Autumn Budget 2024

Budget 2024 Predictions

Economic Outlook

Provided by Nina Skero, Chief Executive - Centre for Economics and Business Research

New government, same old fiscal qualms. When Rachel Reeves steps up to the despatch box on 30 October to deliver her first Budget, she will be doing so in the unenviable context of elevated public debt, a historically high tax burden and strained public services.  

These challenges will come as a surprise to no one, given that the Chancellor and the rest of the Labour party have taken every opportunity since the election to emphasise that a) the previous government left the economy in a poor state and b) hard decisions will need to be made to set us up on a more sustainable track. 

It is clear from the messaging that the new government is laying the groundwork for a combination of spending cuts and tax increases. The £22bn question is how much ‘extra money’ is needed to fill the ‘black hole’ in public finances and what is the optimal policy mix to achieve that? 

The £22bn figure that the government has been drawing attention to refers to the amount of public overspend this year alone. The amount of fiscal headroom the government actually has to create will likely be greater and is subject to the OBR’s forecasts. 

That is assuming that there are no changes to the self-imposed fiscal rules which, as they currently stand, are close to meaningless and can force the government into a suboptimal policy stance, all based on a highly uncertain set of projections. 

Having ruled out hikes to income tax, employee national insurance and VAT, the Chancellor is likely looking at options on employer national insurance, capital gains tax, inheritance tax and various duties, including that on fuel.

However, with the tax burden already at a post-WWII high, many of these taxes are close to, or at, the level where any further hikes will lead to diminishing receipts via reduced activity.  Supporting economic growth will alleviate the fiscal pressures and key to this will be supporting productivity. The government is putting its hopes on the reformed planning system which, if adequately implemented, should support productivity, but not choking off this momentum with sharp tax hikes will be equally important. 

So far in 2024, the UK economy has performed better than anticipated with Q2 growth of 0.6% following on from 0.7% in Q1. Inflation has returned to near target, although services inflation stickiness continues to highlight the tightness of the labour market and the impact higher wages are having on prices. 

Households and businesses should also start to see some relief from lower interest rates. Cebr expects a further interest rate cut to 4.75% in November, with the rate reaching 3.75% by the end of next year.  

Despite a better than expected first half of the year and an interest rate cut, Cebr expects the economy to grow just 1.2% over the year as whole, with an uptick to 1.5% in 2025. Achieving higher growth rates will require more decisive action on productivity in both the public and private sectors. Hopefully this, rather than a highly speculative fiscal ‘black hole’, will be at the heart of the new government’s decision making come 30 October. 

Personal taxes in the Budget

Capital gains tax changes

Rates of capital gains tax (CGT) are at historic lows so increasing them seems a likely option. In the past, we have gone through cycles of reforming CGT. For example, in 1988 then Chancellor Nigel Lawson changed the CGT rate from a flat 30% to tax gains at income tax rates - his logic for doing so was set out in his Budget speech:

“In principle, there is little economic difference between income and capital gains, and many people effectively have the option of choosing to a significant extent which to receive. And in so far as there is a difference, it is by no means clear why one should be taxed more heavily than the other. Taxing them at different rates distorts investment decisions and inevitably creates a major tax avoidance industry.”

The reform options for the Chancellor Rachel Reeves include:

• A return to taxing all capital gains at income tax rates as if they were just another form of income (ie up to 45% for high earners) – as supported by the Institute for Public Policy Research (IPPR)
• Taxing gains at one fixed rate below the top rate of income tax (from 1965 to 1988 a flat rate of 30% was charged on gains)
• Reintroducing some form of tapering for longer term gains and taxing short terms gains more heavily as is the case in the USA
• Reducing the most widely used exemptions – for example, setting a ceiling on the private residence relief of say £2m
• Introducing CGT on disposal on death (in addition to IHT) – perhaps at a lower rate/s than lifetime rates.

Regardless of which combination of these options the Chancellor implements, there is also the issue of when the changes will take effect. As CGT is a transaction-based tax, changing the rate part way through the year is not a major problem administratively. However, announcing on 30 October that rates will change from April 2025 should net a short-term boost to the tax take if individuals bring forward disposals to save tax (even if this may risk disrupting market conditions by occasioning a mass sell-off of assets). Read more on capital gains tax planning.

If effective tax rises are announced, the impact may be softened for business owners. For example, it would not be surprising if the lifetime limit for business asset disposal relief (BADR) were to be increased if the main rate of CGT increases sharply – although the effective rate is perhaps unlikely to stay at 10%.

If you are concerned about the potential impacts of changes to Capital Gains Tax, register now for a free, informal conversation with one of our expert team, and understand your position and options before the announcement. 

Register your interest now.

Pension tax relief

Estimates of the total cost of the various pension tax reliefs to the government vary, but the accepted figure seems to be around £50bn a year - so cutting this cost is going to be attractive to any Chancellor. However, this is a politically difficult area: previous Chancellors have either shied away from making changes or had to soften the rules. For example, former Chancellor Jeremy Hunt chose to abolish the Lifetime Allowance to placate Doctors and prevent mass retirements.

However, if the Government’s finances are as bad as the current Chancellor has suggested, she may choose to spend some of her political capital on tackling this issue early in this parliament. There are a range of options for her to choose from including:

• Removing the IHT exemption for residuary pension funds on death
• Reintroducing the Lifetime Allowance on total pension saving in some format – perhaps exempting public sector pensions
• Cutting the overall rate of income tax relief on contributions to 30% or even imposing an annual maximum relief in cash terms
• Imposing an annual maximum to the NIC exemption from employer pension contributions – for example by charging employers’ NIC on annual contributions per employee above say £10,000 or 20% of earnings.

Taking some or all of these steps could raise substantial funds. There are politically low-profile measures, like removing the IHT relief for residual pension funds passing on death – the economic rationale for that relief is obscure. Limiting income tax relief on contributions to a fixed rate seems simple on the face of it but will be difficult for HMRC to implement across the board and make the tax system yet more complicated. Learn how pension tax relief works.

Equally, while a change such as imposing employers’ NIC on high level pension contributions could be easier, it will nonetheless be hard for a government so focused on growth to justify raising costs for employers.

The Chancellor will have to be brave to make substantial savings on pension tax relief, but if she does take radical steps, there may also be changes to public sector pensions to cut costs there too.

Inheritance tax changes

While it may seem attractive to freeze the Nil rate bands for IHT, it is possible that the Chancellor will take the opportunity to give IHT an overhaul. Abolishing the Residence Nil Rate Band and increasing the main Nil rate band to £500,000 per person, (£1m per couple) would be a welcome simplification at relatively low cost.

This sort of reform might be announced as a trade-off with other changes to increase the IHT take for the wealthiest taxpayers, for example by:

• Removing the IHT exemption for residuary pension funds on death
• Introducing progressive bands of IHT starting at say 25% and perhaps rising to 50% for the largest estates
• Reducing and/or capping 100% business relief (BR), and agricultural relief (AR)
• Tightening the BR and AR qualification criteria (eg removing the relief for AIM shares and less active farmers) – learn how BR works
• Combining and reducing other reliefs - for example by having one annual gift relief set at £10,000 but including larger gifts out of income and Potentially Exempt Transfers in the death estate.

Changes to BR and AR would be of particular concern to business owners. Despite their high combined cost to the government, it seems unlikely that these important reliefs that allow the passing on of family businesses will be withdrawn altogether. Instead, we would expect them to be restricted by technical amendments to the rules. For example, it would be relatively straightforward to limit the relief for shares in unlisted companies so that companies listed on AIM no longer qualify for relief. Similarly, the current two-year holding period requirement could be extended, perhaps with bands of relief at different rates rising over the years before full relief is obtained. Another alternative could be to limit the relief for very large estates on death – for example, such that the first £20m of business assets could qualify for 100% and higher values only qualify for 50% relief.

Whatever changes are introduced on BR and AR, we would expect them to be preceded by a detailed consultation exercise. Read about IHT planning.

If you are concerned about the potential impacts of changes to IHT in the Budget, register now for a free, informal conversation with one of our expert team, and understand your position and options before the announcement. 

Register your interest now.

A new “wealth tax”? 

Some unions and left-wing think-tanks have suggested the idea of a 1% wealth tax. While some other countries do impose a wealth tax, a UK wealth tax would be highly politically divisive and would be difficult to construct as it could disproportionately penalise individuals who own valuable homes but have relatively low incomes. In a recent interview, the Chancellor ruled out creating a whole new tax, but while a specific wealth tax is not on her agenda, other taxes on assets may change.

Capping other tax reliefs

While the announcement of a wealth tax is unlikely, reducing the availability of tax reliefs would be a less controversial way to raise revenue. As with possible restrictions to pension tax relief and IHT reliefs mentioned above, there are other tax reliefs that could be capped or restricted in some way.

For example, the current ISA regime costs the Government around £5bn a year in lost tax revenue so reducing this in someway could be attractive - introducing a lifetime cap on the value of funds held in an ISA has been suggested by some commentators. Similarly, the Private Residence Relief from CGT applies no matter how big a gain you make on selling your home: capping this relief at a high figure - say £1m of gain- could also raise revenue.  

Taxation of private equity carried interest

The government has already announced its intention to reform the taxation of private carried interest (the capital share of profits on a managed investment fund that is allocated to the fund executives). BDO has responded to the call for evidence on potential reforms, read a summary of our response here, and we would expect further detailed proposals to be announced on Budget day if the changes are to be implemented from April 2025 as seems likely.

Currently, carried interest that can pass the tests to be classified as a capital gain is taxed at 28%. If wider reforms are introduced to tax capital gains at income tax rates, this is likely to apply to carried interest as well. If a higher fixed rate of CGT is to be implemented (say 33%), we would expect further qualifying conditions to be applied (around the percentage investment in the fund by individual PE executives) for some carried interest to be continued to be taxed as capital gains.

Non-dom reforms

On 29 July, the government published updated proposals for abolition of the UK’s special tax regime for non-domiciled individuals and replacing it with a residence-based regime. But there were a number of details to the proposals that remain to be finalised, particularly the inheritance tax position of these individuals.

We hope that further detailed proposals are published by Budget day at the latest if the reforms are to take effect from April 2025 as planned. Read what we already know about the abolition of the non-dom rules.  

Longer fiscal drag

The Chancellor has already committed to freezing income tax and other thresholds until 2028 so extending that freeze a year or two could be an attractive option in helping to balance the books.

Fiscal drag is already set to be a big earner for the Treasury as more and more people will move into the higher rate and additional rate tax bands by 2028. Action to smooth out marginal rates when taxpayers cross a threshold could make extending the freeze and uprating withdrawal thresholds for some government benefits (such as the recent increase in the threshold for the High-Income Child Benefit Charge) more palatable to voters.

Fuel duty

More than 10 years ago, the government effectively scrapped the “fuel duty escalator” that had been designed to encourage the use of lower emitting or zero CO2 vehicles. Rishi Sunak also reduced duty by 5p per litre in 2022, although the impact on consumers was minimal due to the inflation of the time. The new Labour government has recommitted to introducing a ban on the sale of new combustion engine cars by 2030 so the Chancellor may choose to underline this green move by reinstating the fuel duty escalator or a similar regime to ratchet up the economic pressure on consumers to go electric. However, with inflationary pressures expected to tick up in the autumn, any increase in duty may be deferred until spring 2025.

On a similar theme, it would not be a surprise to see benefit in kind rates for company cars increase dramatically for combustion engine cars in the run up to the 2030 deadline.

Property Taxes

The Labour manifesto committed the new government to increasing the SDLT supplement charged to overseas nationals buying UK residential property by 1% to help prevent the sale of new builds to overseas buyers. It is also possible that new ultra- high thresholds with high SDLT rates could be created.

Although council tax was not mentioned in the Labour manifesto, it did make a public commitment not to change council tax bands. However, a revaluation of properties has not happened since 1991, so the Chancellor may now decide that levying taxes on valuations over thirty years out of date is not sustainable (or fair) given the current pressures on government finances. As a result, a revaluation exercise may be announced.

VAT on school fees

The government has already published details of the VAT charge that will apply to fees for private school boarding from 1 January 2025. Unfortunately, the information published on 29 July 2024 leaves a number of questions on the new rules unresolved. We hope that, following consultation, HMRC will publish more information and guidance on the changes and how it expects schools to implement them. Read more on the VAT proposals and how schools can prepare.

Business tax changes

Roadmap for business taxation

The Labour manifesto committed to publishing a roadmap for business taxation within six months of the election, and the Chancellor has confirmed this will be published on Budget day.

Pledges to freeze corporation tax at 25% and retain full expensing capital allowances should be confirmed, but other measures may also be included. For example, Labour have promised to replace business rates so a timeline for that would be helpful, as would a confirmed date implementing the promised reforms to the UK’s planning system. There may also be simplification measures, such as increasing the size threshold for SMEs to remove  administration burdens, as proposed by the last government.

But it will not be good news for all businesses. We can expect the increased windfall tax on oil and gas companies to be confirmed. Similar proposals to increase the bank tax surcharge for a fixed period may be announced. Equally, while Rachel Reeves has pledged not to reimpose a cap on bankers’ bonuses, she may just be tempted to create a specific employers’ NIC surcharge on the bonuses banks pay to additional rate paying employees.

Other sector specific proposals may also be imposed, for example a specific ban on water company dividends until sewage spills are under control. An increase in the rate of residential property developer tax may also be announced so that developers effectively fund a greater share of the cost of tower block cladding replacement.

It will be interesting to see if the transition to Making Tax Digital for corporation tax will also feature in the roadmap: although the original 2026 target date has been dropped, it is not clear if this part of the MTD initiative has been abandoned completely. Similarly, we may get an update on the implementation of a UK Carbon Border Adjustment Model (CBAM) that will affect importers. Labour has committed to implement it from 2027 - read about the EU CBAM here.

Government Industrial strategy

Labour has also promised to create a formal industrial strategy for the UK for the next ten years and lay out its proposals for supporting growth in different areas of the economy. Like the business tax roadmap, this should give businesses some long overdue certainty about government policy and  enable them to plan ahead for investments with more confidence. Around the Budget, the Government will publish a Green Paper on the strategy which will lead to a full strategy document in 2025. 

The outline strategy is likely to include a number of net zero transition goals and proposals as well as sector-specific plans such as energy security proposals, and support for high growth sectors.

Specific proposals for the launch of the proposed National Wealth Fund are also likely to feature in the strategy as it is to be used to invest in the steel industry, ports, green hydrogen technology, automotive gigafactories, carbon capture projects and other industrial clusters. Labour’s pledge to implement full gigabit broadband and national 5G coverage by 2030 may also be fleshed out with funding details. We also expect the Budget to contain an update on the creation of Great British Energy – perhaps when it will start trading and news on its first co-investment ventures.

Employment

Although the Labour manifesto ruled out an increase in National Insurance rates, it did contain a commitment to increase the National Minimum Wage (NMW) to make it “a genuine living wage” by including cost of living considerations in the remit of the Low Pay Commission (LPC). BDO and LPC conducted a recent webinar to get input from businesses on how this should be reflected in its recommendations, and we would expect the LPC’s report on the 2026 increases in the NMW to be published at the Budget. Read more on how the NMW operates now.

Possibly of more urgent concern is the range of employment rights changes that the government plans to implement – from action on zero-hour contracts to new day one rights for employees. We would expect more details on implementation of these to be published by Budget day at the latest. Read more on what changes employers can expect from the new Labour government

Labour also committed to replacing the Apprenticeship Levy with a more flexible “growth and skills levy” and it is possible that a formal consultation on this will be published at the Budget.

If you are concerned about the potential impacts of changes to National Minimum Wage on your business, register now for a free, informal conversation with one of our expert team, and understand your position and how to mitigate any risks ahead of the announcement. 

Register your interest now.

Devolution

The Labour manifesto pledged more devolution of powers to local authorities, city mayors and regional bodies. How radical this will be remains to be seen - might it encompass replacing business rates with a local business tax levied by local and unitary authorities? This would fit with Labour’s manifesto commitment to create a tax that “will level the playing field between the high street and online giants”. The approach may prove attractive as it would remove business rates from the Chancellor’s domain so that the responsibility falls on local politicians.

Tax avoidance

No Budget is complete without anti-avoidance measures, but the definition of a ‘loophole’ or avoidance tends to be flexible depending on the political colour of the government and its finances at the time. It would not be surprising to see some planning arrangements that HMRC has challenged in the past to be targeted as ‘loopholes’ – this may even extend to revoking tax ‘incentives’ created by previous governments.  It has already been announced that a consultation on E-invoicing for VAT will be published at the Budget to help reduce VAT return errors and there may also be similar administrative proposals that seek to remove opportunities for fraudulent behaviour, for example, a VAT split payment system to ensure the VAT element of any transaction is always collected. 

In its manifesto, Labour pledged to invest £555m to help HMRC close the tax gap and collect an additional £5bn a year. This will be used to fund 5,000 more compliance officers for HMRC over the next five years. Given the need to raise revenue without increasing tax rates in core areas, the Chancellor may choose to invest even more in HMRC: even if there are diminishing returns, it may still turn out to be a cost-effective and uncontroversial approach.