Tax rises and cuts: breaking down the pre-Budget speculation

The Budget – our speculation checker

We’re 13 days away from the Budget- so obviously speculation is in over drive. Chancellor Rachel Reeves has reportedly included £40bn worth of tax rises and spending cuts.

But media speculation is sometimes carefully planted to give Governments some indication on sentiment and insight into how planned announcements might land.

The latest report to capture attention is news of a planned increase in capital gains tax on the sale of shares and other assets. But will this be in the Budget? And what other measures is Chancellor Reeves considering to plug the £22bn gap left by the Tories?

Prior to the election, Labour committed to changes to the taxation of non-domiciles, charging VAT and business rates on private schools- which has already been announced will come into effect from 1 January- and increasing stamp duty on residential property purchases by non-UK residents

National insurance contributions

Labour's manifesto also promised however not to increase national insurance "for working people". But this week’s media has been divided on whether the refusal to rule out an increase to the tax for ‘employers’ is clever wordplay or indeed a broken promise.

The loophole explored here is whether NI, which is not currently paid by employers on pension contributions to employees, could be targeted rather than those paid by either side on earnings.

Other taxes

Private pensions have also entered the spec pool with reports the cap on tax-free lump sums from pension pots could be reduced (from £268,275 to £100,000); all the way to speculation the Treasury could be considering reform of the whole tax relief system on pension contributions.

For Stamp Duty, Labour confirmed the threshold for first-time buyers would fall back to £300,000, after a raise to £425,000 in 2022, and suggested there might be a reform of the tax to focus it on annual land value tax instead.

A Fuel Duty hike also seems inevitable this year with even the RAC saying “…the Chancellor has no option but to put fuel duty back up to 58p a litre in October’s Budget.” Blaming higher-than-average retailer margins for pressure rather than tax.

Speculation that the government was considering abolishing the single person discount on council tax (25% for people living alone) was quickly slapped down by government and following the winter fuel allowance announcement is now widely considered to be off the table.

On the “wealth tax” side of things, the focus is on Capital Gains Tax (CGT) and Inheritance Tax (IHT).

Capital Gains Tax

For CGT, media reported that Treasury modelling reviewed by the Chancellor explored a range of 33% to 39%. However, since then there is more nuance coming out of Camp Reeves to suggest capital gains tax which is levied on the sale of assets such as second homes and shares could be set at different values for different assets.

Ministers have even told the Time CGT levied on the sale of second homes and buy-to-let properties would indeed be left untouched.

CGT on the sale of shares set at up to 20% has been indicated by Starmer himself to increase “by several percentage points” but he poured cold water on the 39% figure telling Bloomberg such speculation was "wide of the mark".

Some Labour MPs have gone as far as to advocate for CGT rates to mirror those of income tax. This seems unlikely despite recent reports by the Institute for Public Policy Research (IPPR) that millionaires when interviewed suggested most would not be put off investing by a rise in CGT.

Inheritance Tax

On IHT there are several options. An increase the rate of inheritance tax, cutting the tax-free allowance, removing gifting allowances or abolishing IHT reliefs.

Talk of a “double death tax” by applying capital gains tax on top of inheritance tax has been branded sensible by some think tanks but would raise the rate above 50% and could be seen by some as further political suicide.

Meanwhile removing the exemption for pensions from inheritance tax could be branded as fixing an IHT 'loophole' and may seem more palatable.

ISAs

Personal savers will likely not see any changes to the ISA allowance but changes to the system may be announced. Experts have claimed it should be simplified by combining Cash and Stocks and Shares ISAs. Confirmed seems the news that Reeves will scrap the British ISA – A Tory Idea giving savers the opportunity to raise an extra £5,000 towards their ISA allowance for investments made into UK stocks.

Dividends

One thing that could go either way is a change to the dividend allowance. This currently allows the first £500 in dividends received by an investor in any tax year to be tax free, but only for dividends that are not in an ISA or pension. If targeted this would only apply to the wealthy as this mechanism is most used by those who have maxed out their ISA and pensions allowances. However, this has been a target of the Tories in past Budgets, so there may be caution to scrap it and invite even more accusations of being ‘Tory in all but name’.

Impact and what next?

One thing is for certain, the Institute for Fiscal Studies (IFS) thinktank isn’t cheering from the sidelines. They were quoted saying: “With large swathes of the tax system seemingly off-limits due to Labour’s manifesto commitments, the chancellor is going into this year’s budget with one hand tied behind her back. There will be a temptation to increase revenues in ways that would be economically damaging.”

There will be some more back and forth between Treasury and Office for Budget Responsibility until 25th October; so commentary and lobbying may still make a difference, but after that all we can do is wait.