It feels like we have been holding our collective breath for this week’s Budget. Not since 1997 has a new government been elected with such a landslide which gives a new Chancellor the opportunity to make sweeping and unpopular announcements that they feel necessary to help the economy recover.
The government have sounded continuous warnings about the “pain” some may feel due to the black hole they claim to have inherited. So, what can we expect on Budget Day this Wednesday? There has been wild and varying speculation, so, together with some of my own predictions, I have picked out a few recurring themes:
Income Tax
We have been promised no headline rate changes for any of Income Tax, National Insurance or VAT. However, that has since morphed into “no tax increases for working people” although only last week we got a better idea of what the government mean by “working people”.
It seems “working people” does not include business owners or people with additional assets (e.g. savings or property), only lower earners, but not those who own or hold shares in a business. This is considerably narrower and gives a lot of scope for targeted tax increases, without raising headline rates.
It is expected that the long-standing freeze on income tax thresholds will be continued for another two years beyond the current 2028. This measure by itself is expected to raise an additional £7 billion in tax for 2029-30 due to the effect of “fiscal drag”, where thresholds do not keep time with pay rises. If the employer NIC threshold were also frozen, an additional £1 billion would be added to this.
The new clarity on “working people” could pave the way for other changes to taxes on e.g. property income or savings income, such as reducing tax free thresholds or restricted tax relief on certain expenses.
Capital Gains Tax
It is almost certain there will be some significant increases here. CGT receipts in the third quarter of this year have skyrocketed due to people selling up assets and businesses in anticipation of increases. Here are some areas where we could see change:
- Business Asset Disposal Relief – I did not believe this would be impacted until late last week, however there is now fresh speculation that it may be either abolished, or more likely reformed.
- Rates of CGT are likely to increase. It is possible they will align once more with Income Tax rates, but that would be a huge increase, so a smaller, but still significant increase is more likely. Rates on commercial property and shares are likely to increase but potentially not the rate on residential property which is at 28%. It was dropped to 24% in April 2024, but I consider this unlikely to continue as an increase in rates to align with that 28% top rate seems a high probability.
- The uplift of asset values on death could be removed – currently on death, the beneficiaries of the estate inherit assets with a CGT “base cost” of probate value. This is perhaps less likely as it will not increase tax revenue in the very short term.
There have been a few suggestions about a “Wealth Tax” such as that in many other countries. Such a tax would not be introduced straight away but we may well see a consultation launched on how it may work.
Pension Relief
There is almost certainly going to be some changes to pension relief such as
- Higher rate tax relief for individuals is likely to be curtailed, with speculation of a potential flat 30% relief.
- There is also a widespread rumour that employer NIC will also be due on employer pension contributions, which could raise an additional £10 billion for the Exchequer.
- It is also possible that a lifetime allowance cap on pension funds could be reintroduced, as well as a reduction in the amount that can be drawn down tax free on retirement.
Inheritance Tax
Several potential changes have been suggested here:
- Reform of agricultural and business property reliefs – either reducing or phasing out.
- Increasing the 7-year timescale for “Potentially Exempt Transfers” in lifetime to 10 years. Although this is less likely, some have even suggested abolishing the lifetime gifts rules so that lifetime gifts are simply accumulated and then included in the tax calculation for the estate on death.
- Inclusion of residual pension fund in death estate (currently excluded).
- Extending the freeze on the £325,000 nil rate band – although this could be increased instead alongside abolition of the £175,000 “main residence nil rate band”.
- Abolition of the exemption for “gifts from surplus income”.
Again, changes to these rules would not increase tax take in the very short term so may be lower priority, so we may simply see a wider consultation period begin to cover reform of the tax.
Stamp Duty Land Tax
The current temporary increases to the lower thresholds for SDLT on property are due to expire in April 2025, so it is likely that they will not be extended. In addition, there is a good chance that the additional surcharge for non-UK residents may be increased – this has been suggested already in order to fund the recruitment of additional planning officers.
Corporation Tax
No major changes are expected here, and the government has committed not to increase the main rate above the current 25% for the duration of the Parliament.
We are expecting the publication of a draft “Business Tax Roadmap” at the Budget which will give a good idea of government thinking for future business tax reform.
Employer’s National Insurance
The rumours of an increase here had quietened down somewhat as the Budget drew closer, but a fresh story on Friday suggested a general increase may well be on the cards. It does remain a distinct possibility that this rate could be increased from its current 13.8%, perhaps to 15%. That increase would raise around £11 billion per year, and if the starting threshold is also lowered, this figure could be a lot higher.
In summary
It is clearly going to be a huge, wide-ranging budget, and the speculation has been far reaching. However, if I had to pick out the three things I consider the most likely to happen, they would be:
- Employer National Insurance on pension contributions
- Continued freeze of Income Tax thresholds
- Increasing headline rates of Capital Gains Tax
Do keep an eye on our social media channels and website on Wednesday for our coverage as things unfold and detailed breakdown of all the announcements and what their implications may mean to us.
James Geary is our Corporate Tax Partner and volunteers his time for the Chartered Institute of Taxation as well as sitting on their Owner-Managed Business committee which is directly involved with government policy makers to help shape proposed tax policy before it goes live. He also contributes to various working groups with the CIOT, HMRC and Treasury specifically on R&D Tax Relief reform and tackling abuse. Contact James by emailing james.geary@randall-payne.co.uk or call 01242 776000.
