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Commentators are predicting that Rachel Reeves will unveil a clutch of tax hikes to fill a £22 billion ‘black hole’ she has identified in the public coffers when she delivers her Budget speech on Wednesday 30 October, writes Kevin Pratt.
She’ll also want to raise additional funds to underwrite the government’s spending plans.
The decision to axe Winter Fuel Allowance payments to around 10 million pensioners this winter has demonstrated that Reeves – the first woman to hold the post of Chancellor of the Exchequer – is not afraid to make unpopular decisions.
She’s received unwavering support from Prime Minister Sir Keir Starmer in the teeth of protests from across the political spectrum, so it’s reasonable to assume she’s not going to pull any punches.
Tax: the ‘holy trinity’ and the pain thresholds
Reeves has reiterated Labour’s manifesto commitment not to increase the rates of three key government revenue-generators – the holy trinity of income tax, National Insurance Contributions and VAT (although VAT is being introduced on private school fees).
The Chancellor could, however, maintain the freeze on income tax thresholds, which would result in more people becoming taxpayers or ascending into higher tax bands as their pay increases – something known as ‘fiscal drag’.
Say, for example, your income is £12,000 and you have no other taxable income. This amount falls within the £12,570 standard personal tax allowance, so you do not pay income tax.
But if your pay increases and you earn more than £12,570, you would then be taxed at 20% on the amount above the allowance.
The same scenario applies with the threshold between the 20% basic rate of tax and the 40% higher rate (£50,270), and between the higher rate and the 45% additional rate (£125,140).
Couple of points to note here: if your taxable income is over £100,000, you lose £1 of your personal allowance for every £2 of income above the £100,000 level. This means by the time you get to £125,140, you don’t get any personal allowance and are taxed on everything you earn.
If you live in Scotland, there are six thresholds rather than three, set at different levels with different rates of tax applying. Any changes here will likely be announced in December.
Under the Tories, the thresholds in England, Wales and Northern Ireland were already due to remain frozen until 2028, but it is conceivable that the Chancellor might extend this date to help balance the books over a longer forecast period.
The decision to axe Winter Fuel Allowance payments to around 10 million pensioners this winter has demonstrated that Reeves – the first woman to hold the post of Chancellor of the Exchequer – is not afraid to make unpopular decisions.
Where will the pain-points be?
The prime candidates for a tax hike in the Budget are:
- capital gains taxwhich is paid on the disposal of assets. The current rates are 10% (8% for residential property) and 20% (24% for residential property) on any gain above the basic rate tax band. The government could either hike these rates or reduce or remove the £3,000 tax-free CGT annual allowance to which everyone is entitled
- inheritance taxwhich is levied at 40% on the value of an estate above £325,000, although the estate is exempt if the amount above £325,000 is left to a spouse, civil partner, charity or amateur sports club. Again, the Chancellor could increase the rate or tighten the net on the estates that would be liable to pay it, for example by removing exemptions on pensions and agricultural land
- pensions. Here the options include reducing the amount of tax relief on contributions (perhaps by abolishing the 40% and 45% rates of relief enjoyed by top earners and making it a flat rate of 20%) or trimming the size of tax-free withdrawals from pension kitties
- investment income. At present, everyone gets a £500 annual share dividend allowance, meaning those with modest (or underperforming) share portfolios often do not have to worry about paying tax. This allowance could be in line for the chop, which would make it even more imperative for shareholders to make full use of their stocks & shares ISA allowance, which shelters shares income and gains from all tax
- savings interest. Again, taxpayers get an annual allowance (£1,000 for basic rate taxpayers, £500 for those paying the higher rate, £0 for additional rate payers) that protects interest from tax. If this were changed, it would be imperative to shelter savings to the fullest extent under an ISA umbrella
- fuel duty. Worth the thick end of £25 billion a year, according to the Office for Budget Responsibility (OBR), this is a delicious source of revenue for any government – and one that is deeply resented by many drivers. It’s been frozen since 2012 and there was a 5p-per-litre cut in 2022 when pump prices went through the forecourt roof – but the cut is due to be reinstated next year, and it is hard to envisage. Reeves reversing this plan. She’ll also be mindful that electric cars, which are growing steadily in number, don’t pay fuel duty (although VAT is levied on energy for recharging), so she can’t rely on this particular cash cow indefinitely
- ‘Sin’ taxes. Alcohol, betting, tobacco and, from 2026, vaping duties may also be increased.
What else could be in the firing line?
We may also see changes to the rules affecting ‘non-doms’. These are individuals who live in the UK but who are non-domiciled for tax purposes, meaning they can avoid or reduce the tax they pay on overseas earnings.
If the Chancellor is feeling particularly combative, she could introduce a wealth tax on the super-rich, although this would be immensely complicated as well as deeply controversial as it would seek to harvest revenue from illiquid assets such as property and other possessions.