Money blog: State pension hike next April revised after new wage data (2024)

We have been told the upcoming budget will be painful - but what might that mean in practice?

Labour has promised income tax, national insurance and VAT won't change on 30 October, though there is a small caveat on NI.

In comments that emerged yesterday, Chancellor Rachel Reeves suggested those with the "broadest shoulders" would take the biggest hit.

We've taken a comprehensive look at which taxes could rise below - but should say right from the off that at this stage we're dealing largely in speculation and clues offered by ministers...

National insurance

Before the election Labour promised not to increase taxes on working people, including national insurance.

But when asked by Conservative leader Rishi Sunak at PMQs if the commitment on national insurance applied to both employer and employee contributions, Sir Keir Starmer dodged the question.

Employer contributions are currently worth up to 13.8% of a worker's salary.

Speculation ramped up yesterday as Ms Reeves said employers' contributions were "not in the manifesto", arguing: "We were really clear in our manifesto that we weren't going to increase the key taxes paid by working people."

Another option would be taking national insurance from employer pension contributions.

The Institute for Fiscal Studies saidin a reportthis could raise £17bn a year.

Other business taxes

Also yesterday, Ms Reeves implied additional business taxation would not deter investment. "Tax is not the first thing businesses and investors are raising with me," she said, in a hint that at least some of the pain will be directed at businesses.

Labour is understood to be consulting on changing business rates, which are charged on most non-domestic properties with relief for some including small businesses, retail, hospitality and leisure properties.

A change could be made so they are related to the value of the land instead of the current rateable value, which is an estimate of how much it would cost to rent that property for a year in April 2021.

Ms Reeves has previously confirmed the 25% cap on corporation tax will remain.

Pension lump sums

Rachel Reeves, the chancellor, is reportedly considering reducing the amount people can take out of their pensions without paying any tax.

At present, the tax-free lump sum most people over the age of 55 can take from their pension pot is 25%, up to a maximum of £268,275.

But government officials have asked a major UK pension provider to look into the impact of cutting that amount to £100,000,according to The Telegraph.

Financial advisers are said to be receiving a growing number of calls from clients wanting to cash in their 25% tax-free lump sum ahead of the budget.

But Ross Lacey, director and chartered financial planner at Fairview Financial Management, advises his clients not to make any "rash decisions".

"Seeing as there's a greater emphasis on people providing for their own retirement and pensions already suffer with an image problem, we think it would be madness to make any changes to pensions that make them less attractive," he said.

Pensions tax relief

The Fabian Society, a left-wing thinktank, said the government could raise at least £10bn a year by reducing tax relief on the money people pay into their pension pots.

The rules give you tax relief equivalent to whatever your marginal rate is - so basic-rate taxpayers get 20% tax relief, while higher and additional-rate taxpayers are entitled to 40% and 45% respectively.

One idea could be reducing the relief offered to higher earners - for example, to 30%.

But according to a report inThe Timesthis month, Treasury officials have told the chancellor the policy would hit public sector workers on "relatively modest incomes" and the idea has been abandoned.

It's worth noting that the tax relief only applies on the first £60,000 saved each year (this is employee and employer contributions combined).

Some have suggested this limit could be reduced.

Other potential pension changes

Other ways the chancellor could increase the tax-take on pensions - and we should be clear that there's been no guidance that this is the direction Ms Reeves will take - include:

  • Charge national insurance on private pension incomes;
  • Levy income tax on all inherited pensions;
  • Pension pots could also be liable to inheritance tax in the same way as other assets.

Inheritance tax

This is one of the taxes most speculated about.

Inheritance tax is charged at 40% on the value of an estate above £325,000 when someone dies - though the numbers change when partners and children are recipients. Read about all the intricacies here:

The tax rate could be increased or the value people have to pay inheritance from could be lowered.

There are several exemptions, including on agricultural land and family businesses - these could potentially be lifted.

In a leaked recording from March, Darren Jones, now chief secretary to the Treasury, was heard saying inheritance tax could be used to "redistribute wealth" and address "intergenerational equality".

Capital gains tax

This is another tax being looked at, according to multiple reports.

Capital gains is imposed on the profit from the sale of capital assets, including second homes, shares, business assets and most personal possessions worth £6,000 or more, apart from cars.

At present, people do not have to pay tax on the first £3,000 of profits, or £1,500 for trusts.

The tax-free threshold could be removed and the tax could be imposed on assets that are exempt now.

Alternatively, the tax rate could be increased. Capital gains tax is between 20-28% for those who pay higher rates of income tax, but could be increased to as much as 39%,according to The Guardian.

This report was put to the prime minister yesterday, and he seemed to scotch it, replying that much of the budget speculation to have emerged so far was "wide of the mark".

There have been several reports of an increase in asset selling ahead of 30 October.

A third of houses for sale on Zoopla are "chain free", the online property website said this month, a notable rise as investors and second home owners look to sell"dueto recent tax changes and speculation more may follow in the autumn budget".

Council tax

Council tax is set in bands that are based on the 1991 value of homes, which has been branded "absurd" by the IFS and "incredibly poorly designed" by the Institute for Government (IfG).

Gemma Tetlow, chief economist at the IfG, said council tax could be reformed "in a very sensible way... rather than having the banded system you could move to something that is much more proportional tax on land revenue".

Former shadow minister Jonathan Ashworth told Sky News during the election campaign that Labour would not change council tax bands.

Despite this, there have been reports the government could replace the banding system in favour of a 0.5% tax on the value of a property per year.

This would mean that someone in a property worth £350,000, for example, would pay £1,750 a year.

That could particularly affect those living in London, where the average one-bedroom flat peaked at £327,000 in 2020.

In the leaked recording we mentioned earlier, minister Darren Jones said he was frustrated by the "out of date" council tax system and hinted homes worth over £1m may have to pay more.

One thing that won't change is the single person 25% discount, Pat McFadden, the chancellor of the duchy of Lancaster, all but confirmed on Sky News last month.

Savings

An option open to the chancellor is increasing the tax on savings.

The Resolution Foundation thinktank has previously argued for a lifetime cap on ISA savings at £100,000.

People can currently put £20,000 a year into ISAs, and this money is protected from tax.

Interest from ordinary savings is liable for tax after £1,000 for basic-rate taxpayers and £500 for those in the higher-rate band (additional-rate taxpayers get no allowance).

Stamp duty

Stamp duty is paid on the cost of a property over £250,000, with more paid for second homes and by non-UK residents, and relief for first-time buyers (FTB).

However, the FTB relief is due to be cut from April next year.

Labour has confirmed the threshold for stamp duty for first-time buyers will fall back to £300,000, after it was raised to £425,000 in 2022 by Rishi Sunak.

Could other changes be on the cards?

Gambling tax

A report in The Guardian suggested a £3bn tax raid is under consideration.

"It's definitely on the map," a source familiar with Treasury thinking told the newspaper. "There's no obvious pushback to it."

The left-leaning Institute for Public Policy Research has said up to £3.4bn could be raised by 2030 by doubling taxes on "higher harm" products such as online casino games.

The report claims the 15% general betting duty, levied on high-street bookmakers' profits, could be doubled.

Remote gaming duty could go from 21% to 50%.

Fuel duty

In 2022 Rishi Sunak cut fuel duty by 5p - until March next year.

This could be scrapped, with the RAC saying the cut costs the Treasury £2bn a year.

Fuel duty has otherwise been frozen for more than a decade.

When could any changes kick in?

Dozens of readers have asked this question over the past few weeks. For example...

If they decide to reduce the amount of pension lump sum you can take out tax free to £100k, how quickly could they put in place?

Josh

As with much of the above, we're speculating, but we can look at past form.

For example, Labour came to power promising to apply 20% VAT to private school fees - but there's been a short grace period, from the election in July to the policy being enforced from 1 January.

Speaking specifically about the potential pension change Josh asked about, Mark Scott, director and independent financial advisor at Positive Advisers, said: "If she does make changes, they will most likely start at the beginning of the next tax year [April 2025]."

Ross Lacey, from Fairview Financial Management, agreed: "Historically, any changes made by government on things like this have included transitional protection, so that those who would already be affected by the new rules keep whatever rights they currently have."

There's one notable precedent for tax rises being implemented immediately, however - in 2010, George Osborne, the chancellor, upped capital gains tax in an emergency budget as of midnight that evening.

Another way?

Tax rises are widely expected, with Labour saying they are needed to fill a £22bn black hole left by the Tories.

But this black hole could become less of a problem if the fiscal rules the chancellor has committed to were to change.

Data and economics editor Ed Conway explained previously: "A lot of economists believe the net debt statistic she inherited from the Conservatives is the wrong one to use in her fiscal rules - and that she should use the country's total national debt, not excluding any debt owned by the Bank of England.

"Long story short, if she uses this other measure (and I'm told this is something she is considering) then she suddenly has a lot more headroom."

Even if this does happen, though, Conway warned "there will be more bad news to come".

Whatever happens...

The tax burden in the UK "will likely stay at its 70-year high for decades", the Institute for Fiscal Studies has said.

Paul Johnson, its director, warned that factors such as rising health spending, people living longer, the pensions bill and a need to increase defence spending would make it harder to bring down public spending.

"My guess is that is going to stay there. My guess is it will not, in my lifetime, go back down to where it was through most of my lifetime," he said.

What could you do now to plan ahead?

We spoke to Duncan Bailey, partner and head of private client and charity at Brabners Personal, to find out what measures people could consider.

Read that here...

Money blog: State pension hike next April revised after new wage data (2024)
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