Now that the Autumn Budget date has been confirmed for 30 October, speculation surrounding what taxes will increase and by how much is mounting. We can all expect that the amount of tax we pay will rise in one way or another, and a capital gains tax hike is clearly the hot favourite. But what else could the Chancellor do? What other taxes could be targeted? And what is the likelihood of this happening?
Our article outlines what Labour could potentially announce that will impact small business owners and/or high net worth individuals, with our own calculated ‘guesstimation’ of the likelihood of it happening. Our scale of ‘attack’ is based on a probability rating of 1 being very unlikely and 10 being pretty much a dead cert. You will see there are no 10s listed here at the moment, because when it comes to tax increases, nothing is certain until we hear it on Budget Day!
In the meantime, here’s what COULD happen to taxes:
#1 Corporation tax
Before the election, Labour pledged not to increase corporation tax as part of a drive to win business support. It is unlikely that there will be a backtrack so we probably won’t see any changes here. The current rate of 25% for all companies with profits in excess of £50K was recently increased from 19% and is already relatively high, compared with other countries.
Probability that corporation tax will be increased – highly unlikely – 1
#2 Income tax and national insurance/ employer taxes
Labour has pledged not to increase taxes on ‘working people’. There is no clear definition of exactly who ‘working people’ are so as a default we must assume that they mean people who pay the basic rate of income tax. Sticking to this policy would mean there will be no increases to the current rates of income tax and no reductions to levels of personal allowances. There could be an increase to the amount of personal allowance offered to basic rate taxpayers, to sweeten the pill of increases elsewhere.
Whatever happens is likely to be minimal and continues to be a tax increase by stealth, because if personal allowances do not increase in line with inflation, everyone is automatically faced with a tax increase anyway, even if the headline rate remains the same. This situation is nothing new and has been affecting all UK taxpayers for quite a long time.
Probability score of any changes to income tax or personal allowances –possible – 5
Where Labour could introduce a tax increase, without breaking their ‘working people’ promise to lock in current income tax rates, would be to increase employers’ NICs (national insurance contributions). This appears to be an easy and obvious target because they have never said they would not increase employer NIC rates.
Probability score that employers’ NICs could be increased – possible – 5
Another area where charges on employers could further increase and in a way that doesn’t require an increased headline tax rate, relates to minimum levels of company pension contributions. Currently under the workplace pensions rules, the minimum contribution that can be made into a company pension is 8%, of which employees must contribute 5% and employers must match that with a 3% contribution. Labour could increase the minimum employer contribution to 5% and equalise the rate with employee contributions.
Probability score that employer pension contributions could be increased by increasing compulsory employer pension contributions – probable – 7
#3 Capital gains tax (CGT)
Labour’s stance on CGT has been unclear and it has gradually changed since they were elected. They have not committed to freezing this tax but have also not indicated whether they plan to increase it. Generally, tax experts are in agreement that this is one of the most likely taxes to be increased in the Autumn Budget, especially given that a rise was already widely anticipated when the former Tory government were still in office.
One thing Labour has confirmed is that PPR (principal private residence) relief will remain intact, and they will not introduce CGT on any gains made from selling a primary residence, i.e. your main home.
The potential does however exist to increase the rate of CGT to either be aligned with rates of income tax, or to bring in a standard (say) 30% rate for all transactions. If it is linked to income tax rates, this would be 25%, 40% and 45% vs. the current rates of either 10% or 18% for basic rate taxpayers and either 20% or 24% for all other taxpayers. For a 40% or 45% taxpayer, this will be a very significant increase.
Probability that CGT rates will be increased either in line with income tax or as a flat rate – highly likely – 8
There have been suggestions that Labour could also introduce a CGT charge for assets held on death. This is unlikely because assets over a certain value already suffer IHT on death and this would mean the introduction of a double tax charge.
Probability that CGT will be charged on assets held on death – unlikely – 1.
Over the past few years, the annual tax free allowance for CGT has been gradually eroded and is now just £3,000 per person. Given that this downward trajectory is already well entrenched it would be a straightforward move for Labour to either cut the annual exemption further or remove it completely.
Probability that the CGT personal allowance will be cut or abolished – quite possible – 7.
#4 Inheritance tax
Labour have always made it clear that they do not favour what they call inter-generational inequality (caused by inherited wealth) across the country. They view IHT as a means to recover some of this inherited wealth to ‘redistribute across generations’. Whatever your view on this, these comments appear to make the increase of IHT ‘fair game’ in the Autumn Budget.
Probability that IHT will be changed to increase Treasury revenues – extremely probable – 9
There are many ways in which the Chancellor could introduce changes to IHT, and increase revenues without having to increase the main IHT rate of 40%. Potential policies include:
Removing the IHT-free wrapper from pensions – very likely – 9;
Increasing the main 40% rate of IHT – possible – 5;
Removing or restricting business and agricultural IHT tax reliefs – possible – 7;
Changing the rules on lifetime gifts (PETs) from being tax free to becoming chargeable at the time of gifting – possible – 4;
Reducing the 7 year period before death after which PETs become tax free – possible – 6;
Changing the IHT lifetime exemption allowance – this has stayed at £325,000 for many years and is unlikely to increase – 1;
Removing the residential nil rate band of £175,000 which was introduced by the Conservative government to protect family homes from IHT – possible – 4.
#5 Pensions
Recent Tory Budgets have made investing in a pension increasingly tax efficient, especially for higher rate tax payers and business owners. There is plenty that the Chancellor could do to make pensions less tax efficient:
Removing or reducing the ability to take a 25% tax free lump sum from a pension pot – probable – 8;
Reducing income tax relief on pension contributions to a flat rate for both basic rate and higher rate taxpayers – very likely – 9;
Increasing compulsory employer pension contributions – probable – 7;
Re-introducing the Lifetime Allowance which caps the total amount that can be saved into a pension tax free – possible – 5.
Clearly there is plenty that Rachel Reeves could announce on Budget Day and possibly there are other policies that could be proposed that we haven’t yet considered. These suggestions are based on our expert views but remember that they are guestimates. Nothing is official until it is announced.
We will be monitoring the Budget and sharing our analysis of the detail surrounding all new policies with readers, so keep an eye out for our articles and updates.
In the meantime, if you would like to discuss tax planning with us, please email partners@rjp.co.uk.