Keir Starmer yesterday announced that Labour’s first budget in over 14 years could be “painful” and prompted fears of that unpopular tax rises will be amongst the announcements.
Chancellor, Rachel Reeves, has already confirmed that her statement will bring fresh tax rises as she says more needs to be done to fill the Government’s shortfall in public finances. The tax plans for the UK reflect a mix of continuity and change, focusing on increasing tax fairness and addressing wealth inequality while promising not to raise taxes on ordinary working people.
Here, we look at some key elements of their planned changes:
Capital Gains Tax (CGT)
One of the most significant areas under review is Capital Gains Tax (CGT). The government is expected to introduce measures that will close perceived loopholes and potentially increase CGT rates for high earners. There are discussions around taxing carried interest at income tax rates instead of the current lower CGT rate of 28%.
There is also speculation that Labour might reduce or eliminate Business Asset Disposal Relief (BADR), which allows business owners to pay a reduced CGT rate when selling their businesses. Such a move could significantly increase the tax burden on entrepreneurs and business owners, especially those planning to retire or exit their businesses in the near future.
Inheritance Tax (IHT)
We discussed Labour’s plan around IHT back in June, in our article ahead of the General Election.
While Labour has not announced broad changes to IHT rates, they have proposed closing loopholes that allow the use of offshore trusts to avoid IHT. Additionally, Labour may reduce or eliminate IHT reliefs for Business Property (BPR) and Agricultural Property (APR), a move that could significantly increase the tax burden on estates with such assets.
Corporation Tax (CT) and Business Reliefs
Labour has pledged to keep the current corporation tax rates until at least 2029, providing some stability for businesses. The main rate of corporation tax is currently 25%, whilst the small profits rate (for profits under £50,000) is currently 19%.
However, they plan to review and potentially reduce various business tax reliefs, including full expensing and the Annual Investment Allowance, which could affect investment decisions. Labour has also promised to publish a comprehensive “roadmap” for business taxation within six months of the election, which will outline their long-term strategy.
VAT on Private School Fees
Labour’s plan to subject private school fees to VAT has been one of the most discussed proposals. From January 2025, private schools will no longer enjoy VAT exemption, potentially raising significant revenue but also increasing costs for families using private education. Additionally, the removal of charitable business rates relief for private schools is set to take effect from April 2025, further adding to the financial pressure on these institutions.
Pensions
One of the most discussed potential changes to pensions is the reduction or elimination of higher rate tax relief on pension contributions. Currently, individuals who pay income tax at the higher rate of 40% receive equivalent relief on their pension contributions, meaning that for every £100 contributed to a pension, the actual cost to the individual is only £60. The government is considering moving to a flat rate of relief, possibly around 25% or 30%, to make the system more equitable and to raise additional revenue. This change would particularly affect higher earners, who currently benefit the most from the existing system.
Another possible change involves the 25% tax-free lump sum that retirees can currently withdraw from their pension pot. There has been speculation that the government might cap the amount that can be taken tax-free or reduce the percentage altogether. This could be part of a broader strategy to increase tax revenues from pension savings while encouraging retirees to spread their withdrawals over time rather than taking a large sum upfront.
Increased HMRC Enforcement
Labour plans to provide HMRC with additional resources, including 5,000 more staff, to crack down on tax avoidance and evasion. This initiative is part of Labour’s broader strategy to close the UK’s tax gap, which is estimated to be nearly £40 billion. Small businesses, which are believed to account for a significant portion of uncollected taxes, may face increased scrutiny as a result.
With that in mind, we would always remind you of the Business Protection Package we offer. Our Associate Director, Scott Lees, will be writing to all our clients, personally recommending taking this protection out. This could provide you and/or your business with the security and cover that a HMRC Investigation or Enquiry can be looked after by us at no additional cost (over and above the what you have already paid for Business Protection).
Conclusion
The upcoming budget is set to introduce significant tax changes that reflect the government’s efforts to balance fiscal responsibility with economic growth. By targeting areas like CGT, IHT, and VAT while avoiding direct tax increases on income and profits, the government aims to increase revenue in a way that minimises immediate economic disruption. The full details of these changes will be revealed within the budget on Wednesday 30 October 2024, with this likely having wide-ranging implications for individuals, businesses, and the broader economy.
Further Information
To arrange a meeting to discuss any tax planning or any queries or matters you may have ahead of Labour’s planned budget, please contact your usual NRB advisor or our tax team.
Scott Lees – Senior Tax Manager
Mandy Schofield – Tax Manager
The information and advice provided here is based on the current tax rules and tax legislation. However, the upcoming Budget may result in significant changes to tax laws and policies, including all taxes. NRB would always advise you to consult with a professional advisor who can provide up to date information, pending or following the Budget.
