October Budget: Part Two

Pensions and Wealth Tax in the Crosshairs?

In Part Two of our analysis of the upcoming Autumn Budget, our financial experts dive into possible changes to pensions, wealth tax and fiscal rules. With a £22bn shortfall to address, Chancellor Rachel Reeves may look to reform pension tax relief, revisit wealth taxes and redefine public debt to balance the books.

In a nutshell:

• Pensions: Flat-rate tax relief could boost Exchequer by £2.7bn, while NICs relief may be scaled back.
• Wealth Tax: Reeves has previously opposed a wealth tax, but rising IHT, CGT and investment taxes remain on the table.
• Lifetime Allowance: Possible return or reduction of pension lump sum limits could raise funds.
• Fiscal Rules: A potential redefinition of public debt could reshape budget calculations.
• QT Adjustments: Quantitative Tightening (QT) tweaks may give Reeves more budgetary breathing room.

In Part One, we examined what Rachel Reeves’ Budget on October 30 might do to the “locked” personal taxes (Income Tax, National Insurance and VAT), Capital Gains Tax (CGT) and Inheritance Tax (IHT). In this second part, we move away from the capital taxes and examine some other ways to balance the books:

Pensions

Tax relief on pension contributions is the low-hanging fruit successive chancellors have done no more than nibble at. HMRC puts the cost of pension income tax relief in 2022/23 for all contributions (employer, employee and self-employed) at £42.5bn. HMRC statistics also show that 56% of up-front income tax relief was given at the higher rate and 7% at the additional rate.

In the run-up to the Spending Inheritance statement, many media outlets commented on a Treasury presentation to the new Chancellor that proposed a flat rate relief of 30%. According to the Institute for Fiscal Studies (IFS) calculations, this would benefit basic-rate taxpayers but boost Exchequer receipts by £2.7bn. The revenue-neutral rate would be around 33%, although that makes several hard-to-model behavioural assumptions. Administration of a flat-rate scheme could also be complex because of the need to “tax” employer contributions for higher and additional rate taxpayers, especially in the context of Defined Benefit (DB) schemes.

Another alternative would be to remove some or all NICs relief, worth about £15.4bn for employers and £8.6bn for employees.

The future restoration of the lifetime allowance remains a possibility. Its absence from the Labour manifesto was not confirmation the idea had been abandoned. A possible more accessible alternative would be to reduce the maximum pension commencement lump sum from the current £268,275 to, say, £150,000. The inevitable transitional reliefs mean neither of these changes would be the quick money-spinner that reform of contribution relief would represent.

One allowance that has remained in place, the annual allowance, could also be revisited, perhaps with the £20,000 increase introduced in 2023/24 being unwound. However, any such move raises the spectre that looms across all potential pension changes: what will be the impact on senior NHS personnel? The Government will not want another remuneration-based NHS battle, having just reached a costly recommended offer for junior doctors.

Wealth tax

Rachel Reeves had said she did not favour a wealth tax in interviews before the election. When, in earlier times, she spoke of taxing wealth more heavily, the emphasis was on higher IHT, CGT and income tax (on investments) rather than creating a new tax.

In the past, a wealth tax hit a brick wall because the administrative costs were significant relative to the revenue produced. The last serious proposal for a wealth tax from the independent Wealth Tax Commission (please see this Bulletin) was a 5% one-off levy payable over five years on wealth (all assets) above £0.5m. In 2021, this was projected to produce a total of £262bn over its limited life. Despite the publicity the proposals received, the only Labour interest was from its far fringes, and a year later, the topic had disappeared.

Given the electorate Labour gained in July and the complexity of the legislation, it would be a brave move to introduce a wealth tax rather than look for more revenue from existing capital taxes. A wealth tax polls well – most people support taxing somebody richer than they are – but the appeal disappears when voters realise pensions and homes would fall within the tax’s ambit. Nevertheless, a wealth tax continues to be advanced as a policy from the fringes. For example, the Green Party’s manifesto proposed a wealth tax of 1% on assets worth over £10m and 2% on assets worth more than £1bn.

A halfway house on a wealth tax is to apply a minimum tax rate on income above a certain threshold or, as it appears Biden may be considering in the US, taxing unrealised gains.

Reforming the fiscal rules

In her speech on July 29, Reeves said: “We will meet our fiscal rules.” These are similar to, but not the same as, Jeremy Hunt’s. The Labour Manifesto says:

• The current budget moves into balance so that day-to-day costs are met by revenues (In 2023/24, the current budget deficit was £46.9m, 1.7% of GDP, and was forecast by the Office for Budget Responsibility (OBR) in March 2024 – pre-Spending Inheritance – to be £20.7m, 0.7% of GDP in the current financial year, turning into a marginal surplus by 2027/28.)
• Total debt must be falling as a share of the economy by the fifth year of the forecast.

Unlike Hunt, Reeves has no explicit limit on overall in-year Government borrowing, but she is constrained by the five-year debt reduction goal, just as her predecessor was. This is gameable to a point, as it is a rolling target. For Reeves, it means her Autumn Budget will look one fiscal year further out than Hunt’s March Budget – 2029/30 rather than 2028/29.

History is littered with revisions and technical tweaks to fiscal rules when the targets look unachievable. Currently, the one occupying the nerdiest fiscal experts is a change to the definition of total debt. This is currently defined as public sector net debt excluding the Bank of England – £2,524.4bn or 91.6% of GDP in June 2024. Although the Bank of England debt is excluded, it does figure in the overall number because of how quantitative tightening (QT) is accounted for. This is where matters become arcane but financially significant.

George Osborne changed the rules for quantitative easing (QE) in 2012 to mean that, effectively, the Treasury retained the surplus interest earned by the Bank from QE purchases. The then Chancellor also agreed that if the Bank suffered net interest shortfalls and capital losses due to the QE programme, the Treasury would indemnify these. Until October 2022, the Treasury gained a net £153bn from this bargain, as explained in this OBR note.

By 2023/24, the Treasury had to pay the Bank of England (BoE) over £44bn to cover excess net interest (thanks to the high bank base rate and low gilt coupons) and the capital losses on bonds sold under QT or reaching maturity (QE generally resulted in gilt purchases at prices above par). Only the interest cost shows up in the annual deficit, but both it and the capital losses are counted in total debt. This has a variety of odd consequences, such as the total debt ex-BoE figure being sensitive to the speed at which the Bank sells gilts under QT or its holdings mature. Logically (a dangerous word in this area), it does not make sense for the decisions the Bank makes on managing its balance sheet to impact the Chancellor’s all-important five-year ‘headroom’.

A redefinition of debt that revises how QT is accounted for is possible on October 30, as is a change or suspension of QT (presented as a Bank decision, which is currently due in September). One estimate, from Toby Nangle at the FT, was that if QT had been stopped at the time of the last Budget, Jeremy Hunt would have had about £22bn of headroom in 2028/29 against the OBR’s estimate of £8.9bn.

Comment

There will doubtless be more rumours about how the Chancellor might raise taxes as we move nearer to October 30. To an extent, she has already picked one target: wealthier pensioners who will no longer receive winter fuel payments nor have their care fees capped. They would also be in the line of fire for higher capital taxes. And they are not, generally, “working people”.

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.