The new Government has repeatedly warned that this week’s Autumn budget would involve ‘difficult decisions’. According to the Chancellor, Rachel Reeves, this Wednesday’s announcements will include tax hikes and spending cuts, which may mean it could be something of a Halloween horror budget.
Whether it turns out to be as bad as many have predicted remains to be seen. One thing that is certain though, the Government has got to find a significant amount of money to fill a major ‘black hole’ in public finances.
According to the Chancellor, the black hole stands at £22 billion, yet the BBC recently reported that the expected tax hikes spending cuts could total £40 billion. As such, Wednesday’s budget is looking like it’ll be far more ‘trick’ than ‘treat’.
So against this backdrop, read on to discover the key announcements the Chancellor is expected to make.
Capital Gains Tax
The rumour that the Government may increase Capital Gains Tax (CGT) has been gathering momentum. The tax, which is between 10-24% in 2024/25, is typically charged on any profit made from selling assets such as property that’s not your main home or certain types of investments.
While you’re allowed to make £3,000 in profit before the tax is charged in 2024/25, or £6,000 if you’re married or in a civil partnership, the amount has plummeted from £6,000 and £12,000 respectively in 2023/24.
According to the Guardian, the Government could increase CGT to 39%, which could significantly impact some investment’s growth potential. As such, understanding how best to mitigate your exposure to the tax could be more important than ever, something a financial adviser could help you with.
Inheritance Tax
There has been plenty of speculation around what the Chancellor may do with Inheritance Tax (IHT). In 2024/25, the tax is typically charged at 40%, however there have been suggestions in the media that the Chancellor may be considering increasing the 40% rate of IHT.
The tax is paid on any part of your estate that’s above your nil-rate band (NRB). This is the amount you’re allowed to have in your estate when you die, and in October 2024 is between £325,000 and £500,000 depending on your situation.
In addition to this, you may be able to use the residence-nil rate band (RNRB) if you leave your home to your children or grandchildren. If you are entitled to the RNRB, you may be able to have £1 million in your estate when you die before IHT is charged, although again, this will depend on your situation.
Some reports have suggested Reeves may scrap the residence nil-rate band, and may also change the gifting rules so that it’s harder to shield your wealth from IHT. One way she may achieve the latter is to extend the number of years you live for after making a gift called a Potentially Exempt Transfer from seven to 10 years.
As such, talking to a financial adviser to look at ways you could reduce your exposure to the tax could be a very shrewd move.
Income Tax
The Chancellor could be considering extending the existing freeze on Income Tax thresholds beyond April 2028, which is when they’re currently frozen until. The current freeze has resulted in millions of workers being pulled into higher tax bands, so a further extension could result in many more facing a higher Income Tax liability.
While financial advisers are not accountants, they do understand how you might be able to lower your exposure to the tax. As such, speaking to an adviser about any announcement that the Chancellor makes could be a very savvy strategy.
National Insurance Contributions
During the election, Labour promised it would not increase taxes on working people, saying Value Added Tax (VAT), Income Tax and National Insurance Contributions (NICs) would not rise. While the Government is likely to keep its pledge by keeping NICs the same for employees, there have been reports that the NICs rates for employers could increase.
In 2024/254, employers pay NICs at 13.8% for workers who earn more than £9,100. If the chancellor does increase NICs for companies, it’s likely to result in a tax hike for businesses across the UK.
Pension tax relief
Whispers of a cut on tax relief for pension contributions is nothing new. That said, this time there may be more chance of the rumours becoming a reality.
One change that could be announced is to cap pension tax relief at 20%, which could slash the amount of relief that those in the higher- and additional-rate tax band enjoy. Furthermore, Reeves may reduce the amount retirees can take from their pension pot as a tax-free lump sum.
In 2024/25, the amount of tax-free cash that can be taken is usually 25% of pension pot’s value, up to a maximum of £268,275.00. Any amount of money that’s taken over and above this is usually liable to Income Tax.
But two major think tanks, the Institute for Fiscal Studies and the Fabian Society, have called for the cap to be reduced. According to the Telegraph, it could be slashed to just £100,000, which could signal a substantial increase in retirees’ exposure to Income Tax.
Stamp Duty
The tax is paid when you buy property, and in 2024/25, is charged at 5% on properties worth between £250,000 and £925,000. If the property is worth more than this, Stamp Duty rises again.
According to the media, Reeves is expected to reduce the thresholds, something that was due to happen anyway. If it does, homebuyers will pay the tax on property above the value of £125,000, or £300,000 if they’re a First Time Buyer, meaning their exposure to stamp duty will increase.
State Pension
There may be some light at the end of the tunnel though, as the State Pension could increase by over £460 a year thanks to the 'triple lock'. The lock guarantees pensions will be boosted by the higher of the following;
- September’s rate of inflation
- earnings growth in the period between May to July)
- 2.5%.
Based on current wage growth figures, the State Pension will increase by 4.1% from April 2025, boosting it to £11,962.60 in 2025/26. Those receiving the basic State Pension will receive around £9,167 a year.
Get in touch
If you would like to discuss how any announcement made by the Chancellor could affect your finances, please call us on 0333 010 0008, as we’d be happy to help.
Monday 28 October 2024