What could Rachel Reeves do to raise tax... And what should you be doing in advance of the Budget?

In her first speech as Chancellor of the Exchequer, Rachel Reeves, revealed a £22 billion ‘black hole’ in the public finances. Last month the Prime Minister, Keir Starmer, referenced the forthcoming Budget in his speech on ‘Fixing the Foundations of our Country’ and confirmed ‘…it’s going to be painful…..those with the broadest shoulders should bear the heavier burden….’.

Given Labour’s pre-election manifesto promises, it will be a challenge. They promised not to raise the basic, higher or additional rates of income tax, national insurance, corporate tax or VAT rates. These taxes contribute around two thirds of total UK tax receipts. This leaves finding £22bn from taxes which together contribute approximately £150bn.

Despite Labour’s pre-election tax promises, given dividends on shares are often viewed as income of the wealthy, and are used as an alternative way to extract remuneration from an owner managed company tax efficiently, we could see an increase in the dividend tax rate. The basic rate of tax on dividends is 8.75% which is significantly lower than the main basic rate of 20%.

If you are an owner of a limited company and normally receive dividends, if the dividends have not yet been paid for the current tax year, you may wish to consider bringing them forward to before Budget Day.

Income tax receipts can also be increased through the continued freezing of tax thresholds. In 2024/25 there is estimated to be 4.4 million more taxpayers compared to 2021/22 when the thresholds were frozen. This includes a 26% increase in taxpayers over state pension age. There is also estimated to be a 117.1% increase in additional rate taxpayers paying 45% tax.

The current CGT rate system is complicated with rates of 10%, 18%, 20% and 24% depending on what is being sold and the level of other income received in the tax year of disposal. It does need simplifying. The low CGT rates also encourage the avoidance of higher income tax rates through schemes which change income to capital gains.

However, history has shown us that raising CGT rates, to say 40%, could cause a significant fall in tax raised as investors choose to retain assets rather than sell and pay higher tax.

Given CGT represents 1.5% of total tax receipts there is unlikely to be a huge contribution to the black hole by raising CGT rates. Further, any significant increase in the tax rate should realistically be accompanied with some form of allowance for inflationary gains, to ensure taxpayer behaviour does not result in less asset sales which would not be good for the economy.

Given the argument for simplicity we could see a single flat rate of CGT, which is likely to be at least the highest current rate of 24%, and perhaps an increase to that rate. Further, a scrapping of the very low 10% rate seems sensible, by removing business asset disposal relief. This relief currently allows individuals to pay CGT at 10% on gains of up to £1M during lifetime on certain business assets.

Whilst it is usual for budgetary changes to tax rates to be applied from the start of the next tax year, if you are considering a disposal of assets and can bring forward the taxation date to before Budget Day, this should be considered with appropriate legal and tax advice.

There has been much in the press about the possible removal of business property relief (BPR) and agricultural property relief (APR).

Whilst there is some need for reform of IHT legislation the purpose of these reliefs should not be forgotten. APR and BPR enable taxpaying businesses to continue to contribute to the economy, employ people and invest in the local and wider economy. Without the reliefs businesses and farms, and assets used within them, would need to be sold to settle IHT liabilities.

Whilst protecting the above reliefs, Reeves could raise tax by removing the CGT uplift on death. This seems fair – with the purpose of APR and BPR being to protect the future continuation of businesses and farms, why should there also be no CGT payable if IHT relievable assets are sold by beneficiaries shortly after the previous owner’s death?

These IHT reliefs are often used to avoid paying IHT. To counter this we could see a lengthening of the ownership test from two years to up to say ten years, to ensure genuine business investments qualify. We could also see a cap on the value qualifying for relief.

The removal of BPR on AIM shares has been suggested, however, this needs to be considered alongside the benefit of the capital this provides to new entrepreneurial businesses which contribute to the growth in the economy.

Over the last few years there has been much debate over the ‘wholly or mainly’ test and whether this should be changed to the CGT test of ‘substantially’, which would require more than 80% of the business to be trading for BPR to apply. This would have huge implications for many diversified farming and estate businesses and would require careful planning of the business structure going forward.

Any changes to IHT are also likely to impact Trusts. Therefore, if consideration is being given to banking existing IHT relief using Trusts, one should also consider the impact on Trusts of future changes.

If you own relievable assets, or are a Trustee of a Trust with relievable assets, consider the succession plan and whether there is the ability to pass on assets now to bank existing reliefs. Careful planning would be required to ensure this fits with the overall succession plan and the existing owner retains sufficient assets and income for their future needs.

It would be hugely damaging if radical changes, such as the removal of APR or BPR or capping those reliefs, were introduced in the Budget without first completing a full consultation process to consider the impact on businesses and the economy.

There has been much debate in the press regarding limiting relief and raising tax on pension investments.

To promote saving for retirement, pension contributions benefit from tax relief at the savers rate of income tax, with basic rate taxpayers receiving 20% relief and higher rate taxpayers at 40% or 45%.

This costs the government £45bn each year, so it is possible we may see the introduction of a flat rate of between 20% - 30% for everyone, which would result in a significant Treasury saving.

However, any such move would contradict initiatives from previous governments, where there has been a drive to encourage individuals to save more funds for their retirement. Making pensions less generous for higher earners risks individuals saving less for their retirement.

There are some positive steps you can take before the Budget on October 30. If you are planning to make additional contributions to your pension this year – and you are a higher rate taxpayer – you should consider doing so prior to the Budget taking place. Additionally, you can utilise any unused allowances from the previous three tax years.

There has also been speculation the lifetime allowance could be reduced. In addition to this, some commentators have highlighted the possibility the tax free 25% lump sum could be reduced, or possibly capped at a maximum of £100,000.

Further IHT could be introduced on pension funds left on death. Any funds that remain in a pension at death (at any age) are not subject to inheritance tax. As such, there is a substantial incentive, for those who can, to use non-pension assets to fund their retirement while preserving their pensions for bequests. This may be a target for the government and has been widely criticised by left leaning think tanks.

Income from interest and dividends on cash and shares in ISAs is exempt from income tax and capital gains tax. Capping the amount invested in an ISA on which exempt income can be received could raise tax towards the black hole.

Tax relief on ISAs is anticipated to cost the Treasury nearly £7bn in 2023/24. Just 20% of ISAs hold more than £50,000 in savings. However, it is the high volume of smaller saving pots which accounts for the majority of the ISA relief.

In theory the government could save up to £5bn by capping relief on the first £50,000 held within an ISA. However, this is likely to be viewed as unfair by savers who have taken advantage of a scheme widely promoted by previous governments. Changing the rules now would be an unpopular move.

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Since the publication of this article, the government has announced that as of 1 January 2025 all education services and vocational training supplied by a private school, or a “connected person”, for a fee, will be subject to VAT at the standard rate of 20%. Boarding services closely related to such a supply will also be subject to VAT at 20%.

A wealth tax has been put forward many times from various lobbying groups. However, a wealth tax would be complicated to implement and expensive to administer. Therefore, I doubt this is something we will see in this Budget.

Instead, it is likely we will see some changes to Council Tax. We should expect an increase or removal of the cap, or more bands to bring larger properties into higher rates.

If any of the potential changes are likely to impact you, please get in touch.