Will this be a real punch in the face for the taxpayer? As the UK awaits the upcoming budget announcement, the Government’s proposals are under increased scrutiny as they outline their vision for addressing economic challenges while also distinguishing themselves from the previous Conservative government. Labour’s economic platform is expected to resonate as they push forward with plans that address cost-of-living pressures, social infrastructure, and climate resilience. Here’s a closer look at the Government’s key proposals and the changes they are pushing for ahead of the budget.
The Government has placed a significant emphasis on fairer taxation, which they argue will generate revenue without disproportionately impacting low- and middle-income households. One of the Government’s primary proposals is a tax on wealth and high earners, a measure they claim would address the growing income inequality in the UK. Chancellor, Rachel Reeves, has also proposed taxing income from wealth at the same rate as income from work, a move aimed at levelling the tax burden across income types and increasing overall fairness.
Additionally, the Government has hinted at closing existing loopholes that allow high earners and corporations to minimise their tax liabilities. They argue that reforms to taxation on capital gains, dividends, and carried interest could increase tax revenues, making more funds available for public services.
Employer National Insurance (NIC) Contributions
NICs are the UK’s second-largest tax after income tax. They are paid by both employees on their own earnings, and employers on the earnings of their employees. Labour officials say they will uphold the manifesto pledge to not raise NICs for employees above the recently lowered rate of 8%. However, speculation has mounted that this could leave the door open for an increase in the rate paid by employers, with both the chancellor and prime minister refusing to rule out the measure. Additionally, there may be the imposition of NICs on employer pension contributions.
Employer NICs are currently paid at a flat rate of 13.8%. Analysis by the HMRC in June showed that increasing by 1% could raise around £8.5bn in the first year.
Capital Gains Tax (CGT) Reform
CGT is paid on the profit made when an asset which has increased in value is sold. It is applied to assets such as the sale of personal possessions worth more than £6,000 (apart from a car), property that’s not the seller’s main home, shares and business assets.
It is charged at 10% or 18% for basic rate taxpayers, and 20% and 24% for higher or additional rate earners. There is currently a tax-free annual CGT allowance of £3,000. There are several ways CGT could be changed. In the run-up to the election, the Lib Dems and Greens both said they would rethink the tax bands to be more similar to income tax. This could raise an estimated £5.2bn a year.
There has been speculation that these rates could be increased but the prime minister appeared to dismiss suggestions of a rise to as much as 39%.
Inheritance Tax (IHT) Reform
IHT is a levy on the estate of someone who has died. This is their property, money and possessions. Crucially, it is not paid if the value of these things is below £325,000. The tax rate is 40%, but it’s only charged on the part of the estate that’s above the threshold. In 2023/24, only 5% of deaths generated an IHT bill, raising around £7bn.
However, it has been rumoured that the current Government may abolish the current reliefs in place, such as Business Property Relief (BPR), Agricultural Property Relief (APR) and the ability to pass on pension pots tax free.
This measure to withdraw such reliefs is reported to raise around £4.8bn a year by 2029.
Pension Taxation
There are various ways the chancellor could raise more money by changing the way private pensions are taxed. That could include reducing the cap on tax-free lump sums from pension pots, cutting the tax break for employers putting money into employees’ pensions, or changing the system of tax relief on pension contributions, external.
At the moment, basic rate taxpayers get tax relief at 20% and higher rate taxpayers at 40% or 45%. The government could introduce a single flat rate of relief (30% has been rumoured) which would make the system less generous for higher earners.
The measure would raise around £3bn a year, with 7 million earners paying more tax.
Rationale and Expected Impact
The Government’s tax proposals are reportedly designed to balance fiscal responsibility with fairness, aiming to increase public revenues while lessening inequality. Their approach could result in:
- Increased funds for public services, particularly the NHS and education, by drawing additional revenue from the wealthiest individuals and corporations;
- A reduction in inequality, through progressive taxes that shift the burden away from low- and middle-income earners;
- Support for green initiatives, with tax incentives aligned to promote investments in renewable energy and climate-friendly technologies.
In summary, the Government’s taxation proposals centre on ensuring that wealthier individuals and profitable corporations contribute more to public revenue while providing targeted relief for low-income households. These measures are intended to create a more balanced, sustainable economy, reflecting Labour’s priorities for social equity and climate responsibility.
Further Information
Following the budget on Wednesday, we will be sharing the budget highlights in our “Rapid Reaction” summary. We will then be sharing a more in depth look into any changes that may impact you or your business in our “Budget Summary” which will be circulated first thing Thursday morning.
If you would like to discuss any changes that come from the budget with us, please contact your usual NRB advisor or our tax team.
Scott Lees – Senior Tax Manager
