First Labour Budget set for October

The Chancellor, Rachel Reeves, has announced that the new government’s first major fiscal event will take place on 30 October.

This is being branded as a Budget – indeed a “Budget to fix the economy” – rather than merely an Autumn Statement. This suggests significant changes to come.

The first fiscal event of any new government is always keenly anticipated. It typically looks to set the direction for the parliament, implement key tax and spending commitments, and perhaps make difficult decisions at a time when its popularity is highest (and the next election is some years away!).

The context of this Budget, however, could hardly be more dramatic. In her announcement, the Chancellor referred to an “unsustainable” £22bn black hole in public finances. The claim is vigorously contested by her predecessor, Jeremy Hunt, highlighting that a substantial part of the shortfall is a result of the Labour government’s decision to award generous public sector pay settlements.

Whether such spending decisions are viewed as addressing a situation which the new government has inherited or are effectively unfunded manifesto commitments may depend on one’s political standpoint. However, it seems that the steps announced on 29 July 2024, such as means-testing the winter fuel allowance and deferring capital projects – controversial as they may be – will need to be supplemented by further major decisions on tax and spending.

If, as widely expected, tax-raising measures are required, what might they include?

In the election campaign, the Chancellor committed to not raising the rates of income tax, National Insurance or VAT, and gave a clear commitment on corporation tax to keep the UK competitive.

These are the main revenue raising taxes. Is the scale of the issues that the Government claims to have identified so great that even these commitments require reconsidering?

On the assumption that the revenues would be raised elsewhere, however, where might the Chancellor look?

Speculation about the rates of capital gains tax (CGT) – a feature of almost every Budget cycle – will no doubt intensify. The main rate applicable to disposals is 20%, compared with much higher rates of tax on income. Given previous commitments not to raise taxes on “working people”, this could be an area which the Government targets, with a potential increase in CGT rates. The introduction of any rate change from the start of the new tax year (6 April 2025) cannot be assumed, but such a step could be seen as producing a “double-bubble” for the Treasury – an acceleration of asset sales and capital gains tax revenues in the short-term, and potentially higher longer-term CGT yields beyond that.

Business asset disposal relief (BADR) is currently available on the first £1m lifetime gains from qualifying sales of business assets and provides an effective rate of 10%. The Government might consider that the removal of a relief is easier and more palatable than a rate change – particularly if it wishes to implement it immediately rather than from the start of the next tax year.

Higher rate tax relief on pension contributions is an area which always attracts much commentary. The current annual allowance was increased by the previous government from £40,000 to £60,000 and the lifetime limit was abolished. This may therefore be an area which the present government wishes to revisit.   

The difficulty is that the rates and reliefs in place are there for a reason. Some form of capital gains tax relief on the disposal of a business has been a consistent feature of the CGT regime for many years. Any steps which create a less business-friendly environment are unattractive for a government which wishes to be seen as promoting business and economic growth. Likewise, governments of all colours have promoted saving for retirement. Reducing the incentives to do so risks a greater future burden on public finances from pensioners in retirement and a reduction in the ability of pension funds to invest.   

The tone of the Chancellor’s announcement would suggest significant change is coming – but where?

If you would like to discuss the impact of potential tax changes, please contact me or a member of the team. Call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Dominic Carter