There is therefore speculation that the upcoming budget may include more changes to the UK tax regime than we have seen in a number of years. However, having ruled out changes to National Insurance Contributions (NIC), VAT, and specifically the rates of Income Tax and Corporation Tax, the question remains as to where the Chancellor will look to raise revenue. There has been some media speculation about an increase to the rates of employers’ NIC and whether this would amount to a breach of a Manifesto commitment.
A number of the announcements made by the previous government have been confirmed to be carrying through, albeit we await finer details. Such announcements included the abolition of the special tax regimes for individuals not domiciled in the UK (“Non doms”) and Furnished Holiday Lets. However, more changes will be needed if the Chancellor wishes to raise tax revenue to cover the shortfall.
The relief provided for pensions has been a popular choice for changes in past budgets, and this has been suggested as an area for further reform. Currently, 40% and 45% tax rate payers receive tax relief at their highest marginal rate for contributions to their pensions.
There is speculation that a new flat-rate, for example 30%, could be introduced so that everyone would benefit at the same rate as high earners. However, this could be difficult to implement due to a range of complex aspects.
In a similar vein, NIC could be applied to pension income and to contributions made by employers, which is not currently the case. There is also speculation about a further reduction to the 25% tax free pension commencement lump sum, which would be a harsh blow for those who have been saving for retirement. More likely, however, may be the introduction of provisions that bring pension funds within the scope of Inheritance Tax (IHT) on death.
Careful consideration to any pension reform is required, as excessive restriction to pension relief could discourage individuals from saving towards retirement.
There is a general consensus that changes will be introduced to the Capital Gains Tax (CGT) regime. However, an increase in the rate of tax could result in a decline in the number of transactions where CGT may be paid.
HMRC’s own analysis shows increasing CGT rates too far could result in a lower take overall. A slight increase to rates may not have this effect, and instead we may see a limit to, or removal of, certain reliefs. Private Residence Relief, which is available on disposal of the main home, could be restricted.
Likewise, the Chancellor could consider abolishing Business Asset Disposal Relief which allows the first £1m of qualifying gains to be taxed at 10% rather than 20%. This relief was already restricted down from £10m qualifying gains in 2020.
Signalling an increase to CGT (say on 6 April 2025) may accelerate the appetite to trigger capital gains before then, resulting in an influx of gains which may not otherwise have happened.
Another area which has not been ruled out by the Chancellor is IHT. In September 2023 the Institute of Fiscal Studies reported that only around 4% of estates incur IHT, and that it collects a relatively meagre amount (approximately £7bn) annually.
Recently, the Chancellor has been reviewing a report from 2019 undertaken by the Office for Tax Simplification, which recommended a number of changes to the IHT regime. Some of these changes would help to simplify IHT but a number would also raise revenue, such as restrictions to Business Property Relief and abolishing the tapering of IHT payable on gifts – currently the rates of IHT reduces by 8% per year once a donor has survived a gift by 3 years.
These changes could mean that Business Property Relief could be withdrawn on shares listed on the Alternative Investment Market (rather than shares in private unlisted companies). However, the IHT benefit provided is often a driving factor for such investments, and restricting relief could leave listed companies having a smaller pool of investors. This would seem to contradict the Government’s pro-growth, pro-investment message.
Given the areas that have already been ruled out and the need for longer-term consultation in other areas, there may be limited options to raise sufficient funds, and we may find that a series of smaller changes are used to make up the shortfall. Otherwise, the Chancellor will have to risk breaking a Manifesto commitment.
The Chancellor may also use other options to plug the £22bn black hole, such as increasing borrowing. However, this may require changes to current fiscal rules, something which Chancellor Reeves alluded to in March 2024.
As always, in advance of any budget speculation is rife, but it is important to remember that any proposed tax changes will be reviewed by the Office for Budget Responsibility to confirm the likely amount that any tax changes will raise. The Chancellor will have to balance ensuring that any tax changes will raise the revenue required without impairing the ability of the economy to grow.
