QUESTION: What tax changes can we expect in October’s Budget following the Chancellor’s public finance update?
ANSWER: The Budget, scheduled for October 30, is poised to bring significant changes following Chancellor Rachel Reeves’ public finance update in July. With Labour uncovering £22bn of unfunded spending and a more dire state of public finances than anticipated, expectations of tax increases are mounting.
Reeves has promised not to raise the major taxes - income tax, national insurance, and VAT - on working people, but numerous other measures are under consideration to bolster government revenue - there are numerous ways to increase tax revenues without altering these rates, primarily by adjusting reliefs. As taxpayers brace for potential changes, prudent financial planning becomes more essential than ever.
One of the most significant methods for the government is leveraging the fiscal drag effect of frozen personal allowances and income tax bandings.
As people earn more, they move up the tax bandings and consequently pay more tax. This mechanism allows the government to benefit from inflation without changing tax rates. Currently, tax revenues are at an all-time high in the UK, with government income rising from £649bn in the 2013/14 tax year to a projected £1,096bn in 2023/24.
There is also speculation in the media about removing higher rate income tax relief on personal pension contributions. Under the current system, an individual contributing £8,000 to a pension can have this amount uplifted to £10,000 through basic rate tax recovery by the scheme.
The individual can then claim an additional £2,000 or £2,500 in tax relief, depending on whether their personal tax rate is 40% or 45%. Consequently, a 40% taxpayer can effectively contribute £10,000 to pensions at a cost of £6,000.
Capital gains tax (CGT) appears to be another major target. Currently, CGT rates are 20% for most gains and 28% for residential property gains (assuming they fall into higher tax rates).
Despite CGT accounting for only about 1.5% of total UK tax revenues, its rates are lower than income tax rates to offset inflation’s impact on asset value growth. There is speculation about aligning CGT rates with income tax rates, potentially increasing the main rate to 40% or even 45%. This would represent a significant change if implemented.
Given these potential changes, individuals selling a company or disposing of an asset should consider completing these transactions before October 30. Similarly, those planning to make personal or company pension contributions might also benefit from doing so before the Budget.
These are indeed interesting and challenging times ahead for taxpayers in the UK, and prudent financial planning is more crucial than ever.
Beyond the immediate measures, experts also predict that there might be further scrutiny on corporate tax loopholes and a potential increase in windfall taxes on industries that have seen substantial profits, such as energy companies.
With the government seeking to balance fiscal responsibility and economic growth, staying informed and proactive will be key for individuals and businesses alike.
- Malachy McLernon (malachy.mclernon@aabgroup.com) is partner at AAB Group Accountants (www.aabgroup.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
