Rachel Reeves’ speech – what the Autumn Budget may imply in your cash
The Chancellor has fuelled speculation that taxes will rise in this month’s Budget to build a bigger financial cushion and tackle sky high borrowing costs
Rachel Reeves took the radical step of setting the scene for her Budget in three weeks time. While short on detail, it was seismic at this stage in the game in terms of the big picture.
For a Chancellor whose tax hiking Budget of 12 months ago was seen as “one and done”, it now looks anything but. Ms Reeves’ speech contained the megaphone message to voters that more tax rises are likely, including manifesto-breaking pledges that are likely to go down like a bowl of cold sick.
She’s gambling that after “we will have to contribute” the country, public services and the national finances will be a much better shape. Whether she is right, or wrong, could determine the outcome of the general election, and for many years to come.
Will your taxes rise?
The Chancellor was keen to avoid any reference to either in her speech, but that’s been the growing drumbeat in recent weeks, and the decision to deliver a speech just three weeks ahead of the big day paved the way for another painful Budget. But it looks like the emphasis will be tax rises rather than massive spending cuts, especially given the pledge that there will be no return to Tory-era austerity
Which taxes will rise?
Labour’s manifesto was clear, promising to “not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.” But the last Budget already saw employers’ National Insurance increase – though Labour insisted this wasn’t a manifesto breach – and Rachel Reeves stressed that much has changed about the world since then. The three taxes together account for two-thirds of all tax collected, and economists say it will be hard to bring in what’s needed without touching them.
What is income tax?
It’s what you pay on your income, in many forms. And not just wages, but income above certain thresholds on a whole bunch of other things. As a result, it’s paid by more than 37 people in the UK. How much you pay depends on your income.
The standard Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on. You then pay the 20% basic rate on the next £12,571 to £50,270, a higher rate of 40% on £50,271 to £125,140, and the 45% additional rate on incomes over £125,140.
How much could income tax rise by?
It’s purely speculation at this stage but think tank the Resolution Foundation – whose former head is now a Labour minister – says a 2p rise across all three bands would raise a whopping £20billion. But it would highly controversial to up the basic rate as it’s been half a century since the last chancellor did do – Labour’s Denis Healey in 1975 – which is why it’s been called the 50-year tax taboo.
How much more would I pay?
Broker AJ Bell says an increase in the basic rate from 20% to 22% would cost someone on a £20,000 salary, an extra £149, on £30,000 an extra £349 a year, while those earning at the higher-rate threshold of £50,270 would see the biggest increase in their tax bill of £754 a year. The same would be try for those who incomes are also taxed according to the banding, including pensioners and the self-employed.
Laura Suter, director of personal finance at AJ Bell, said: “A hit of this kind will be an unwelcome extra cost to people, on the back of rising bills, huge increases in mortgage costs and still rising food costs. If it was implemented straight away at the Budget, Keir Starmer could easily be compared to the Grinch before Christmas, eating into people’s take-home pay just as they are trying to afford one of the most expensive months of the year.”
The Resolution Foundation has suggested cutting employee National Insurance by 2p, which would mean workers being no worse off but, because more people pay income tax than NI, the Treasury would get a net £6billion a year boost.
Could VAT go on?
Value Added Tax is added to most products and services sold by VAT-registered businesses. It’s a huge money spinner for the Treasury, with the Office for Budget Responsibility forecasting it will raise £180.4billion this financial year, or 14.7% of all taxes, equivalent to £6,300 per household and 6% of national income. HMRC figures suggest increasing the 20% to 21% would raise around £8.8billion next year, while increasing the reduced 5% rate would raise around £490million.
But the Treasury’s big worry is that higher VAT will put upward pressure on inflation, just when there are signs it may have reached a recent peak and with Ms Reeves pledging to “improve the cost of living”.
Could there be help with energy bills?
Ms Reeves highlighted energy – and food prices – as the two of the biggest costs impacting families. There is growing speculation that the 5% VAT on energy bills could be scrapped, saving the average household about £90 a year.
The Resolution Foundation has suggested going further and moving social and net zero levies off electricity bills and into general taxation. That would save households £160 a year – and bring inflation down by 0.3% – but cost the Treasury £3.5billion by 2029/40, the Foundation says.
What other tax rises could be in the Budget?
There are whole host that are being rumoured, some of which would hit households directly or some indirectly.
Speculation has been swirling around pensions, and one option could be to reduce employer National Insurance relief for pension contributions. Increasing Income Tax would also hit those pensioners above the tax-free threshold, though experts argue pensioners’ incomes have increased much faster over the past 20 years than working age people.
Some form of targeted increase in gambling duty on online betting firms also seems likely at this stage. The debate here is around whether it will unintentionally hit betting shops, bingo halls and the horseracing industry.
