The Budget date has been set for 30 October 2024. Are tax increases on the way? Craig Simpson, Tax Partner at Bates Weston shares his thoughts.
Craig believes that Rachel Reeves is building up to tax increases. Capital Gains Tax (CGT) and higher rate relief on pension contributions are the likely targets. With the Budget date set at 30 October it would be wise for anyone considering a transaction to get this over the line before Budget day.
Setting the scene for tax increases – what should I do?
Rachel Reeves, the Chancellor of the Exchequer, has set the scene for tax increases in her speech in parliament this week. In their first two weeks in power, they claim to have uncovered £22bn of unfunded spend and that the state of public finances is much worse than expected. And so, the political games begin. It is perhaps not surprising then that this has fuelled the flames and expectation of tax increases. She has said she will not increase taxes on “working people” by not raising the big three taxes of income tax, national insurance, and VAT. But there are many ways to increases tax revenues without touching the rates, you tinker with the reliefs! The biggest player for the government is the fiscal drag impact of frozen personal allowances and income tax bandings. As people earn more, they move up the tax bandings and pay more tax, rates don’t have to change and the government can just let inflation do the work. There is no doubt middle England will contribute the most to increasing tax revenues over the coming years.
Tax revenues are at an all-time high in the UK, by way of comparison in 2013/14 tax year the overall government income was £649bn, in 2023/24 it is published to be £1,096bn (Over £1 trillion!). Over a ten-year period that is quite some increase. Looking at the latest government accounts (WGA_2021-22_Final_for_publication.pdf (publishing.service.gov.uk)) the biggest liability carried by the public purse in the liability provision for public sector pensions, which increased from £1,301bn in 2013/14 to £2,639bn in 2021/22 (£2.639 trillion!). My point here is that there are bigger challenges to be addressed in the public finances that are not talked about.
There is talk in the media of removing higher rate income tax relief on personal pension contributions. This is where an individual say contributes £8,000 to a pension and the scheme recovers the basic rate of tax to uplift the contribution to £10,000. The individual can then claim a further £2,000 or £2,500 of tax relief depending on whether their personal tax rate is 40% or 45%. So overall a 40% tax payer can get £10,000 into pensions as a cost of £6,000.
Capital Gains Tax would seem to be a big target. Currently the rates are 20% for all gains other than residential property which is 24% (assuming gains fall into the higher rates of taxation). But it is not a big player raising around 1.5% of tax revenues in the UK. The rates of Capital Gains Tax are lower than income tax to take account of the impact of inflation on growth in asset values. The talk seems to be of aligning Capital Gains Tax with income tax rates. If this does happen the main rate of Capital Gains Tax would jump to 40% and possibly even 45%. Quite some move if it does happen.
So, what should you do about this? If you are in the process of selling a company or planning to dispose of an asset then it would be wise to get this completed before the Budget date – 30 October 2024. If you are planning to make pension contributions, and we include company contributions in this, then getting the contribution paid before the Budget is also wise.
There are interesting times ahead.
As always, you are reminded that this article is generic in nature and you should take no action based upon it without consulting your professional advisor.
Additional Information:
Government Publication Fixing the Foundations Public Spending
