The chancellor’s autumn budget is expected to bring spending cuts and tax rises, though Labour vowed in its election manifesto that income tax, national insurance, and VAT wouldn’t budge. The chancellor Rachel Reeves has assured the UK that Labour will honour this manifesto promise, but this is not to suggest that other tax hikes are not possible…
This blog is designed to talk you through some of the changes that have already been confirmed, some that have been proposed or rumoured, and explain what they might mean for UK taxpayers.
Capital gains is one of the taxes that is most likely to be targeted. It is imposed on the profit from the sale of capital assets, including second homes, shares, business assets and most personal possessions worth £6,000 or more, apart from cars. At the moment people do not have to pay tax on the first £3,000 of profits, or £1,500 for trusts. The minimum limit could possibly be removed, and the tax could be imposed on assets currently exempt.
Like capital gains, inheritance tax is one of the taxes that is most likely to be changed. Currently, inheritance tax is charged at 40% on the value of an estate above £325,000 when someone dies. This figure is known as the nil-rate band or tax-free allowance, with an additional £175,000 available to those leaving the family home to their children or grandchildren. This rate could be increased, or the value people have to pay inheritance from could be lowered to raise money. There are currently several exemptions, for example on agricultural land and family businesses, but these could be lifted.
Labour is also likely to address how inheritance tax should apply to gifts. At the moment, gifts to individuals are exempt from inheritance tax if the donor survives seven years from the date of the gift (with a reduction in the inheritance tax rate after three years). It is being predicted that this might change to a system where inheritance tax (or a gift tax) is payable when a gift is made – which is similar to many European systems.
The government could also reduce the number of years allowed when giving away assets before someone dies, before inheritance tax kicks in. It is suspected that Labour may use inheritance tax to redistribute wealth and address intergenerational equality. Ultimately, rather than reduce the nil-rate band or increase the inheritance tax rate, there will be changes around what is liable combined with scrapped reliefs.
Labour are also understood to be considering changing business rates, which are charged on most non-domestic properties with relief for small businesses, retail, hospitality, leisure properties and some others. Labour may make the change that they are related to the value of the land instead of the current rateable value, which is an estimate of how much it would cost to rent the property for a year in April 2021. The government is also pressing ahead with plans to end business rates relief for private schools, which is said to come into force from April 2025.
Changing to a flat rate of tax relief on pensions has also been discussed as a possible Labour policy. Tax relief on pensions accrues at your marginal Income Tax rate, so the wealthiest receive the largest savings. Labour could reform pensions toward a single, flat tax rate on pensions (say 20% or 30%) regardless of income band. A flat rate of tax would be much harder for employers and savers to administer and would lead to double-taxation for higher-paid workers. This is because at a flat rate of 30%, for example, Higher Rate taxpayers would pay 10% on income deposited in their pensions (because their marginal rate is 40%) and then another 20% (if they are Basic Rate taxpayers at retirement) when they withdraw them years down the line. This is complicated and time consuming, so it’s not something Labour are expected to put forward any time soon.
Another much talked about change is the fact that Labour will apply a 20 per cent VAT charge to private education and boarding schools from January 2025. The party estimate that the move will raise up to £1.5bn for state sector investment, including on recruiting 6,500 teachers. This VAT charge will also apply to payments made in advance for school terms starting after January 1, 2025, starting on and including the 29th July 2024.
The government has also specified that these costs would not apply to pupils with acute special educational needs whose needs can only be met by a private school, or in cases where a pupils’ education costs are funded by a local authority. In these situations, local councils would be able to reclaim the VAT.
Stamp duty currently discourages people from moving home and is part of the reason older people are increasingly not moving out of expensive larger properties. It is paid on the cost of a property over £250,000, with more paid by non-UK residents and for second homes, and relief for those who are first-time buyers. It has been suggested that Labour may change the tax so it is focused on annual land value tax rather than on a transaction – but this is less likely than other possibly changes that have been proposed.
Labour has ruled out increasing income tax or NICs for working people, emphasizing that the tax burden on this group should be lower. However, they have not specified their position on income tax thresholds, which are currently frozen until April 2028.
The chancellor is also reportedly considering a hike in the current rate of employers’ national insurance in the October budget. Under the existing rate on earnings and employee benefits (13.8%), employers paid £107.9bn in the last tax year. This figure is up 35% from the £79.1bn paid pre-pandemic. Employers’ NI last increased 1.8% from a 12% rate in April 2018.
The national insurance secondary threshold is currently frozen at £9,100 until April 2028 but this is not to say that it couldn’t be adjusted. Higher rate earners could also be targeted with a review of the upper earnings limit and Class 4 upper profits limit, all as part of the government’s efforts to plug the current shortfall in public spending, estimated to be in the region of £22bn.
Labour are also bringing in a new tax regime for non-domiciled individuals. Individuals first moving to the UK or non-UK residents (for at least ten years) will benefit from a special regime wherein all non-UK income and gains (profits) will be fully exempt from UK tax for the first four years of tax residency. Under this new regime, individuals will be able to spend their foreign profits in the UK without triggering UK tax. After four years of tax residency, these individuals will be subject to UK tax on their worldwide assets.
So there you have it! We hope that this blog has given you more of an idea of the changes to come, and how they might affect you. The chancellor’s autumn budget, which will be revealed on the 30th October 2024, will give us a clearer idea of how Labour plan to move forward in the current economic climate.
If you want to learn more about this, or need any advice on your taxes or finance, please contact us to find out how we can help you!