What to Anticipate from the Labour Government's Forthcoming First Budget on 30 October 2024
As the date for Labour’s first Budget under Chancellor Rachel Reeves approaches, there is growing anticipation about what economic strategies and reforms will be unveiled. Drawing from Labour’s manifesto, ministerial statements, and recent speeches, this Budget is likely to set the stage for significant changes aimed at addressing key economic, social, and environmental issues. Here is an outline of what to watch for based on current information and speculation.
Key Policy Areas to Watch:
1. Economic Strategy and Business Investment
Labour is expected to introduce a comprehensive industrial strategy to boost living standards and economic growth. The "Business Partnership for Growth" document from January 2024 provides a strong indication of how the government aims to work with businesses to stimulate investment and innovation. The Budget will likely include policies designed to support business expansion, including maintaining the Full Expensing and Annual Investment Allowance schemes. While the main corporation tax rate (25%) is likely to remain unchanged, there may be adjustments to the small profits rate (currently 19%),and consequently marginal relief may change.
2. Income Tax and Fiscal Drag
Labour has committed not to increase national insurance, VAT, or income tax rates at the basic, higher, and additional levels. However, this does not rule out freezing of banding thresholds or the personal allowance, which could lead to fiscal drag—where allowances are frozen while inflation erodes their real value, effectively increasing tax burdens without raising rates.
Possible Tax Changes:
1. Capital Gains Tax and Inheritance Tax
While Labour has pledged not to raise income tax rates, there is speculation that capital gains tax (CGT) and inheritance tax (IHT) could see adjustments. This could include higher CGT rates or changes to exemptions and / or reliefs, along with a potential overhaul of reliefs for IHT, especially targeting high-net-worth individuals. The removal of the carried interest loophole for private equity fund managers could also be announced, aligning their taxation more closely with income tax rather than capital gains tax.
2. VAT on Private School Fees
A Labour manifesto pledge is to apply VAT on private school fees starting in January 2025. This could significantly increase costs for parents who send their children to private schools, including boarding fees.
3. Non-Dom Taxation
Labour is expected to eliminate non-domiciled status, ending the tax advantages for wealthy individuals who live in the UK but claim their permanent residence is abroad. The "Foreign Income and Gains" (FIG) regime, introduced by the Conservatives in their 2024 Spring Budget to replace the remittance basis from 6 April 2025, will be implemented by Labour. However, Chancellor Rachel Reeves has confirmed a review of key elements to ensure the regime is fair and competitive. The removal of these tax benefits could generate significant revenue but may also provoke debates regarding its impact on foreign investment.
Other Expected Changes:
1. Stamp Duty for Foreign Buyers
Labour plans to increase the stamp duty land tax (SDLT) surcharge on purchases of residential property by non-UK residents from 2% to 3%, reflecting their broader agenda of addressing property inequality and housing affordability.
2. Pensions
The Budget could see significant changes to the pensions tax framework. While Labour has indicated no intention of changing the tax-free cash allowance, there is concern about potential reforms to annual allowances and the introduction of a flat-rate tax relief on pension contributions. These changes could affect high-income earners, making it critical to review pension strategies before any reforms are announced.
Speculative Changes:
1. Wealth Tax
Although Labour has not formally proposed a wealth tax, discussions around the idea are gaining a little traction. A wealth tax could target high-net-worth individuals to help close the growing gap between the richest and the poorest in society.
2. Making Tax Digital
Labour remains committed to Making Tax Digital (MTD), particularly for income tax. However, there could be adjustments to the timeline and implementation strategy, especially with Labour’s plan to modernise HMRC using artificial intelligence (AI) to tackle tax avoidance and evasion.
Pre-Budget Planning Considerations:
Given the wide-ranging speculation and potential for significant changes, individuals and businesses may want to take pre-emptive steps to maximise current allowances and plan for the future:
ISA, Pension, and CGT allowances: Consider making use of these allowances before the Budget to lock incurrent benefits, especially with potential changes to capital gains tax.
Inheritance Tax Planning: If inheritance tax is a concern, now may be the time to act before any restrictions on reliefs are announced.
Pension Strategy: Reviewing pension contributions and annual or carry-forward allowances could prove beneficial if Labour introduces changes to pension tax reliefs or annual allowances.
Conclusion:
While most of what will be in the Budget is still speculative, Labour’s overarching goals are clear: stimulating economic growth, addressing inequality, and enhancing environmental sustainability. These aims will likely shape the policies introduced on
30 October, and staying informed will be critical for effective financial planning.
It’s important to note that we can only provide advice on your tax position ahead of these possible changes. For a more comprehensive assessment of how this may affect your overall financial strategy, it may be appropriate to consult a financial adviser.
Ellis Atkins
T: 01306 886681