As Rachel Reeves prepares to deliver her first budget on October 30, several key predictions have emerged.
These predictions offer insights into how she might tackle the £22 billion deficit left by the Conservatives, with a mix of tax reforms and selective borrowing.
Income Tax Threshold Adjustments
Rachel Reeves has dismissed the notion of a return to austerity, instead promising real-term growth in public spending. However, this growth is likely to be funded by tax increases and selective borrowing.
Although the main income tax rates of 20%, 40%, and 45% are off-limits for increases, Reeves could adjust thresholds. This adjustment would pull more earners into higher tax brackets, effectively increasing revenue without altering headline rates.
Pension Tax Relief Reforms
Limiting pension tax relief to the basic rate of income tax could raise £15 billion annually. Alternatively, requiring employers to pay National Insurance on pension contributions could generate £12 billion over five years.
These proposed reforms would particularly target individuals benefiting from 40% or 45% relief, who only pay 20% tax when withdrawing their pensions. By changing the structure of relief, the government aims to ensure a more equitable distribution of tax burdens.
Capital Gains Tax (CGT) Adjustments
Raising Capital Gains Tax rates or broadening the base of taxable assets could significantly increase revenues.
While aligning CGT more closely with income tax could disincentivise investment, the introduction of inflation indexation might soften this impact. This balance is essential for maintaining investor confidence while achieving fiscal objectives.
Potential CGT reforms are likely to be carefully considered, given their wide-ranging implications for both individual investors and the broader economic environment.
Inheritance Tax (IHT) Revisions
Reeves may also look into reforming Inheritance Tax by capping exemptions on pension wealth, business assets, and agricultural land. These measures could potentially raise £2 billion annually.
Abolishing relief on Alternative Investment Market shares, which are currently exempt from IHT, could yield an additional £1.1 billion. Such changes would aim to ensure that tax reliefs are better aligned with modern economic realities.
Fuel Duty Modifications
Fuel duty has been frozen since 2011, but this could change under Reeves’s administration. Ending the freeze could potentially raise £6 billion annually.
This increase would not only support fiscal objectives but also align with environmental goals by encouraging a shift towards electric vehicles.
The potential rise in fuel duty is expected to be a contentious issue, sparking debates about its impact on both the economy and consumer behaviour.
Stamp Duty Reforms
Economists have long criticised stamp duty as an inefficient tax. Abolishing it would be costly, with estimates suggesting a £13 billion loss in revenue.
Instead of outright removal, Reeves may opt for targeted reforms to make the property market more efficient. These reforms could include changes to how the tax is applied, making it fairer and less disruptive to the housing market.
Taxing Carried Interest
Taxing carried interest at income tax rates rather than the current 28% CGT rate could generate £2 billion.
However, potential behavioural changes in the private equity sector could reduce the overall impact. The government would need to consider these implications carefully to avoid unintended economic consequences.
One-off Tax on Banks
Reeves could introduce a one-off tax on banks, targeting the widened net interest margins that have allowed them to benefit from rising interest rates without passing the full gains onto savers.
Tweaking Fiscal Rules
Reeves may tweak fiscal rules to create additional fiscal space. Adjusting these rules could minimize the impact of the Bank of England’s bond sales, potentially freeing up £15 billion for investment.
Rachel Reeves faces significant challenges as she formulates her first budget.
Balancing fiscal responsibility with the need for growth will require careful consideration of each proposed measure.
