When is the Autumn Budget and what do consultants predict will occur?

Sir Keir Starmer has laid the groundwork for an increase in taxes after warning the Autumn Budget on 30 October will be ‘painful’. 

Increases to the rates of income tax, national insurance and VAT have already been ruled out, making it harder to balance Britain’s books.

Instead, the Prime Minister said those with the ‘broadest shoulders should bear the heaviest burden’ suggesting there will be tax rises elsewhere, with winter fuel payments already cut.

We look at when the Budget is, what Starmer and Chancellor Rachel Reeves could unveil this autumn, who might pay more tax and whether their plans will work. 

Tax raid: Rachel Reeves is expected to look at pensions, CGT and IHT as part of a package of measures to boost the Treasury

When is the Budget and why are taxes set to rise?

Rachel Reeves announced that she will hold a Budget on Wednesday 30 October, on 29 July this year.

The threat of tax rises comes after Reeves warned of a £22bn black hole in the country’s finances, and she is widely expected to announce significant changes to plug that gap.

The Chancellor’s own gloomy assessment came at the end of July when she claimed to have discovered the UK’s finance were even worse than thought. The previous Conservative government has challenged these claims.

Independent economists say that while the UK’s finances are not in the greatest shape, due to high levels of debt and higher interest cost, and more bad news has emerged, the broad picture was clear before the election.

Winter fuel payments for pensioners have already been scrapped, while inheritance tax, capital gains tax and pensions could also be likely candidates for some changes.

Capital gains tax

There have long been rumours that Labour would stage a capital gains tax raid to boost the Treasury’s coffers.

It refused to rule out an increase in the current levels of capital gains tax (CGT) during the election.

CGT rates are lower than income tax rates and profits from investment and property tend to be made by wealthier people, which makes them a prime target for a hike.

Capital gains tax rates depend on an individual’s tax bracket and the type of asset sold, with profits above the annual £3,000 tax-free allowance from investments, businesses and the sale of second homes and buy-to-lets all falling within CGT net.

Basic rate taxpayers with taxable income below £50,270 pay 10 per cent capital gains tax, while higher and additional rate taxpayers pay 20 per cent. 

Rates are different on property that isn’t your own home, and profits on second homes and buy-to-lets face capital gains tax rates of 18 per cent for basic rate tax payers and 24 per cent for higher and additional rate tax payers (the latter rate was reduced from 28 per cent as of April 2024).

There is a separate CGT rate for entrepreneurs selling businesses they have built up. Business Asset Disposal Relief means they pay tax at 10 per cent on all gains on qualifying assets. 

Although capital gains and income tax are separate, profits are added to other income to decide the rate paid. So a big profit can drag a basic rate taxpayer into the higher rate capital gains tax bracket. 

There is a capital gains tax-free allowance which is now just £3,000, after former Chancellor Jeremy Hunt slashed it from £12,300 to that level over the course of a year.

Rachel Reeves could chip away at the CGT tax-free allowance, but it is more likely that CGT rates will increase.

Some have called for this to be done so that they are in line with income taxes, at 20, 40 and 45 per cent. However, that is a big jump and previously when rates have been that high investors have benefitted from indexation relief, meaning that they are only charged on profits above inflation.

Even if capital gains tax rates are not brought in line with income tax rates, experts think Reeves is likely to raise the current rates.

Nimesh Shah, CEO of tax advisory firm Blick Rothenberg says: The Prime Minister and Chancellor seem to be acting with urgency when it comes to tax changes, so taxpayers will need to prepare now for a likely mid-year CGT rise.

‘Currently, CGT raises less than 2 per cent of the total tax take – it raised £14.5bn in 2022/23, and this is £2.5bn down from the previous tax year. 

‘To improve that tax take, the Chancellor could potentially increase the rate of CGT to 25 per cent to 30 per cent, and apply a lower rate, of say 20 per cent, for sales of business assets to support entrepreneurial growth.’

Industry groups have warned that increasing CGT could significantly impact those at the centre of Labour’s plans to grow the economy.

The government’s own figures show that a big increase in CGT rates could backfire and lead to lost revenue.

‘Raising both the lower and higher CGT rates by 10 percentage points, to 20 per cent and 30 per cent for non-property gains, would result in a total loss of £2.05billion for the Exchequer by 2027/28,’ says AJ Bell’s personal finance director Laura Suter. 

‘That’s because while the rates are higher, investors would be expected to change their behaviour to mitigate paying the tax.’

Inheritance tax

Inheritance tax at 40 per cent is charged on the part of an estate above the individual nil rate band threshold of £325,000. This can be doubled to £650,000 by those who are married or in a civil partnership, who can pass on their unused nil rate band to their spouse.

There is a further allowance, known as the residence nil rate band, of £175,000 per individual, which applies to your own home left to children or grandchildren. This increases the potential inheritance tax-free threshold to a joint £1million.

Once an estate reaches £2million this own home allowance starts being removed by £1 for every £2 above this threshold. It vanishes completely by £2.3million. 

The freeze in the thresholds combined with the property price boom of recent decades means more people are being forced to pay the ‘death tax’.

You can give away £3,000 a year, plus make unlimited small gifts of £250, free from inheritance tax. Amounts above this fall under the so-called seven-year rule, meaning that if the person making the gift survives for another seven years they become tax free. If they die before this, IHT is charged at a sliding scale on the gift.

There are also other inheritance tax reliefs relating to things ranging from money to help with a wedding, to business assets, AIM-listed shares and farmland. 

Reeves could raise the overall rate of inheritance tax, or curb the current relief available on certain inherited assets.

Gloomy: Keir Starmer warned of Budget pain ahead as he delivered a downbeat speech

One potential target is pension pots, which fall outside of the inheritance tax net. 

Currently, it is possible to pass on your pension savings tax-free if you die before the age of 75. 

If you die after 75, those who inherit your pension pay income tax on money they draw from it. This means they could pay more or less than the 40 per cent inheritance tax rate.

Some think tanks have called on Reeves to consider an IHT raid on pension pots and include them in estates.

Tom Selby, director of public policy at AJ Bell says: ‘This is undoubtedly a generous set of rules and something which could easily be reviewed by the new government. 

‘However, as is often the case with pensions, applying any new tax on death – or bringing pensions into the IHT net – would come with substantial challenges.

‘The biggest of those would be around how to treat people who have made decisions about their retirement pot based on the pensions death tax rules as they are today.

‘If all of a sudden that money became subject to a new pensions death tax, those people would, understandably, feel like the rug has been pulled from under them.’

Pensions

Reeves might have her eye on pension pots for an IHT raid, but there are some other ways she could raise cash from retirement savers too.

One area of speculation is whether Reeves will change the rules on pension tax relief and introduce a flat rate.

Under current rules, savers receive pension tax relief at their income tax rate. Basic rate taxpayers receive relief at 20 per cent, while higher and additional rate taxpayers receive 40 and 45 per cent respectively.

It is considered an important tool to encourage people to save into their pensions, especially as employers shift away from defined benefit schemes to defined contribution schemes.

Recent figures show that the cost of providing this tax relief surged to £48.7billion in 2022/23, with almost two-thirds enjoyed by higher and additional rate taxpayers.

Sir Steve Webb, This Is Money’s retirement columnist and former pensions minister, said: ‘There is no doubt that the Chancellor will be eyeing up the large price tag attached to providing tax relief on pension contributions.’

Reeves is expected to consider a proposal by Treasury officials for a flat 30 per cent rate of pension tax relief but that presents potential pitfalls.

Selby says: ‘As with most radical pension tax changes, introducing a flat rate of relief is much easier said than done. 

‘A huge chunk of any potential savings to the Treasury from a pension tax relief raid would come from defined benefit (DB) schemes, the majority of which now reside in the public sector.

‘If a flat rate of pension tax relief below 40 per cent were applied on these schemes, the only way to ensure the correct level of tax relief was applied to contributions from higher and additional-rate taxpayers would be to hit those members with a tax charge likely running into thousands of pounds.

‘This would therefore risk opening up a blistering row with NHS staff and civil servants at a time when many public services are already stretched to breaking point.’

The Treasury could also look to restrict people’s entitlement to tax-free cash when they access their pension pot.

Most people can take up to 25 per cent of their fund tax-free from the age of 55, which is due to rise to 57 in 2028.

The most savers can take over their lifetime tax-free is capped at £268,275 but Selby says the government could theoretically lower this amount, or abolish the entitlement in its entirety.

However, he says this would be ‘deeply unpopular and fundamentally undermine wider government efforts to boost long-term investing’ as well as being ‘hugely complicated.’

Dividend tax

The number of people paying dividend tax has doubled over three years, according to HMRC figures, as more have been dragged into its net.

The dividend tax-free threshold has been cut over recent years, from £2,000 to £1,000 in April 2023, and then to just £500 from April 2024 for this tax year.

Above this dividend tax rates are 8.75 per cent for basic rate taxpayers, 33.75 per cent for higher rate taxpayers and 39.35 per cent for additional rate taxpayers.

The freeze in tax thresholds also means more investors are dragged into higher rates. This means that many normally basic rate taxpayers, who only just breach the allowance, are required to file a tax return.

The previous government made huge changes to the thresholds and Reeves could cut this further to as low as £250, or equalise the rates with income tax levels.

Dan Coatsworth, investment analyst at AJ Bell says: ‘While slashing the allowance, perhaps to £250, cannot be ruled out, the new government would be incredibly unpopular with investors if it reduced the dividend allowance any further.’

Instead, the Treasury could raise the rate of dividend taxation, although again this could be difficult.

‘There’s only so much room for manoeuvre with tax rates on dividends already very close to matching income tax rates for higher and additional rate taxpayers,’ adds Coatsworth.

‘The government will likely tread carefully here. Labour wants to encourage investment into the UK stock market and create a more vibrant place for British businesses to access growth capital.

‘Therefore, taking even more of investors’ returns as tax would mean shooting itself in the foot.’