Autumn Budget 2024 predictions

Ahead of Labour's autumn budget on 30 October 2024, which the Prime Minister says will be "painful", we take a deep dive into what key measures may be announced on tax rises, particularly in relation to capital gains and employers' national insurance. As much as £40bn in tax rises are now expected.

NOTE: this is an evolving story, so new developments will be added as they occur.

Register for one of our post-Autumn Budget seminars - click here.

Also, check out our earlier table: quick guide to Labour's tax plans

KEY POINTS

• Black hole now £40bn?
• Inflation dropped to 1.7%, but is likely to rise again in October (due to energy costs)
• Interest rates likely to fall below 5%
• Capital Gains Tax to increase
• Employers' National Insurance to rise (and National Minimum Wage)
• Freeze on tax allowances to extend beyond 2028 (fiscal drag)
• A cap on lifetime savings in ISAs likely?

Background

Halloween eve will unleash the spectre of tax rises and spending cuts to fill in a black hole in public finances. It started at £22bn, but now has rocketed to £40bn, due to planned extra NHS spending, public sector pay rises and various net zero projects.

Whilst the Chancellor says she is committed to fiscal prudence and economic growth, it's not clear how this fits in with a rising black hole, and proposed further burdens on businesses through rises in employers' NICs, the national minimum wage, and enhanced workers rights.

To help Reeves, the UK economy appears to be improving for now, with inflation down to 1.7%, making it very likely that the Bank of England will reduce interest rates to below 5% at its next meeting on 7 November. But inflation could rise again due to increasing energy costs, so a cut in interest rates may not be as much as people hope.

The economy rebounded in the first half of 2024, with GDP growth driven by business-facing services. Growth is expected to continue over the rest of 2024, albeit at a more modest pace, and economists forecast the economy to expand by just over 1% in 2025. (House of Commons Library report)

Fiscal drag on steroids?

We know that the Budget will contain large tax rises, to augment the highest tax burden since the 1940s due to frozen tax allowances and thresholds (fiscal drag).

But they were meant to be unfrozen in 2028. Not any more it seems. 

It now appears that Reeves will extend the freeze on tax thresholds, originally brought in by Rishi Sunak in 2021, to beyond 2028, thus dragging more people into tax at 20%, 40% and 45% as incomes rise in line with the cost of living.

That means even pensioners and those on the national minimum wage will have more of their income taken in tax.

Taxpayers pay tax at 20% on income over £12,570, at 40% on incomes over £50,271, and 45% on incomes above £125,140. 

Tax rises - what's coming?

In addition to prolonged fiscal drag, what's likely to be announced? 

Increases to employers' NICs seems likely, together with rises in capital gains tax, inheritance tax, and stamp duty, alongside new restrictions on pension tax relief and other reliefs. Fuel duty looks like another target. 

And still to take effect from April 2025 are the new rules for Non-doms and the abolition of furnished holiday lets.

On the non-doms issue, Treasury officials have now said that Labour’s additional measures on top of those put forward by the previous government could actually lose the the exchequer more than £1bn, rather than raising revenue.  And the Adam Smith Institute suggests that if the current non-dom plans are enacted this could cost the UK £6.5bn by 2025 and 23,000 jobs by 2030.

It is thought that the Chancellor is reconsidering the non-doms measure ahead of the Budget.

Employers' National Insurance

No one predicted before the general election that NICs would increase, particularly as Labour had ruled out any such rise in its manifesto.

But if the strong rumours are correct, the Chancellor will increase employers' NICs on the grounds that it does not conflict with the manifesto promise not to increase taxes on working people. This is at odds with what Reeves said two years ago as shadow chancellor when she claimed Rishi Sunak's proposed increase in employers’ NICs would affect employees’ pay packets.

The current rate of employers' NICs is 13.8%, and it is estimated that a 1% increase to 14.8% could reap the Treasury between £8bn and £9bn.

The Office for Budget Responsibility has previously said that the majority of any rise in employers' NIC would be passed on to workers via lower pay rises, with the rest passed on to consumers.

If the NIC rate is going up, the Employment Allowance could also rise to help small businesses keep staff and build confidence when hiring new team members.

Alternatively, Reeves could instead, or as well, impose NICs on employer pension contributions made for employees, which are currently exempt from NICs. The likely impact of this would be for employers to seek to make less generous pension contributions in future.

Other employment costs

Could we also see owner managers having to pay more in dividends tax as an adjunct to a NIC rise?

If employers' NICs are being increased, then Reeves may also look at other employment costs such as the apprenticeship levy.

See also our article: New employment rules to impact employers

Capital Gains Tax

There was no mention of CGT in the Labour manifesto, but Reeves has noted the Office of Tax Simplification's idea of aligning CGT rates with income tax, meaning that the maximum rate in most circumstances would rise from 20% (24% for residential property) to 45%. 

However, not equalising rates but instead just nudging them upwards could signal to business owners that the government is on their side. 

A rate of 39% has been suggested, but the Treasury has sought to deny this. But maybe a rate of around 28%-30% is possible.

Another possibility is that CGT rates could be harmonised - just one rate for all disposals.

As explained in one of our earlier articles, Equalising the CGT rate with income tax has been done before, and this could apply to gains arising on or after Budget day, so there is little time to realise gains at the current rates.

Could a rate rise be coupled with a reduced business disposal allowance, or maybe there could be a new form of allowance for those exiting their companies such as an indexation allowance or taper relief?

The timing of a change is uncertain. A rate rise could take effect either on Budget Day or from 6 April 2025. If delayed until April, there may be a surge in asset sales to lock in the lower rate.

There is little time before Budget day to finalise any commercially-driven sales, but such sales could be accelerated as long as there are no artificial steps included that may fall foul of any new anti-forestalling rules.

See our article: Autumn Budget 2024 and its impact on exiting a company

Inheritance Tax

Currently, IHT is applied at a rate of 40% on estates valued above £325,000.

Changes to IHT could see a rise in the rate to above 40%, or a lowering of the existing £325,000 threshold.

The current Residence Nil-Rate Band, which allows relief for a residence past to children, could also face being cut or removed.

Business and Agricultural reliefs are important reliefs from IHT. These could be scrapped, or maybe a cap put on the amount of relief available. This would impact on business successions. It is understood that Reeves may actually issue a consultation about these reliefs, rather than announce measures on Budget day. It is to be hoped that this is correct.

The current exclusion of pension pots from IHT could also change.

A new gifting tax could also be a measure Reeves is considering. Currently a gift from one individual to another isn’t subject to IHT unless the donor doesn’t survive seven years, or they retain some benefit. Reeves might consider extending the period from seven to ten years, for example, or simply make IHT payable at the time of the gift.

A form of gift tax already exist where one gifts an asset not qualifying for any relief into a trust, creating a 20% IHT liability on the value exceeding the £325,000 nil-rate band. 

Pension contributions

Tax relief on pension contributions attracts income tax relief at a person's marginal rate, which can be as high as 60% where the personal allowance is being tapered away. 

Replacing this marginal rate relief with a flat rate relief has been suggested before, and could happen in this Budget. However, Reeves is concerned about the impact of this on public sector workers, so may choose to avoid the measure.

The Chancellor may also reduce the 25% tax-free cash that pensioners can withdraw, or maybe make pensions subject to IHT.  At present, the amount of tax-free cash a person can take from their pension from age 55 is 25%, up to a maximum of £268,275, but this could be reduced to say £100,000. This would impact on future confidence in saving in a pension scheme. Such a change is likely to be delayed until at least April 2025.

NIC on pension contributions?

As stated earlier under NICs, Reeves could levy NICs on employer pension contributions made for employees. She may prefer to do this instead of increasing employers' NICs on wages.

An issue that could arise is the impact on salary sacrifice schemes if NICs were levied on pension contributions. Workers can choose higher pension contributions in return for a lower salary to save employee NICs. But the incentive for employers to offer salary sacrifice schemes would be impacted, potentially leading to employees being dragged into a higher tax bracket if the salary sacrifice is abandoned.

It is understood that the public sector will be shielded from NIC on employers' pension contributions, with the Treasury planning to reimburse public sector employers to avoid them having to make make significant cuts. It means the NIC rise will only fall on businesses and private sector workers.

Individual Savings Accounts

These immensely popular ISAs are used by many working people to save for retirement or just a rainy day. Reeves is known to want to tax them, or reduce their tax exemption.

At the moment, you can save up to £20,000 a year in a cash or shares ISA, and over the years people have saved up a great deal.  There are now ISA millionaires and their ISA savings are tax free.

It is rumoured that Reeves will seek to impose a lifetime limit on how much a person can save in an ISA, such as say £500,000, but that would lead to complications in the tax system for ordinary savers when the UK population is already known for its lack of private savings - taxing ISAs would discourage savings.

Fuel Duty

There is growing expectation that fuel duty will increase for the first time in 13 years, adding to the costs of motorists and businesses. It could be viewed as a tax on working people.

The first rise in fuel duty since 2011, when it was frozen by then-chancellor George Osborne, could also be viewed as promoting electric cars. 

The levy was cut by 5p a litre by Mr Sunak when he was chancellor in 2022 as motorists were struggling with increased costs in the wake of the war in Ukraine, so Reeves could simply cancel that reduction.

VAT

We already know that VAT is to be imposed on private education from 1 January 2025 (see our earlier article). And the draft legislation suggests it also catches universities as 18 year olds will be captured.

Intense lobbying of the government continues in the hope of delaying the change until September 2025, and a legal challenge is also underway under European Convention on Human Rights (ECHR): 

Article 1 - Protection of property. 
Article 2 - Right to education.
Article 14 - Prohibition of discrimination.

The government also appears unlikely to achieve its objective of raising money to recruit new teachers, at least in the short term. 

Many independent schools that are being forced to register for VAT will be able to reclaim input tax on capital projects over the past 10 years, which could cost the Treasury a great deal more than the income it had hoped to generate. Will it seek to limit the damage by restricting claims? Will it delay VAT registration until September 2025?

Contact us

We will keep you updated as tax policy announcements arise ahead of the autumn budget.

In the meantime, if you would like to discuss how your taxes or those of your business may be affected, please contact your usual Bishop Fleming advisor.

[Gary Mackley-Smith]