Autumn Budget 2024

FINANCES| 5 MIN READ

Guess what is in the Budget!!

Written by Sally Dempsey
Follow @f3_wealth

Less than a month until the October 30^th budget

Our new government has been consistent with their messaging “There is a £22 billion black hole in the finances. Things will get worse before they get better. There are some tough decisions to make”.

This appears to be part of a narrative to manage our expectations that the budget at the end of October will be painful and this has led to the media being awash with speculation, second guessing the “painful” tax changes in the coming budget.

The mood at the recent Labour Conference, however, suggests they may have gone too far with the “doom”. It might not be that bad.

Here, we “think like a socialist” to try to guess what the upcoming budget will hold. They are just our guesses, though, not any more accurate than anyone else’s guesses.

Political spin aside, the government must both raise funds for its “fully costed” plans and deal with the £22 billons overspend, but:

its plans will be partly funded by government borrowing, not taxes
some of the tax increase will come from direct taxation and duties.
the £22 billon overspend is just 1.8% of government expenditure, (but still needs to be found)
therefore, the amount of funding required from increases in personal taxation is unknown

The key point is that the tax rises in the Budget are UNKNOWN and EVERYBODY, including us, are just guessing the tax changes that will be announced.

Firstly, what do we know for certain?

Very little; and it is not unknown for a Politician to say one thing and do something else, but:

The taxation of non-domiciles will change, and loopholes will be closed
VAT and business rates will be introduced for private schools
Stamp duty will increase on residential property purchases by non-UK residents
The Government has said:
- the biggest burden would be borne by those with the broadest shoulders
- there will be no increases in tax for ‘working people’ (taken to mean no increases is Income Tax, National Insurance and VAT)
- no increasing in corporation tax above 25%.

These comments eliminate Income Tax, VAT and National Insurance from tax rises, so the speculation spotlight is shining on Capital Gains Tax (CGT) and Inheritance Tax (IHT) and possibly pension tax relief

Current media speculations are on:

Pensions tax relief
Inheritance Tax changes
Capital Gains Tax (CGT) rates and exemption
Investment income taxation
A Wealth Tax and other noise

Pensions Tax Relief

The speculations on Pensions are:

Your Contributions to your pension receive tax relief at your highest rate of income tax. A Basic Rate, (20%) taxpayer receive tax relief at 20%, whilst and Higher Rate (40%) taxpayer receives tax relief at 40%. From a socialist perspective, why should someone who earns more get a greater tax incentive to contribute to their pension than someone who earns less? This could be changed to a flat rate for everyone and might be limited to Basic Rate of 20%. The Chancellor has previously endorsed this idea.
Your Tax-free lump sum enables you to withdraw 25% of their pension pot tax free up to a maximum of £268,000. Again, why should someone who has the benefit of a larger pension get a larger tax-free sum than someone with a smaller pension? The Government might standardise this amount or scrap it entirely.
The Lifetime Allowance limited pension tax relief to those pensions with a value of just over £1m, roughly. This was abolished by the last government and could be re-instated
Your pension is not part of your Estate for Inheritance Tax purposes. Your pension currently sits outside of your estate for inheritance tax calculations and is therefore a good way of passing assets onto family without inheritance tax liability. The argument is why should those with larger estates be able to pass pensions on without inheritance tax.

Our guess is that pension changes will be limited. Labour’s manifesto stated they would ‘undertake a review of the pension landscape’, so it is reasonable to guess that significant change will not happen before then. In addition, the Government has stated they do not intend to change tax-free cash on pensions and Rachel Reeves has stated that there is no plan to change tax relief on contributions or reinstate the Lifetime Allowance. The most likely change, because it increases tax take immediately is a restriction in the tax relief on contributions

Inheritance Tax (IHT)

The Labour Party has indicated a desire to reform IHT to increase public revenue and promote economic equality

The speculations are:

The 7-year rule will change – gifts made over seven years before a person’s death are exempt from IHT. The 7 years, for instance, may become 8-10 years or the amount that can be gifted may be limited
The residential nil rate band which provides up to £175,000 extra Nil Rate Band to each parent if they leave their home to their children, may be reduced or withdrawn – Why should someone with Children have a favourable tax treatment to those without children?
No Capital Gains on death – The value of an asset, on death, passes to a beneficiary at market value, without any gain being liable to CGT due to IHT being payable @ 40%. Where no IHT is payable (and with no CGT payable), tax revenue is lost. There is talk that the Government will change tax rules to ensure tax is payable.
IHT Reliefs – Agricultural and business property reliefs reduce the value of Estate assets by either 50% or 100%. There is no socialist logic to business owners etc paying less IHT than other people.

Our guess is that IHT rules will changes. This is in line with the aim of “economic equality”. We guess that the CGT loopholes and Reliefs are a target for change or even being scrapped. In line with “no increases in tax for working people”’ we are wondering whether there may well be a two-tier system introduced to charge more tax of the wealthier estates but the same\reduced tax to working people.

Capital Gains Tax

Capital Gains are currently taxed at 10% for basic rate taxpayers and 20% the higher rate. If the gain is from a second residential property, these rates increase to 18% and 24% respectively. These rates are below income tax rates of 20%, 40%, or 45%.

The speculations are:

Equalisation with Income Tax rates – From a socialist perspective, why should a person making a gain pay less tax than a person earning an income? The government may look to make the rates the same, maybe in stages or maybe in one change.
Reduce the tax-free threshold. The current allowance of £3,000 before a gain is taxable may be reduced\scrapped. Again, why should a person making a gain have an additional tax allowance to a person who has no gains?
CGT Relief – most CGT reliefs provide the benefit of lower tax, for instance, Business Asset Disposal Relief allows a business owners selling their business to pay 10% CGT on the first £1 million of their gain. The reliefs also give a benefit to private equity. The Government could scrap certain CGT reliefs claiming fairness in tax charging

Our guess is that CGT rules will change. This is logical in that the government have not ruled this out like it has for Income Tax etc. The precise change is difficult to guess but we guess all three of the above speculations are possible.

Investment Income Tax

For the 2024/25 tax year, you can earn up to £500 in dividends without paying tax and then you pay 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, 39.35% for additional rate taxpayers.

Again, from a socialist perspective, why is there a lower tax rate on dividend income than on earned income? Even though the answer is that the company paying the dividend has already paid Corporation Tax, there is still scope to equalise taxation

Our guess is that there may be some tinkering with the rates but not wholesale change.

Wealth tax and other “noise”

There is also much noise about a possible wealth tax, changes to council tax and removal of bus passes etc. We regard this as “noise”. Although nothing is certain there are no indications that the Budget will contain any measures of this nature.

What should you do?

The general rule is that you cannot plan for what you do not know, so do nothing and, like everyone, wait and see and hope for the best.

The above commentary, however, provides you with the areas of risk which you may want to consider. If you have definite plans that you are looking to complete before the end of this tax year, then you may want to act before the Budget whilst you are certain of the situation. For instance, if you intended to use your capital gains tax allowance for this tax year then you might want to do so before the budget, just in case it is scrapped overnight. If you do not any plans, then wait and see.

If you have any questions or intend to take any action, please call or email us. There are always ramifications to any decision, and we would want to talk through such ramifications before you act.

As always, thank you for being a valued client

Whatever your thoughts, to ensure you take account of the full range of available options, we would always recommend you consider obtaining professional financial advice.

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A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS PLAN HAS A PROTECTED PENSION AGE). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

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