Tax-free allowances are expected to fall steeply overnight
With less than a month until the “painful” October 30th Budget, time is running out for investors and taxpayers to brace for potential tax hikes. Failing to act now could leave many scrambling to manage sudden changes – but what are the probable reforms that could impact your wealth? Russell Brett explains all.
With a confirmed £22 billion ‘black hole’ in the treasury, Labour’s first Budget in 14 years is certainly set to be an interesting one. With the Prime Minister promising a “painful” readjustment after over a decade of austerity under Conservative rule, Brits are rightfully concerned about the impending announcement.
Chancellor Rachel Reeves assured the nation at the Labour Conference this month that she won’t “play fast and loose” with public finances, but the party’s promise that it “will not raise taxes on working people” makes it all but certain Britain’s highest earners will shoulder the burden.
With just under a month to go, we outline Matthew Douglas’ top 5 areas under consideration that could be included within the Labour government’s Autumn Budget 2024:
Capital Gains Tax will increase?
Speculation abounds that Capital Gains Tax could well be increased – which has caused a sudden surge of activity in the property sector as owners look to offload their assets under the current legislation.
This is understandable because, should the Chancellor decide to redefine the threshold for CGT, this would likely happen immediately – forcing homeowners who haven’t finalised sales into a situation in which their tax-free allowance is radically reduced overnight.
If CGT were to be altered to meet inflation, this could raise it from 20% to as much as 45% for higher earners – which would have costly implications indeed. Such a steep increase in Capital Gains Tax would essentially be a tax on the wealthy in all but name. Can the fledgling government really afford to isolate the nation’s high-net-worth individuals (HNWIs) so early into its rule?
Inheritance tax to exceed 40%?
Currently, IHT is taxed at 40% on assets above £325,000 in value. This level hasn’t changed since 2009, which makes it a prime target for reform.
Changes to the lucrative inheritance tax may well be one of the most direct paths to filling in the fiscal deficit – it’s almost certain that the Chancellor will reform IHT in some way, but whether she does this by raising the 40% rate to a higher figure for those over the nil-band rate, moving the nil-band threshold itself or introducing a third band for larger estates, only time – and the infamous red briefcase – will tell.
Changes to business relief, Agricultural Property Relief, trust taxation and the lifetime gifts restriction could also be considered.
For Britons with intergenerational wealth and valuable assets, any change to IHT will likely cause them to inherit a costly problem themselves – something I would expect the current government to empathise with, given the Conservative legacy it is currently contending with.
Pension inequity to be addressed?
UK taxpayers can currently enjoy tax relief on private pension contributions up to 100% of their annual income – but this is largely in favour of higher earners who can afford to put more away and therefore benefit from better reliefs. Reducing the reliefs for funds being added to a pension may address this inequity, so savers who have not yet reached their £60,000 annual tax-free allowance and are looking to further invest in their pension are strongly advised to do so before 30th October to avoid any surprises.
There is also talk about the 25% tax-free amount taken from pension savings which may also be subject to change, in order to generate additional revenue for the treasury..
Tax-efficient profit extraction will be altered?
Under the existing rules, if an employee opts to pay into a corporate pension scheme via the salary sacrifice option, they enjoy tax reliefs on these contributions – albeit at the slight cost of a smaller net salary on paper. From an employer’s perspective, this shifts the onus onto them to ensure that the full pension contribution is paid – but it also saves up to 15.8% on National Insurance contributions.
If NI were to be extended to apply to pension contributions in this way, it could significantly increase takings for the treasury – at the, very literal, expense of UK business owners. This is something to be watched closely indeed.
A broader Stealth Tax?
The term stealth tax is often used to refer to the clandestine way that taxpayers can end up paying more income tax as a result of fiscal drag when Income Tax and NI thresholds are frozen.
Since the Conservative government came into power in 2010/11, the number of higher-rate taxpayers has doubled – with projections showing this could triple by 2028, which is when the bands are frozen until.
Without intervention, this will continue to drag people into the higher rate of tax as their wages rise to combat the punitive impact of inflation on spending power – which is estimated to generate £40 billion of revenue over the next four years.
Clearly, there is a lot to consider and not a lot of time to do it. But similarly, it is unlikely that all of the above measures would be implemented, just that we believe they are under consideration. If you’re concerned about how to minimise your tax liabilities and maximise the tax-free allowances on your assets before the Autumn Budget comes into effect on 30th October, get in touch with your financial adviser today.