With the upcoming Autumn Budget announcement fast approaching, there are many predictions in the media surrounding potential tax changes. The government has pledged to not increase income tax, employee’s national insurance, corporation tax or VAT, but several other areas of tax were omitted from Labour’s statements. In this article, we look at some of these predictions and the possible impact they could have on individuals and businesses.
Capital Gains Tax
Capital Gains Tax (CGT) is one of the main taxes that Labour is expected to increase, with speculation that the rates could be increased to match income tax rates. Of course, the rate could be raised to any level, but it is highly unlikely to exceed the top rate of income tax. Equalising CGT and income tax would create a significant tax burden for some of those liable for CGT. There is speculation over how much of an increased tax take this would generate since it will impact behaviours. A large increase would need to be weighed against the long-term impact on business in the UK, such as a slowdown in both the housing market and business transactions.
We could also see a change to Business Asset Disposal Relief (BADR), which has already undergone a substantial decrease in previous years, from £10 million in 2011, to only applying to the first £1 million of lifetime capital gains. In the financial year 2022/23, BADR produced £1.1 billion of tax savings for individual sellers, meaning it could be viewed as an easy relief to abolish since the seller will have the cash to pay the tax. BADR is applicable in different types of business disposals, which can include the business of a sole trader, interests in a partnership, trust assets and shares in a private company.
Another potential change could be to remove the tax-free uplift in the cost of assets for CGT purposes on death, for assets where IHT isn’t payable. Examples include assets transferred to a spouse or where agricultural or business reliefs are available.
Inheritance Tax
The number of estates paying inheritance tax (IHT) has increased significantly over the years, due to inflation and frozen thresholds. There are currently a number of reliefs available for estates that pay IHT, such as business property relief, agricultural property relief and heritage relief, which are unlimited if the criteria for them is met. There is speculation that these will potentially be capped to an amount per person in the Autumn Budget, or alternatively that some reliefs could be abolished altogether. This would have significant consequences for farms, in a sector where it is already difficult to make it attractive for the next generation, or family-owned businesses on the death of an owner; potentially forcing the sale or winding up of family-run businesses just to pay IHT liabilities. Family-owned businesses are big employers in the UK which means that the implications could touch many more than just the owners.
Pensions
Pension tax relief is currently delivered at the highest rate of income tax for each individual. A ‘flat rate’ of pension tax relief could be introduced around the 30% mark which would make saving for pensions more attractive for those on lower incomes, although higher earners whose pensions are an important part of wealth building as an exit strategy from their businesses and tax management may suffer. Recent figures show that the cost of providing pension tax relief surged to £48.7 billion in 2022/23, with almost two-thirds of the relief going to higher and additional rate taxpayers.
The Treasury may also consider restricting people’s entitlement to tax-free cash when they access their pension pot, removing the inheritance tax benefits or introducing employers National Insurance on pension contributions.
Dividend Tax
According to HMRC, the number of people paying dividend tax has doubled in the past three years, due to the tax-free allowance being cut in April 2023 from £2,000 to £1,000, and again in April 2024 to £500. Current dividend tax rates are 8.75% for basic rate, 33.75% for higher rate and 39.35% for additional rate. The freeze in tax thresholds also means that many taxpayers whose dividend income was previously below the allowance now exceed this and are required to file a tax return. One prediction is that Labour could announce in the Autumn Budget that the dividend allowance could be cut further or abolished or that the dividend rates of tax be increased to equalise them with other earned income tax levels.
What steps can you take to prepare for the Autumn Budget?
Until the Chancellor reveals the Budget on 30th October, these tax changes are only speculation. There may well be other changes made that have not been mentioned here or in the popular press. We would therefore recommend refraining from making any quick and drastic decisions based upon speculations. If, however, you were already considering taking action, it may be beneficial in some circumstances to accelerate transactions ahead of the Budget if you still have time to do so.
