What could happen in Labour’s first Budget?

This article is written by Dan Payne, an expert financial advisor who works for Golden Oak Wealth Management and collaborates closely with us at Cottons. Dan’s extensive experience and knowledge in financial planning and tax-efficient strategies provide invaluable insights for both business owners and employees. In this article, Dan delves into the potential changes and implications of Rachel Reeves’ first Budget as Chancellor of the Exchequer, offering practical advice on how to navigate these possible adjustments.

 

What will change on 30th October when Rachel Reeves’ first Budget as Chancellor of the Exchequer is announced?

 

I am sure you have been reading many speculations in the media, many of which are included in this article.  It is certainly one of the topics that we are being asked the most about at present by our clients.

Keir Starmer recently implored citizens to endure “short-term pain for long-term good”.  Allegedly there is a black hole of around £22billion in the public finances according to Reeves, so how will she fill it?

We know that the Government is likely to agree public sector pay rises above the rate of inflation, increasing the black hole by around another £9billion.  There are also costly items in the pipeline such as compensation for the Post Office horizon scandal, the blood contamination scandal and the Women Against State Pension Inequality (WASPI).  There is also the potential that funds will be required to bail out failing water companies and local councils.  This is before we even touch on the Government’s desire to nationalise the railways and provide more funding for the NHS.  Spending cuts have also been announced, such as some major building projects being shelved and the Winter Fuel Allowance being means tested.

Labour has already pushed ahead with VAT on school fees, applying from January 2025, but many argue that this could lead to an exodus of pupils from the private school system?  I have also spoken to some private school teachers in recent months who have said that a lot of schools will be swallowing some/all of the additional costs associated with the rise in fees, which will result in cost cutting, job losses and impacts on other businesses.  We also know that the taxation of non-domiciled people and furnished holiday lets will change from April 2025 as per the Spring budget, but with additional tweaks.

With no tax rises promised on Income Tax, National Insurance, Corporation Tax, or VAT, the next layer of Treasury revenue comes from Capital Gains Tax (CGT), pensions, Inheritance Tax (IHT), stamp duty, fuel duty, and possibly Council Tax and business rates.  Let’s have a look at the first 3 on that list in more detail; CGT, pensions and IHT.

 

Capital Gains Tax (CGT)

 

A favourite bet appears to be aligning the rates of CGT with those of Income Tax, particularly as this has happened before.  In 1989, under the then Chancellor Nigel Lawson, gains were taxed as the top slice of income (although there was inflation indexation applied back then), which was latterly reversed by Alastair Darling to the system we see now.  This is likely to happen from 6^th April 2025, but it cannot be discounted that the rate could change much sooner in anticipation of assets being sold before then at current rates.

CGT is paid by around 5% of taxpayers, so could be seen as having little impact to the public.  Although Reeves has previously said that ‘preferential tax treatment’ for wealth generators was an important element in growing an economy, and a ‘wholesale equalisation’ of Income Tax and CGT could hurt investment, it cannot be ruled out that CGT will rise in the short term.

Another possibility for raising taxes would be to close the rule that allows asset values to be reset for CGT purposes on death.  Assets sold during probate could then still be liable for CGT.  Other valuable reliefs such as Business Asset Disposal Relief (BADR) could also be cut to bring in more tax, and this would affect anyone selling their business.

 

Pensions

 

Pensions offer generous tax benefits, including Income Tax relief on contributions at your highest marginal rate (or Corporation Tax relief if the contribution is made from an employer), there is no tax on gains or income  on the investments held within the pension fund, you have access to up to 25% of the pension fund tax-free when you reach pension age (up to the current Lump Sum Allowance (LSA) of £268,275), and pension funds are held outside of the estate for Inheritance Tax purposes, noting that pension death benefit taxation does still apply, depending on the size of your pension fund and whether you die before or after age 75.

Rachel Reeves had originally pledged to reverse the abolition of the £1,073,100 pension lifetime allowance, which Jeremy Hunt announced last year, but she has since stated that they will no longer reintroduce it. What is more likely to be looked at is tax relief on pension contributions.

Changing the tax relief system for contributions has been talked about for many years, as well as a flat rate pension tax relief figure – 25%, 30% or 33% has been mentioned previously.  This would give basic and nil rate taxpayers an uplift to their pension contributions (currently they are able to receive 20% basic rate tax relief) but would reduce the amount of tax relief obtained by higher and additional rate taxpayers (who are able to claim back 40% and 45% respectively).

However, how would this work with salary sacrifice arrangements where contributions are made from gross pay as opposed to net pay?  This would be a way of bypassing any reduction in net pay tax relief on contributions, so would this need to be changed?  Also Defined Benefit schemes could be impacted if their members’ tax relief is restricted.

There has also been talk about the tax-free cash entitlement being changed.  This is the ability for you to access up to 25% of your pension fund tax-free, up to the LSA.  Could the LSA be reduced from the current £268,275 or abolished?  It would appear counterproductive as this would surely encourage a run of pension withdrawals where pension investors take their tax free money while they still can.    The other area that has been speculated is whether pension funds will continue to be held outside of the estate for IHT purposes, which could be reviewed.

Ultimately one of Labour’s key election pledges was to encourage more money to be invested in the UK economy, and pension funds were seen as a key method of achieving this.  Providing more disincentives for people investing would appear to go against this, so a removal of the major tax advantages seems to be counterintuitive.

 

Inheritance Tax (IHT)

 

Labour has previously said that it had no plans to change IHT, although did not make a commitment not to change it.  What it did say was that it would close or reduce IHT exemptions for agricultural or farming land and business, but this was not made clear in the manifesto.

They could change the nil rate bands potentially, for example the residential nil rate band (giving people up to £175,000 of additional nil rate band above the basic £325,000 available) could be removed, or perhaps the threshold where it is reduced (for estates currently above £2million) could be reduced.  Or perhaps the current main 40% IHT tax rate could be changed as an alternative, or the period before death where gifts can be made (currently 7 years) could be reduced.

Business Relief, agricultural property relief and pension funds being outside of the estate being abolished would alone raise £4.8billion a year by 2029 according to The Institute for Fiscal Studies (IFS).

 

Conclusion

 

Of course none of us have a crystal ball, so we are not entirely clear what will be introduced or changed in the Budget.  It will be interesting to see which way the new Government will go, and it might signal their intentions during their tenure in power.

Overall, you should not panic and make decisions based on speculation at this stage, but if you are unsure of uncomfortable about anything, you should seek independent financial advice.

At Golden Oak Wealth Management, we advocate the use of multiple tax wrappers to diversify your exposure to any tax rules, rates and allowances.  This allows our clients to mitigate their exposure to any one single tax and the impacts of any changes being introduced.  It has never been more important to seek good quality financial planning advice, to review the impact of any changes that happen on your situation.

We are specialist Independent Financial Advisers (IFAs), so we are able to advise on all areas of financial planning suitable for you, and due to our independence, we can recommend the best products and providers in the marketplace.

For further help or advice specific to your circumstances, contact Golden Oak Wealth Management on 01780 723118.

Meet Daniel Payne, Chartered Financial Planner at Golden Oak Wealth Management. Dan works closely with Cottons to offer expert regulated financial advice, bringing valuable insights for our clients. While we’re great at chartered accountancy and business advice, it’s important to know that financial planning has its own set of rules overseen by the FCA in the UK. As your accountants, we’re here to help navigate you to experts like Daniel for thorough financial planning. Understanding this difference is key, and we’re all about making things clear rather than putting up barriers.

This article is a joint effort to keep you well-informed. If you need any assistance, feel free to reach out to us or directly to Daniel.

daniel@goldenoakwealth.co.uk

07585 233528

01780 723118