October Budget: Part One

Tax Hikes and Tough Choices Loom?

In this first of two pieces looking forward to the Autumn Budget, BAND financial experts explore potential changes to key taxes and how Labour’s manifesto promises may shape fiscal decisions. In part two, which is coming soon, we will look at pensions and wealth tax changes.

In a nutshell:

• Chancellor Rachel Reeves faces a £22bn budget gap.
• Potential tax hikes despite Labour’s pledge not to raise rates.
• Capital Gains Tax, Inheritance Tax and ISA limits on the chopping block?
• Possible adjustments to National Insurance and dividend taxes.

On October 30, Chancellor of the Exchequer Rachel Reeves will deliver the Autumn Budget. After discovering a £22bn black hole, Reeves warned of “difficult decisions to meet our fiscal rules across spending, welfare and tax”.

The Chancellor’s “spending inheritance” announcement revealed a projected overspend for 2024/25 of £21.9bn and offsetting measures of £5.5bn, leaving a gap of £16.4bn for the current financial year. For 2025/26, the offsetting measures are forecast to deliver savings of £8.1bn, but the spending figures will have to await the first part of the Spending Review, due alongside the Autumn Budget.

In a recent speech, Reeves said: “I have to tell the House that the Budget will involve taking difficult decisions to meet our fiscal rules across spending, welfare and tax.” Nevertheless, she confirmed the Labour manifesto commitment that “we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.”

In a subsequent interview with the News Agents podcast, Reeves said: “I think we will have to increase taxes in the Budget.”

So, what might we see on October 30? This article examines Reeves’ options in three areas: the ‘locked’ personal taxes (income tax, national insurance and VAT), CGT and IHT. Our follow-up piece will look at what might happen to pensions, wealth tax and the definition of the key fiscal yardstick, debt.

National insurance (NICs), Income Tax and VAT

It is important to note the Labour manifesto pledge: “Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.” As the previous Government amply demonstrated, not increasing rates still leaves plenty of scope for increasing revenue by freezing or even reducing thresholds. 

One reason is that income tax, NICs, and VAT combined account for 63% of all tax revenue.

Fiscal drag will be less rewarding for the Treasury if inflation remains around the current 2%, but it is still easy money. For example, the HMRC tax ready reckoner says a change of 1% in the personal allowance is worth £1.1bn, and a 1% change in the basic rate limit is worth £0.6bn. Ignoring 2% inflation on those two measures for 2028/29 and 2029/30, adding two years to the existing freeze would yield £3.4bn in 2029/30 – the year in which the deficit must be falling under the fiscal rules.

The as-yet-undefined “working people” reference (see here for Starmer and Reeves’ differing takes) leaves scope for increasing income tax (and maybe even levying NICs) on income other than earnings – as the previous Government did with dividend taxation. There have regularly been calls to align dividend tax more closely with the tax on earnings, a move that would see basic rate taxpayers pay about 16% rather than 8.75% but – at least in theory – mean small cuts for higher and additional rate taxpayers.

The personal savings allowance (PSA), which cost £810m in 2023/24 according to HMRC estimates, may also be in the firing line. It is conceivable that Reeves could scrap it and reinstate the deduction of 20% tax at source. Higher interest rates have made the PSA not only more costly, but also created a greater taxable population that is outside self-assessment and whose tax liability is collected, if at all, via PAYE coding with an inbuilt lag. Returning to deduction at source would have a one-off effect of doubling receipts by removing that lag.

Another investment possibility is a cap on the total value of ISA investment, something the Treasury has looked at in the distant past. The 2023/24 tax relief cost of ISAs is estimated at £6.7bn – a figure that will have again been boosted by high interest rates. Pre-election Reeves said she favoured the UK ISA. Hence, a limit on annual investment looks less likely than a ceiling on the total investment qualifying for capital gains tax (CGT) and income tax exemption. HMRC’s latest ISA stats (for 2020/21, alas) show that there were 3.9m ISAs valued at over £50,000 and that 327,000 individuals with income exceeding £150,000 had ISAs with an average value of £94,000.

Whether any total value cap would apply to existing investors is a moot point. On the one hand is the precedent of protections given to pensions over the years, as the lifetime allowance was reduced. On the other hand, if existing ISAs are exempted, then the Exchequer benefit will only emerge very slowly. The possible precedent is the reduction (under the Conservatives) and the elimination (under the Labour Party) of dividend tax credits. In both instances, PEPs, the precursors of ISAs, suffered the consequences with only short-term special treatment.    

VAT could also be a target for threshold adjustment. Last year, the Resolution Foundation suggested reducing the threshold from £85,000 to £30,000, raising a £1.5bn a year. The then CEO of the Resolution Foundation, Torsten Bell, is now Parliamentary Private Secretary to the Cabinet Office Minister (and member of Starmer’s ‘quad’), Pat McFadden.

CGT

Increases in CGT have been on most hit lists since Labour refused to rule them out in pre-election interviews. CGT is due to raise £15.2bn in 2024/25 and £16.2bn in 2025/26. The HMRC ready reckoner is pessimistic about the benefits of a significant rate increase. For example, it says a 10-percentage point increase in all rates would reduce revenue by about £1.35bn, as greater income (£710m) from the disposal of assets qualifying for Business Assets Disposal Relief (BADR) would be more than offset by a reduction of tax (£2,055m) on unrelieved gains as investors waited for a more tax-friendly climate (or death). A 5 percentage point increase would yield £420m, according to HMRC. 

These numbers are at odds with some think tank calculations. For example, a recent Resolution Foundation report suggested that raising CGT rates to 16% (basic), 32% (higher) and 37% (additional) and reintroducing indexation relief would produce £7.5bn a year.

The quick and dirty option would be simply to scrap BADR, which HMRC estimates cost £1.5bn in 2023/24.

The general rebasing of values on death has also gained attention as an area for tax-raising reform, particularly when agricultural or business relief also applies. Applying CGT at death was floated in the Office of Tax Simplification (OTS) Inheritance Tax Simplification Review. The OTS estimated that for 2015/16, CGT levied at death would raise £1.3bn and affect 55,000 estates (against 24,500 paying IHT). Those numbers, particularly in terms of taxpayer numbers, would skew higher for CGT now, given the reduction in the annual exemption. That underlines one issue about levying CGT on death. As the OTS said: “Many more people would be brought into a charge to tax on death than are currently subject to Inheritance Tax… It would also involve a substantial Exchequer cost and impact a much larger number of people.”

Two halfway houses are possible – removing the uplift if business or agricultural relief is claimed (assuming either survives) or simply not resetting the base cost for the recipient of an inheritance. That would mean the deceased’s base cost would pass across to the new owner in the same way as holdover relief currently operates. The drawback would be a much smaller immediate tax boost.

Inheritance tax (IHT)

IHT is the second manifesto-unmentioned tax that has attracted media speculation as a Budget target, especially as it arguably does not impact “working people”. IHT is projected to yield £7.5bn in 2024/25 and £7.7bn in 2025/26, meaning it raises about as much as 1p on the basic rate of income tax.

The recent paper from the IFS is a good summary of the areas that could provide extra revenue:

Business and agricultural reliefs: The IFS put the cost of these reliefs at £1.4bn and £0.4bn, respectively. HMRC data shows that business relief claimants typically number fewer than 5,000. The IFS proposals were to:

• Scrap business relief entirely for AIM shares, saving £1.1bn in 2024/25, rising to £1.6bn by 2029/30.
• Cap the two reliefs to a transferable £500,000 per person. As much of these reliefs is currently claimed by the largest estates, the IFS estimates the change could generate £1.4bn in the current tax year, rising to £1.8bn by 2029/30. The IFS does not distinguish between ‘working’ and passive asset owners. This would be an option for the Government, but would add complexity while reducing tax receipts.  

Defined Contribution (DC) pensions: The IFS and many others favour bringing pension death benefits within the ambit of IHT. It also thinks income tax should be levied at a minimum basic rate on any funds withdrawn by a successor/dependant, regardless of the age at death of the pension owner. To take into account this additional tax, the IFS proposal would apply IHT to 80% of gross funds. The IHT raised would initially be small beer – £0.2bn in 2024/25, rising to £0.4bn by 2029/30. 

More radical reform, such as switching to taxing recipients rather than donors, could raise more money but would involve a significant legislative overhaul. Ms Reeves may feel her political capital is best spent elsewhere.

Comment

The Chancellor has given the clearest possible signs that taxes will rise on October 30. What we have explained here is by no means an exhaustive list – remember, nobody forecasted the means-testing of Winter Fuel, which arrived in July. Check back for Part 2 and our thoughts on further possible Budget changes.

BAND says:
The upcoming Autumn Budget could bring significant changes to taxes, pensions and wealth management. Our expert team is ready to help you navigate the shifts with tailored tax advice and wealth-planning solutions. Whether you’re looking to adapt to new tax policies, optimise your pension strategy or protect your investments, we’re here to provide clear, actionable support. Get in touch to explore how we can help secure your financial future, whatever the budget brings.