Author: Tim Parker
Chartered Financial Planner, Associate Director - Member of the Investment Committee
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Published: October 2024
With less than a week to go now until Labour’s first Budget in 15 years, we are starting to hear hints and rumours about what may be included in the statement. Unless there are significant leaks in advance, we won’t know the detail until the day, but here are some of the areas where there has been speculation.
National Insurance
In Labour’s manifesto, the party promised “Labour will not increase taxes on working people, which is why we will not increase national insurance”. More recently, our Prime Minister Sir Keir Starmer has refused to rule this out and business and trade secretary, Jonathan Reynolds, told Sunday Morning with Trevor Phillips that the promise “was specifically in the manifesto, a reference to employees”; maybe the clearest indication yet that Labour are considering a change around employer national insurance. At the moment, companies do not pay national insurance on pension contributions they make for staff, but reports have suggested this could change.
Pension
Just one of the rumours is around changes to pensions, whether paying money in, or taking money out. In June, Labour had to deny they had plans to stop people accessing a lump sum of their pension pot tax-free after Sir Keir Starmer suggested the entitlement would end, on a BBC Radio 5 Live phone-in with Nicky Campbell. This hasn’t stopped the rumour mill going into overdrive that the ability to withdraw 25% of your pension as a tax-free lump sum will be removed.
On the flip side, in addition to a change to national insurance on employer pension contributions, another area of possible change is the tax relief received on contributions. At the moment, savers receive tax relief at the same rate as their income tax – so basic rate taxpayers get tax relief at 20% and higher rate taxpayers at 40% or 45%. The government could introduce a single flat rate of relief which would make the system less generous for higher earners, although reports have suggested this is now an unlikely move.
Capital Gains Tax (CGT)
If you had watched Robert Peston on his television show recently, you would be forgiven for thinking Capital Gains Tax (CGT) had already been increased. Although when interviewing former Sainsbury’s boss Justin King, they discussed how the reduction of CGT from 28% to 24% for higher earners selling additional property actually increased the amount of tax the government received.
The speculation for CGT is that the rates could be aligned with income tax. There is precedent for this with Nigel Lawson doing just that in 1988. This would double the 10% rate for basic rate taxpayers to 20% and for higher rate taxpayers, from 20% to 40%. In a similar vein to Peston and King above, Charlene Young, Pensions and Savings Expert at AJ Bell said “The government’s own figures show that a big increase in CGT rates could backfire and actually lead to lost revenue for the government”. She goes on to suggest there are other options such as eliminating the reset of CGT on death, which creates an incentive in some cases to hold onto assets, or changing the level of business relief from 10% to 20%.
Inheritance Tax
According to the Financial Times, Rachel Reeves has been studying a 2019 report by the now defunct Office of Tax Simplification for reforming Inheritance Tax (IHT). The report questioned the IHT exemption for AIM shares, an area in which she has been a long-standing critic, although this could seriously affect the AIM market if the exemption were to go. Going back to the pension theme, a potential reform could be bringing defined contribution pension pots within Inheritance Tax, instead of them being exempt on death. This would be a game changer from a planning perspective when discussing a retirement strategy. Also, removing exemptions for business assets and agricultural land could be within her sights, not least as they could be made less generous, rather than axing them completely and risk too much backlash.
We could see areas of lifetime gifting looked at such as gifts out of income, introducing a fixed percentage of income rather than the excess. Also extending the 7-year rule on gifts, or replacing it with a lifetime limit, could be on the cards. There have been some rumours about this being extended to 10 years.
Whether some or all of these changes happen, there will be plenty for us to discuss with clients to ensure their strategy remains on track or if there are any changes needing to be made.
If you would like to talk to one of our Chartered Financial Planners, please contact us on 01223 233331 or email info@mmwealth.co.uk.
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