally, the current rules around gifting assets could be tightened up. Under the present system, if the donor survives 7 years after making a gift it becomes exempt from IHT.

Pension Tax Relief  : LastlyI would put changes to this tax in the ” highly likely ” category. This is an area that could potentially generate a lot of extra tax revenue, far more than IHT or CGT which have historically been relatively modest sources of revenue for the government. In contrast pension tax relief cost the government over £60 billion last year. Pensions are a politically sensitive area but if Reeves is prepared to be unpopular potential changes could be –

Flat Rate of Relief: Higher-rate tax relief on pension contributions could be replaced with a flat rate, possibly between 20% and 30%. This would reduce the benefits for higher earners and mean everyone received the same rate of tax relief irrespective of their income.

Reintroduction of the Lifetime Allowance: The Lifetime Allowance, a cap on the total amount that can be saved in a pension without incurring additional tax charges, could be reintroduced, limiting tax-efficient saving for high earners.

Reduction in Annual Allowance: The Annual Allowance, the maximum amount that can be contributed to a pension each year and receive tax relief, might be reduced from its current level of £60,000.

Remove tax relief on Employer Contributions – The government could reduce or remove the tax relief available on employer contributions to pensions, increasing the cost of providing pension benefits for businesses.

Reduce or remove the tax-free pension drawdown amount – Currently, individuals can access 25% of their pension pot tax-free when they reach the age of 55 (rising to 57 from 2028). The remaining 75% is subject to income tax at their marginal rate.

Other Potential Changes

Increases in dividend tax rates
Changes to the taxation of non-doms
Restrictions on tax relief for buy-to-let landlords

Planning Ahead

It is possible that any changes to the taxation landscape could take effect immediately, rather than being delayed until the start of the next tax year on 6^th April 26. This leaves limited scope for planning, given that we won’t know exactly what we are planning for until Rachel Reeves stands up in Parliament on the 30 October, and we don’t know when any changes will come into effect. However, if you have questions about any of the points raised in this article, please contact me and I’ll do my best to provide some guidance.