What might be announced in the Chancellor’s Budget?

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By Susan Cattell, Head of Tax Technical Policy

16 October 2024

With speculation about tax increases in the Budget hotting up, we look at what the Chancellor might announce on 30 October.

On 29 July, the new Chancellor told the House of Commons that she had identified a £22 billion hole in the public finances and warned that tax rises were on the way in the Budget. Since then, the Institute for Fiscal Studies has suggested that the Chancellor might need to find up to £25 billion in tax increases to avoid spending cuts and a return to austerity.

Labour’s election manifesto ruled out increases to the rates of income tax, National Insurance or VAT – the three taxes that produce the largest tax revenues. It also said that corporation tax (the fourth largest revenue raiser) would be capped at 25% for the next parliament. These commitments could make it difficult for the Chancellor.

Unsurprisingly, speculation about which taxes might increase in the Budget has been hotting up as we approach 30 October.

Already announced - likely to go ahead

• Increasing the rate of stamp duty land tax (SDLT) on purchases of residential property (in England and Northern Ireland) by non-UK residents by 1%.
• Extending the Energy Profits Levy until the end of the next parliament and increasing the rate of the levy.
• Charging VAT on private school fees (and applying business rates to private schools). Concerns have been raised about the timing of the introduction of VAT on fees, including potential adverse impacts on state schools. The Chancellor could decide to delay the start date, perhaps until September 2025 (rather than introducing the change part-way through the school year), although the Exchequer Secretary to the Treasury recently said that the government remained committed to 1 January 2025.
• Changing the tax treatment of carried interest (ie the profits of private equity funds paid to individuals as carried interest). Currently, carried interest is taxed as a capital gain; it could be taxed as income instead, or the rate of tax could be increased. There has been a call for evidence on reform, so the responses may influence the final shape of any changes.
• Abolishing non-dom status. The core policy seems certain to go ahead – but there have been recent hints that the Treasury might be reconsidering some aspects of the proposed changes, due to concerns about wealthy non-doms choosing to leave the UK. If there are to be changes, the proposals around IHT, particularly IHT on excluded property trusts, seem the most likely to be adjusted.
• Extending the use of electronic invoicing. On 23 September the Chancellor announced that HMRC would ‘soon’ launch a consultation on e-invoicing to promote its wider use across businesses and government departments. While this is not an outright tax raising measure, one of the stated intentions is to reduce errors in tax returns to help close the tax gap.

Changes to Capital Gains Tax (CGT)

There’s widespread expectation that there will be increases to CGT. However, the amount that could be raised is uncertain due to the behavioural changes we might see in response to any changes. For example, people may decide not to sell assets, in the hope of a more favourable regime being reintroduced. Conversely, there could be a short-term surge in disposals, if any changes don’t take effect until, say, the beginning of the next tax year.

• Increase the rates of CGT: This seems to be a strong possibility. Currently, the rates are 18 or 24% on gains from residential property and 10% or 20% on gains from other chargeable assets. The rates could be aligned with income tax rates – or simply increased. Another option would be to have a single CGT rate, which would be a simplification. The Treasury is reported to be ‘modelling’ rates between 33% and 39%. However, any significant increase in rates would prompt calls for the re-introduction of some form of indexation allowance, to avoid taxing gains that have arisen purely due to inflation.
• Reduce the annual exempt amount (AEA): This seems less likely because it has already been reduced considerably since 2022-23 when it was £12,300 (£6,150 for trusts), to £6,000 (£3,000 for trusts) in 2023-24 and £3,000 (£1500 for trusts) in 2024-25. Reducing it further would impose administrative burdens and increased costs on HMRC and taxpayers, due to the need to report very small gains. When the Office for Tax Simplification suggested reducing the AEA in its 2020 CGT Review, it said this should only be done in conjunction with other measures to reduce administrative burdens, including broadening the current chattels exemption However, this wasn’t the approach adopted by the previous government.
• Restrict, reform or abolish Business Asset Disposal Relief (BADR), previously Entrepreneurs’ Relief: Currently, this relief offers a rate of 10% on qualifying gains (with a £1 million lifetime limit on relief). BADR has been criticised for being poorly targeted and failing to achieve its purpose of increasing owner managers’ investment in their businesses. Any changes could be aimed solely at revenue raising – or at providing more of an incentive for entrepreneurs to invest.
• Remove the CGT uplift on death: Currently, any assets held on death benefit from an uplift to market value for CGT purposes. Arguably, this encourages taxpayers to retain assets, even when it might make more sense (for non-tax reasons) to dispose of them. If the uplift were to be removed, ascertaining the cost of assets that might have been owned by the deceased for many years could be a problem for executors or beneficiaries.

Pensions

When the previous government announced the abolition of the lifetime allowance (the maximum amount that could be put into a pension pot without incurring an extra tax charge), Labour initially said that it would reinstate it, but this intention was dropped before the election. Leaving aside problems in the NHS and in other parts of the public sector (for example, the armed forces or the senior civil service), any new lifetime allowance regime would involve significant complexity and administrative burdens, so this change seemed sensible. There are, in any case, other possibilities, as outlined by the Institute for Fiscal Studies (IFS) in its recent Pensions Review, although as the IFS notes, constant changes to the tax regime for pensions are unhelpful:

• Restricting relief on pension contributions to the basic rate: Currently, higher (and additional) rate taxpayers obtain relief at a higher rate. The IFS noted that this change would amount to a £15 billion tax rise (largely borne by higher earners). However, the IFS also highlighted that more people would be brought into higher-rate tax if the treatment of their (and their employer’s) pension contributions changed. For example, it calculated that an experienced nurse would face an additional tax bill of £1,000 a year, if relief were restricted to the basic rate. There would also be major practical challenges for defined benefit schemes (mostly in the public sector) as the value of the employer contribution for individual employees would be difficult to measure.
• Charging Inheritance Tax (IHT) on pension pots: The IFS calculates that removing the current 'inequitable treatment' could raise several hundred million pounds a year in the short term, rising to potentially as much as £2 billion per year (though probably less).
• Reduce or remove the 25% tax-free lump sum: Currently, 25% of a pension can be taken tax-free (up to a limit of £1,073,100, i.e. £268,275). The intention is to incentivise pension saving, but the IFS suggests that it is poorly targeted and calculates that reducing the amount that could be taken tax-free to £100,000 would raise around £2 billion per year in the long term. This would affect those with larger pension savings. The IFS also suggests that some form of ‘top up’ scheme could be implemented to target relief at lower income pensioners (although clearly that would reduce the revenue raised). One likely objection to significantly reducing the tax-free sum would be that those close to retirement have made plans (for example, to pay off mortgages) on the assumption that it would be available.
• Introduce national insurance on employer pension contributions: According to the IFS, if levied at the full rate (13.8%), this would raise around £17 billion per year (before accounting for behavioural responses).

Inheritance tax (IHT)

The IHT nil rate band has been £325,000 since 2009/10. The Residence Nil Rate Band (RNRB), introduced in 2017/18, reached £175,000 in 2020/21 (with a taper threshold of £2 million) and remains frozen at that level. There have been suggestions that the RNRB could be abolished, with the Resolution Foundation suggesting this could raise £2 billion per year. It also proposed that if RNRB (and some other reliefs) were to be removed, the Chancellor could consider the introduction of lower tax bands for IHT, rather than the current single 40 percent rate. For example, IHT could have a 20, 30 and 40 per cent rate structure, with the top rate only kicking in beyond £1.5 million. The combined changes would still result in a net increase in revenues for the Treasury.

In its 2023 Green Budget report, the IFS also suggested that RNRB could be abolished but that this could be combined with extending the nil-rate band from £325,000 to £500,000 which “would cost around £700 million a year and hold the proportion of deaths resulting in inheritance tax down at around 4%, while making the tax system fairer”. The IFS also discussed the reduction or removal of Business Property Relief (BPR) and Agricultural Property Relief.

There has also been press speculation that the IHT relief currently available for AIM shares (through BPR) could be removed.

Other ideas

As Budget day gets closer, new ideas for raising revenues, which the government is said to be considering, appear every day. Here are a few of the more eye-catching ones:

• Increase the rate of employers’ National Insurance Contributions: A 1% increase could produce £8.5 billion per year. This piece of speculation has been given some weight by the refusal of the Prime Minister, the Business and Trade Secretary and the Chancellor to rule it out.
• Remove VAT zero-rating for cakes, so that they would be subject to 20% VAT.
• Abolish or reduce stamp duty on UK share transactions, to encourage investment in London-listed companies.
• Increase fuel duty: The rate for petrol and diesel had been frozen since 2011-12, before the previous government introduced a temporary 5p reduction in 2022, which was extended in subsequent Budgets.
• Increase tax on online gambling: The Social Market Foundation suggests that Remote Gaming Duty could be doubled from 21% to 42%, which could bring in as much as £900 million (assuming no change in activity).

Developing effective tax policy

Whatever the Chancellor decides to announce on 30 October, we want to see the government committing to a robust tax policy making process.

The government has pledged to hold a single annual fiscal event, which we support, as it would facilitate good consultation and the development of effective tax policy. However, we also want the government, HM Treasury and HMRC to ensure that more consultations on tax measures include all five stages set out in the 2011 ‘Tax Consultation Framework’. This would help make sure that the best options for implementing government policies are identified, operational practicalities are addressed, and the final legislation is workable (and avoids unintended consequences).

Let us know your views

We respond to tax consultations and calls for evidence and attend meetings with HMRC at which service levels, delays and issues raised by members are discussed. We welcome input from members to inform our work; email tax@icas.com to share your insights and feedback.