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With the Labor government set to present its first budget on October 30, expectations are rising as both businesses and individuals brace for potential tax changes and spending shifts.
Chancellor Rachel Reeves has made clear that tax increases are inevitable and sees them as necessary to restore fiscal and economic stability. In her speech at the government’s investment summit earlier this week, Reeves underlined the importance of this stability as a precursor to investment, signaling that companies understand the need for such measures to “balance the books.”
While Labor pledged not to increase key taxes on working people, such as income tax, VAT and personal national insurance contributions, the party left the door open to increasing employers’ national insurance contributions, capital gains tax (CGT) and other levies. including those in the gambling sector. Rumors of changes have already sparked concern in some sectors, with British bookmakers seeing their shares fall after reports of possible tax rises of up to £3 billion in the upcoming Budget.
Meanwhile, Prime Minister Sir Keir Starmer has tried to calm nerves, dismissing speculation that the CGT could rise to 39% as “way off the mark”, but confirmed that tax rises would be part of the plan to boost the economic position of Great Britain. This comes against the backdrop of criticism from the business community over Labour’s handling of the economic legacy of the previous Conservative government, with claims of a £22 billion budget deficit requiring ‘tough decisions’.
Here’s a look at the possible changes Chancellor Reeves could announce in the Fall 2024 Budget:
Employer’s national insurance contributions
One of the key potential measures is an increase in employers’ national insurance contributions (NICs). Although Labor ruled out increasing NICs for employees in their election manifesto, they did not extend this promise to employers. Jonathan Reynolds, the business secretary, hinted at this possibility, stating that increasing employers’ NICs could be a viable way to increase Treasury revenues without directly impacting employees.
A one percentage point increase in employers’ NICs could raise around £8.9 billion per year, providing a substantial boost to public finances as it closes the budget gap. However, the move could face opposition from companies already struggling with higher costs due to inflation and rising interest rates.
Capital gains tax
Capital Gains Tax (CGT) is another area under scrutiny. Although Starmer has downplayed the likelihood of CGT rising to 39%, the chancellor could still seek to increase CGT rates to bring them more in line with income tax rates, or to broaden the range of assets covered the CGT can be expanded. Currently, CGT is charged at 10% for basic rate taxpayers and 20% for higher rate taxpayers, with a higher rate applied to property transactions.
Raising CGT could raise significant revenues, but it also risks discouraging investment in Britain, especially in the technology and start-up sectors, which rely heavily on capital investment. Some investors have already accelerated their plans to sell their businesses in anticipation of possible tax hikes, underscoring the uncertainty surrounding the issue.
Non-domiciled tax status
The controversial non-domiciled tax status, which exempts foreign income from UK tax, is also on the table. Although Labor has previously criticized the system that allows wealthy individuals to avoid UK taxes, there are concerns that changing this status could deter wealthy individuals and companies from locating in Britain.
Billionaire John Caudwell, a former Tory donor who switched to supporting Labour, warned of drastic changes to the non-domestic tax regime, warning it could damage Britain’s ability to attract wealthy investors. Any changes to this tax status must be carefully considered to avoid negative consequences for foreign investments.
Income tax thresholds
While the chancellor is unlikely to increase income tax rates, she could lower the thresholds at which the different tax bands come into effect. Currently, individuals pay 20%, 40% and 45% income tax depending on their income, but lowering the thresholds would push more people into the higher tax brackets.
The move would allow the Treasury to increase revenues without breaking Labor’s pledge not to increase income tax rates. According to the Institute for Fiscal Studies (IFS), reducing the personal allowance or basic interest rate cap by 10% could generate an additional £10 billion and £6 billion respectively in annual revenue. However, this approach would still feel like a tax increase to many, because it would actually increase the tax burden on middle income earners.
Pensions
Reeves is expected to back away from previous plans to cut tax relief on pension savings, after warnings that such a move would disproportionately affect public sector workers, including teachers and nurses. Currently, pension contributions are eligible for tax relief at the saver’s marginal income tax rate, meaning higher earners receive a 40% or 45% discount on contributions.
While reducing tax relief for pensions could potentially raise billions, it would risk alienating a significant portion of the electorate and sparking backlash from unions and public sector organizations. As a result, it seems likely that the Chancellor will not make any significant changes in this area for the time being.
Inheritance tax
Inheritance tax (IHT) is another area where Reeves could introduce reforms. Although IHT currently only applies to around 4% of estates, it is often seen as an unfair form of double taxation. Labor could look to increase IHT revenue by removing exemptions for business and agricultural assets, which are currently passed on tax-free.
A cap on these exemptions, or their complete abolition, could raise around £2 billion annually, according to the IFS. Other possible changes include closing loopholes that allow wealthy individuals to avoid CGT when passing on estates to their heirs, which could generate additional money for the Treasury.
Fuel obligation
Reeves could break with the conservative tradition of freezing fuel taxes, which has been in place since 2011. Raising fuel duty could raise a further £6 billion a year, providing a significant revenue boost at a time when the government is looking for closure. the budget deficit. The move could also help motorists move towards more environmentally friendly vehicles, in line with Labour’s green agenda.
Private equity profits
The taxation of private equity profits, and carried interest in particular, has long been a controversial issue. Currently, carried interest is taxed as capital gains rather than income, meaning private equity managers benefit from lower tax rates. Raising the tax rate on carried interest to match income tax rates could raise a further £2 billion in revenue, although it could also lead to behavioral changes that reduce overall tax revenue.
Gambling taxes
Reports that the government is considering raising taxes on UK gambling companies by as much as £3 billion have already shocked the markets. While Labor may see the sector as a potential source of significant revenue, there are concerns that such a move could damage the sector and lead to job losses.
Other tax options
Reeves has ruled out a wealth tax, despite pressure from unions to introduce one. However, the Chancellor could introduce a new tax along the lines of the health and social care levy introduced by Boris Johnson’s government in 2021. Such a levy could provide a new revenue stream without breaking Labour’s promises on income tax, VAT or personal national insurance contributions.
Tax rules
The chancellor can also adjust the budget rules to create more room for public investments. By adopting alternative debt measures, such as public sector net worth (PWNW) or public sector net financial liabilities (PSNFL), Reeves could increase fiscal space by as much as £60 billion, freeing up additional resources for infrastructure and public services.