Next week’s Budget will be the first from a Labour government in almost 14 years, during which time we have lived through challenging economic change following the financial crisis of 2008, Brexit, a pandemic that no one could have predicted, and ongoing international conflicts.
Given the catastrophic impact on the UK economy after the disastrous “mini budget” under former (short-lived) Prime Minister Liz Truss, we have to hope the Chancellor Rachel Reeves will balance the need to resolve the fiscal deficit with the implications of significant short-term tax changes.
As is to be expected with a change in government, there are pessimistic outlooks on the economy and warnings of a huge “black hole” that will need to be funded.
Labour’s manifesto stated it would not increase taxes on working people – no increase in National Insurance, income tax rates or VAT – and there has been a subsequent commitment that corporation tax will be capped at the current rate of 25%.
Given these commitments, where is there left to go to fill the deficit?
While the Government has made it clear that individuals should not see an increase to National Insurance Contributions (NIC)s, news reports suggest this may not be the case for employers and some businesses have already voiced concerns about the impact of increased staff costs.
We also have to look to the perceived “wealth taxes” which would align with Labour policy. The rumoured move to align Capital Gains Tax (CGT) with income tax rates would be a huge blow to entrepreneurial businesses so we hope that is not the extreme measure taken in this Budget, however, an increase in the rate is likely.
There may also be the removal of reliefs such as Business Asset Disposal Relief, albeit that would not realise a significant tax increase for the Treasury. Some of the potential changes to CGT could in fact lead to a tax revenue loss as it may encourage business owners and investors to retain assets.
Another anticipated change is the potential increase in Inheritance Tax (IHT) either from a rate increase or by abolishing/amending IHT reliefs.
However, there has been an increase in estates suffering IHT, with tax receipts to the exchequer increasing by £300m in the period from April 2024 to August 2024 compared to 2023.
We have seen Italy take the bold step to introduce a windfall tax on companies, but there is no suggestion of this in the UK.
Indeed, the Prime Minister and the Chancellor have already tried to ease the concerns of businesses and individuals on tax hikes stating, “there’s not much room for tax rises.”
There has also been a perceived U-turn on speculated plans to change pensions tax relief on personal contributions, reported in The Times.
Justin Rourke, head of advice, Armstrong Watson Financial Planning, says: “This is a reflection of just how difficult it is to implement change. Many experts had already questioned how the proposed change would be implemented, especially via salary sacrifice.
“It also illustrates the danger of speculation and why advice should always be based on an analysis of the individuals’ needs and objectives.
“The alleged U-turn is on tax relief on pension input, but we still nervously await news of any change to pensions death benefits, pensions interaction with IHT, and any further change to the Lump Sum Allowance rules.”
For the first time in a number of years, we will potentially have an interesting Budget from a tax perspective and we await the announcements next week with bated breath.
