Pain Relief…the Autumn Budget and what could it mean for you?
The autumn budget and what could it mean for you?
Tax treatment depends on your individual circumstances and may be subject to future change.
The new Chancellor, Rachel Reeves, has set the date for her first budget, Wednesday 30th October 2024. Ahead of this, she has warned of some “incredibly tough choices” to fill a £22bn fiscal hole (you’ll hear this phrase many more times this year) inherited from the previous Conservative government, thereby paving the way for spending cuts and tax increases. The prime minister, Keir Starmer, has said that those with the “broadest shoulders should bear the heavier burden”, fueling speculation of significant tax hikes. The scrapping of the winter fuel payment and the planned cap on care costs, have already been confirmed, but we suspect there will be some big surprises.
Most notably, there has been a clear shift in the narrative towards higher taxation. The task at hand, raising tax revenues, has been made all the more difficult, by the Labour Party ruling out increases to income tax, VAT or National Insurance, which collectively account for around two-thirds of the c. £1 trillion annual tax take in the UK. Fiscal drag, a continued freezing of income tax bands (ie the thresholds at which you start to pay higher and additional rate tax) seems a near certainty.
Given the flurry of media attention and Labour’s narrative around tough decisions to come, it’s no surprise that clients are somewhat nervous about the Autumn Statement and the potential for tax increases. Ultimately, tax is a choice. If the tax system becomes too punitive, more people will look to relocate abroad (estate agents testify this has already started), to the detriment of the UK economy which desperately needs an injection of growth. Furthermore, tax hikes aren’t the only way to fill the identified £22bn fiscal hole. The government will also target efficiency savings, spending cuts, but also potentially borrow more. As the saying goes, it’s important not to let the tax tail wag the investment dog.
Here’s what we believe may be being considered currently; we focus on the four areas which would have the biggest impact on our clients namely, 1. pensions, 2. capital gains tax, 3 inheritance tax and 4 ISAs.
Pensions
Within the pension regime, three tax perks look the most susceptible to overhaul namely, tax relief on contributions, inherited pensions and tax-free cash. Under current rules, personal pension contributions qualify for tax relief at your marginal rate of income tax. Therefore, the effective cost of a £1,000 pension contribution is £800 for a basic-rate taxpayer, falling to £580 and £550 for a higher and advanced rate taxpayer respectively. Some argue this unfairly benefits high earners and are pushing for a uniform rate of tax relief across all brackets, likely somewhere between 20-30%.
Pension savings currently broadly sit outside your estate and are therefore largely considered exempt from inheritance tax (IHT). Furthermore, if you die before the age of 75, your nominated beneficiary can subsequently draw income from the remaining funds without any income tax to pay, large lumpsum death benefit withdrawals may fall taxable. If you die aged 75 or over, your beneficiaries would pay income tax at their marginal rate. A quick and relatively simple policy change would be to include pensions in your estate, where they’d be liable to IHT of up to 40%. Estimates outline this could raise up to £1bn a year.
At present, once you reach the minimum pension age (currently 55, but set to rise to 57 by 6th April 2028), you can withdraw up to 25% of pension savings completely tax-free, up to a maximum ‘lump-sum allowance’ of £268,275. Any subsequent withdrawals are taxed as income at your marginal rate. The budget may include further reforms, such as changes to pension tax relief or the 25% tax-free lump sum that retirees can currently withdraw from their pension from the minimum pension age.
Scrapping tax relief for higher earners and introducing a flat rate of 30% tax relief could potentially bring in £2.7 billion annually, according to the Institute for Fiscal Studies (IFS). However, historically, changes to pensions have not been made quickly and, if any are made, it seems probable that a reasonable timeframe will be given to allow people to get their affairs in order.
State pension triple lock
Labour’s manifesto commits to maintaining the state pension triple lock, which guarantees annual increases in line with inflation, earnings, or 2.5%, whichever is the higher figure. Reeves may repeat this pledge on budget day. However, more pensioners may face higher tax bills over time due to frozen thresholds. Tax thresholds are likely to remain frozen until 2028 at the earliest, which means the state pension will increasingly take up more of the personal tax-free allowance and may even exceed it. The full new state pension is due to rise to £11,963 in April 2025, so it will only take another 5.1% rise while allowances are frozen to tip that over the personal allowance of £12,570.
Capital gains tax
This has certainly received the most media attention over the last few weeks, mainly because Rachel Reeves has consistently refused to rule out any changes here. The government has pledged not to increase taxes for “working people”, meaning that income tax and National Insurance (NI) are expected to remain unchanged.
So, there have been discussions about a potential hike in capital gains tax (CGT), levied on profits made from selling property, shares and other assets. Everyone gets a £3,000 tax-free annual allowance in the tax year 2024-25, but this has been reduced from £12,300 in 2020. Any profits above your annual CGT allowance are taxed at 10% if you’re a basic-rate taxpayer, or 18% on gains from residential property (except your home home). Higher and additional rate taxpayers pay 20% on assets (24% on property).
There have been reports that CGT rates could be raised in line with income tax. This would mean paying up to 45% tax on profits, the top rate of income tax. This would raise around £1-2bn but for this to be effective, it would need to be implemented overnight rather than at the start of the 2025/26 tax year, otherwise, everyone would ‘frontload’ asset sales to take advantage of the current (lower) rates, and its impact would be considerably diluted.
Consideration might want to be directed to selling some assets ahead of the budget, to take advantage of your annual tax-free allowance in the current tax year – as ever, one should seek advice and don’t let the tax tail wag the investment dog.
Naturally, our Financial Advisers and investment management team continue to manage your investment portfolio within these CGT constraints, to ensure we manage these appropriately, within current legislation.
Business asset disposal relief
This is a tax relief available to entrepreneurs, who pay just 10% tax on the first £1m of gains when they sell a business, as opposed to the standard 20% rate. Removing this would raise some £1.5bn.
Inheritance Tax
Inheritance tax (IHT) is currently payable at 40% on estates worth more than £325,000, but only about 4% of estates are subject to this tax, according to latest figures from HMRC. Potential changes in the budget could include cutting the tax-free allowance, known as the nil-rate band, changing IHT reliefs or gifting allowances. Ultimately, people who fall well short of the threshold of paying IHT now may need to consider tax planning in the future. In addition, there is also speculation of a so-called “double death tax”, where capital gains tax could be added to IHT. This would raise the total IHT tax burden to 54%, according to think tank RSM.
Under current rules, certain assets qualify for Business Relief and are therefore exempt from inheritance tax ‘IHT’ after two years. This relief was originally introduced to enable family businesses to be passed down through multiple generations without incurring major tax charges. It was later extended (by Gordon Brown) to cover shares that aren’t listed on a recognised stock exchange, including the UK’s Alternative Investment Market (AIM). There has long been talk that this Relief could be scrapped or at least reduced (say from 100% relief to 50%), or the eligibility rules tightened. For example, only covering smaller businesses based on the number of employees, asset size, turnover, etc. This could raise an est. £2bn-plus.
ISA allowance
The government could revisit current allowances, including the ISA allowance. At present, you can pay up to £20,000 per tax year into an ISA, which shields any subsequent income or gains from tax. There are suggestions this could be reduced, say to £10,000. This would likely raise £1-2bn a year. Looking back at the historic ISA structure, generally it is only a small amount of individuals that make the full use of their ISA allowance, so the burden would certainly fall on higher earners and would bring more investment into the taxable environment.
Plans for a British ISA have now been abandoned. Proposed by the former chancellor, Jeremy Hunt, in the March budget, this would have introduced an extra £5,000 ISA allowance to encourage investment in UK-listed companies. Investment firms had warned that introducing a British ISA would complicate the existing ISA landscape and have little impact on economic growth. This is likely to be confirmed in the budget.
Winter fuel payment
The winter fuel payment was introduced in 1997 by Gordon Brown. This was aimed at helping pensioners with heating costs. The payment of up to £300 was made regardless of income or wealth. In July, Labour announced that it would now be limited to pensioners receiving pension credit, reducing the number of people getting this payment from more than 11 million to about 1.5 million. The decision, aimed at saving £1.5bn a year, may be confirmed in the budget.
Private school fees
Private schools don’t charge VAT on their fees because of their charity status. Labour intends to remove this exemption, introducing 20% VAT on private school fees from 1st January. This change is likely to be reaffirmed in the budget. This measure is expected to raise £1.6 billion in tax revenue a year which will be spent on state education, including the recruitment of 6,500 more teachers. This move is expected to increase school fees by up to 20%, making private education much more expensive for many families. There are big question marks around whether the state schools currently have capacity to manage potential increased numbers.
Stamp duty
Labour announced before the general election that, if they won, the stamp duty exemption threshold for first-time buyers would fall back to £300,000. The threshold was increased from £300,000 to £425,000 in September 2022, and originally set to be reversed in April 2025. Reeves may address this in the budget, as well as other stamp duty changes. Changes to this tax will depend on whether the government’s focus in on raising money or helping home buyers.
Non-dom tax loopholes
Labour has long planned to crack down on tax avoidance, including abolishing non-dom status. From April 2025, the government has said it will replace the current system with an “internationally competitive residence-based tax regime.” Non-doms arriving in the UK will be exempt from paying tax on foreign income for their first four years, provided they haven’t been a UK tax resident in any of the previous 10 years. After that, foreign earnings will be taxed. The government also plans to end the use of excluded property trusts, which have been used to shield assets from IHT. Several measures are still under consultation and may be finalised in the upcoming budget.
Carried interest tax loophole
Labour aims to raise £565 million a year by closing the tax loophole that enables private equity fund managers to have part of their earnings, known as carried interest, taxed as capital gains instead of income. Currently, these earnings are taxed at 28%, much lower than the 45% income tax rate plus National Insurance. Reeves has stated that private equity managers should be taxed at income tax rates on profits from deals where they haven’t invested their own capital. This change, expected to take effect by 2028–29, is one of the few tax reforms Labour has committed to before the next election. The taxing of carried interest as income could raise £565 million a year by 2028-29, according to the Resolution Foundation think tank.
Conclusion & planning opportunities
The key takeaway is that, as ever, there is a balance between managing the fiscal position versus economic growth. That said, some tweaking around the edges seems inevitable and there may be surprises. Whatever happens, we’ll be keeping a very close eye on this over the coming months and will be on hand to advise clients accordingly.
In terms of planning opportunities, for those with sufficient surplus income and/or cash, make the most of available ISA and pension allowances (potentially the most efficient means of tax planning) whilst you still can. As highlighted above, one should seek advice and don’t let the tax tail wag the investment dog. But most of all, think long-term. Patience & rational thinking remain key aspects of our approach to ensure we remain focused on meeting client needs.
This does not form advice, and opinions constitute our judgement as of this date and are subject to change without warning. Blackadders Wealth Management accepts no responsibility for any direct or indirect or consequential loss suffered by you or any person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. The performance information presented in this document relates to the past. Past performance is not a reliable indicator of future returns. Forecasts are not reliable indicators of future returns.
