On the 30th October 2024, the Chancellor Rachel Reeves will wait for the end of
Prime Minister’s questions, and then deliver her first Budget. She has a lot of
challenges to address, including some which are of her own or of her party’s own
making. [Chris James, Chief Financial Officer at Inflow Finance, gives some
background to this historic Budget and considers possible changes the Chancellor
might make.]
The new Government wants to raise some money where they can and spend some
on their priorities. This isn’t unusual, but due to election promises, options are more
limited than usual. Commitments not to raise income tax, national insurance (NIC), or VAT cover more than half of the money the Treasury receives in tax, totalling
almost a trillion pounds.
Tax and thresholds
That’s not to say the amount of money collected through these ‘manifesto taxes’
can’t increase in absolute terms because if tax thresholds stay the same, then as a
percentage of personal income, the amount of income tax and NIC deducted will
likely rise. Maintaining the tax threshold freezes seems likely, given previous
assurances. Indeed, pensions are likely to get attention for several reasons after the
Budget, not least because the annual planned increase to the state pension may
bring millions of low-income senior citizens into the scope of income tax for the first
time despite having little or no other income.
One good way of justifying a tax increase would be to make a social case for it and
have it not come under the banner of the taxes Labour has promised not to increase.
Health and Social Care Levy, anyone? It is difficult to see how the Government could
justify this against a historically high overall tax rate on the economy (the highest
since 1948). The previous Government cancelled the HSC and then reduced
national insurance further.
Labour has indicated that it will maintain the lower NIC rates so far. The rumblings
about a ‘£22bn black hole’ may be used to justify a change in direction – but it won’t
go down well in some parts of the press. NIC is felt most by ‘working people’. At the
same time, some people have come to accept that with an ageing population,
universal healthcare, benefits, and pensions will only put upward pressure on the
income the Treasury needs. So where can the Chancellor go?
Corporate taxes
Corporation tax has recently been increased for all but the smallest businesses on a
sliding scale of up to 25%. Labour committed to a cap of 25%, so the only wriggle
room here is taking away a tax break for small companies. This seems unlikely.
Capital Gains Tax
Capital Gains Tax has been mentioned a lot. Although only a little over 2% of the
overall tax take, an increase is seen as politically straightforward. CGT is around half
the income tax rate in many circumstances, and the perception is that it’s only paid
by the rich. Looking around the world, though, simply equalling CGT and income tax
rates doesn’t make sense without significant easements for gains on longer-held
assets. Labour is keen to be seen as business and investor-friendly. Some kind of
increase to CGT, although modest, seems a possibility. As with other taxes, though,
more fundamental reform would be sensible rather than quick fixes. The annual
allowance, now at £3k, has already been reduced by 75% in recent years.
Finally, on CGT, Business Asset Disposal Relief (formerly ‘Entrepreneur’s Relief’ –
one way or another, a kind of ‘retirement relief’ for those owning trading businesses) and its possible cancellation have been a feature of Budget speculation for decades.
Now set at a £1m lifetime allowance per individual, it’s easier to defend than when it
stood at £10m per person. Labour may focus elsewhere, given their desire to be
seen as innovation-focused and SME-friendly.
Property taxes
Another measure relevant to the property market would be amendments to the SDLT
rate that applies when a company is used to owning an expensive property rather
than being owned by an individual or in some other arrangement. Residential
property attracts an SDLT ‘penalty’ when owned via a corporate entity, but
commercial property does not. So, a ‘penalty’ rate for commercial property could be
considered. Changes to this or CGT would be expected to be instantaneous (often
applied from the day of the Budget) to avoid a large and rapid volume of transactions
that skew the affected markets.
Another property-adjacent tax that might get some attention is council tax. Labour
promised not to increase this ‘en masse’, but reform to collect more from high-value
property, of which there is a lot, might be an interesting prospect for some. There will
remain challenges for some affected individuals around asset liquidity, but as with
some other taxes affecting the wealthy, sympathy may be in short supply. For similar
reasons, alongside those of complexity, a straightforward ‘wealth tax’ seems unlikely
in the short term.
Pensions and savings
With interest rates easing, significant changes to tax-free savings allowances seem
less likely than they might have done a year ago. However, the other main type of
tax-advantaged saving – pension contributions – may be much more interesting for
the Chancellor. Tax breaks for high earners are significant and valuable and could be
reduced. For example, full tax relief (at 40 or 45%) might be limited to basic rate
relief (20%) for higher earners. The value of this kind of reform could be large, but as
for the lifetime limit issues that affected some public sector pension holders, it could
be complicated.
Other options for pensions include taxing the 25% drawdown or adding NIC to
payments out of a pension. The beneficial treatment of pensions for inheritance tax
(IHT) could also be considered. However, such policies would be controversial, might
need complicated transitional arrangements, and may cause behavioural change.
In summary
Budgets aren’t about easy choices. Ideology is hard to turn into good policy—look at
the growing noise around the private school VAT measures. Balancing a desire to
redistribute wealth with the need to maintain a good relationship with those who
carry out the activities that create it has never been simple.
Will Labour break their election promises? Property taxes, other capital gains issues,
pensions and savings taxes are discussed above because Labour’s Manifesto ruled
out other taxes. It’s hard to see changes to borrowing rules being the main headline
from this first Labour Budget for over a decade.
Like previous Chancellors, Rachel Reeves will be permitted to drink alcohol at the
despatch box while she delivers the Budget Speech. This year, some viewers might
feel the need to join her.
[Chris James FCA is a Chartered Accountant who has worked in practice and
business with a wide range of clients for 25 years. He has worked with HMRC and
other Government departments on policy and enforcement issues and has served as
a trade body chairperson. He is the Chief Financial Officer at Inflow Finance, an
alternative finance provider specialising in short-term funding for professional
developers and investors.]