UK Autumn Budget 2024: How to plan for what may come

There’s a reason the saying “May you live in interesting times” is considered a curse. The new Labour government is facing a decidedly “interesting” challenge this Autumn.

Prime Minister Keir Starmer has made it clear that Labour’s proposed solution to this challenge isn’t likely to come without pain, stating recently that “Things will get worse before we get better.” Offering further clues as to where the measures will be targeted was his comment that “those with the broadest shoulders should bear the heavier burden.”

So it’s all eyes on the 2024 Autumn Budget on 30 October to see what changes Chancellor Rachel Reeves plans to make to the UK’s tax regime.

This article is based on tax legislation prevailing at the time of publishing. These rules can change and depend on individual circumstances. You should always seek appropriate tax advice before making decisions.

What we know so far

There were significant tax promises made in the Labour manifesto and during the election campaign. Some taxes they explicitly ruled out increasing included:

• VAT
• Income tax
• National insurance

These are the three largest taxes in the country and combined they make up over 57% of all government revenue¹. Along with a pledge not to increase the headline rate of corporation tax, this leaves the government with restricted options for raising funds.

There is likely to be an increase in taxes somewhere else. One option in terms of personal taxation is to target wealth, in the form of investments, pensions and the generational transfer of assets, and previous pronouncements from senior Labour figures have encouraged the view that this is likely.

Capital gains tax (CGT)

A recurring option when it comes to increasing tax revenue has been to raise the rate of CGT. Currently, tax on capital gains is levied at a lower rate than income tax. For example, basic rate taxpayers have a marginal income tax rate of 20% and a CGT rate of 10% (18% on residential property and carried interest).

One measure that has been suggested is to equalise these rates, so that profits generated from capital gains would be taxed at the same rate as earned income.

However, the government needs to be careful with how quickly and dramatically they make these changes. Unlike income, capital gains can be managed flexibly to limit the amount of tax that is paid.

In fact, government modelling predicts² that many strategies for increasing CGT would result in lower overall revenue from the tax by 2027/28.

Other options which may be considered include reviewing existing exemptions and allowances such as Business Asset Disposal relief, which is a flat 10% CGT rate for gains realised from the sale of qualifying business assets with a lifetime limit of £1 million.

Action you can take

If your financial plan involves selling an asset at some time in the near future, it may be prudent to consider completing this sale prior to the Budget. Given Keir Starmer’s recent comments, it’s unlikely that the capital gains tax regime becomes more favourable over the coming months.

There are also additional capital gains tax management strategies you can consider. Some examples include using an interspousal transfer so that the gain is realised by a partner with a lower tax rate, or to use both sets of capital gains tax allowance.

This same principle can be used for managing assets going forward, such as using both sets of ISA and pension allowances to maximise the proportion of assets held in tax-efficient wrappers.

In general, tax is only one component of an investment strategy, and you should consider your overall strategy before making any changes.

Inheritance Tax (IHT)

IHT is another key target for a potential tax increase, continuing an ongoing trend of higher IHT revenue. Even with no changes being made to rates or payments thresholds, the revenue generated from IHT already increased by 9% in the first four months 2024/25³ compared to the same period last year.

This upward trend has been progressing for several years now, but still only one in 20 estates⁴ pay any IHT at all.

The nil rate band of £325,000 per person and the residential nil rate band of £175,000 have been frozen since 2009 and are due to remain at these amounts until 2028. The freezing of these IHT thresholds is already seeing the number of IHT-paying estates creep up, as house and asset prices continue to grow while the limit remains the same,

The Chancellor may also look to review the list of exemptions, with some notable examples being pension assets, agricultural land, and specific types of qualifying investments — such as shares listed on the AIM market or investments that fall under the Business Relief exemption for IHT.

She may also want to look at the current gifting regime, which could effectively allow anyone to avoid IHT completely if they make the gift and survive for seven years thereafter.

Action you can take

Much like CGT, pre-emptive action on IHT should only be considered if it is already part of your financial plan. If you have gifts which you have planned to make in the short term, you may want to consider making them before 30 October 2024. 

Pensions

Pensions are one of the few areas that have been specifically highlighted for change, with the Labour manifesto stating the commitment to “review the current state of the pensions and retirement savings landscape.” ⁵

The pension system currently benefits from a large range of tax advantages, with tax-free growth and income on investments, tax relief on contributions, the ability to access a tax-free lump sum once the qualifying age is reached, and total exemption from IHT.

The reason for these tax breaks is to encourage workers to save for their own retirement, and the government may not want to disincentivise this too much, at the risk of increasing the demand on the public purse in later years.

One example reform which has been suggested is a flat rate of pension tax relief. The current system allows higher and additional-rate taxpayers to claim an additional 20% and 25% tax relief respectively through their self-assessment tax return in addition to the 20% tax relief which is paid directly into the pension scheme.

A point of note is that Labour confirmed during the election campaign that they will not be reinstating the pension lifetime allowance⁶, and that the “The ability to withdraw 25 per cent of your pension as a tax-free lump sum is a permanent feature of the tax system and Labour are not planning to change this.”⁷

Action you can take

There are still some relatively generous pension contributions strategies available, such as the ability to contribute up to £60,000 in the current tax year and carry forward unused allowances from the previous three tax years.

Depending on your earnings and previous contributions, this could mean a maximum contribution of up to £200,000.

You should review your current pension contribution strategy and consider making any planned contributions prior to the Budget.

Remember, pensions are a form of investment. Their value and the income from them can go down as well as up.

ISAs

ISAs are a ‘use it or lose it’ allowance that protect your cash savings and investment returns from tax, while offering flexibility in how and when you can access them. In a more challenging tax environment, ISA allowances become even more precious and you might consider whether you are using them to the full, and in the best way possible.

As well as the main adult ISA allowance of £20,000 a year, up to £9,000 each year can be put away for children under 18, which can either be held in cash or investments.

There is the possibility that ISA allowances themselves could be cut in the Budget or that some sort of lifetime limit is imposed on funds accumulated in ISAs.

But remember, stocks and shares ISAs are investments so they will go down as well as up in value and you can lose money.

Income tax threshold freeze

The personal income tax allowance and income tax thresholds have been frozen – or in the case of the additional rate, reduced – in recent years and are due to remain so until at least 2028.

There is a chance the Chancellor could extend this freeze although it would leave the government open to accusations that it is breaking its promise not to raise taxes on working people. As the action of frozen bands drawing in more tax revenue – or ‘fiscal drag’ - is not explicitly a ‘tax rise’, the door could be open to such a move.

General rules for planning ahead of the Autumn Budget

With so much speculation, it could be easy to fall into the trap of trying to pre-empt the announcement and make financial decisions in anticipation.

Our overall view is to avoid making major changes based on speculation. At this stage, we do not know what the Autumn Budget holds.

Tim Stalkartt, Evelyn Partners Financial Planning Managing Partner says:

“You shouldn’t let the tax tail wag the dog. Investors should be driven by making the right investments decisions, not speculating on what might happen in the Budget.”

But that’s not to say investors shouldn’t prepare their finances for the Autumn Budget at all.

“Overall, if you’re thinking and planning to act, it’s potentially prudent to do so prior to the Budget. If you have a planned capital expense coming up or a gift you’re planning to make, you know the rules as they stand now, and changes in the Budget could impact your ability to follow your original plan.”

You shouldn’t let potential tax amendments change your financial plan, but you should be prepared to remain flexible and adaptable, to ensure any announcements don’t stop you from reaching your financial objectives.

Sources

¹ House of Commons Library, Tax statistics: an overview, 10 May 2024

² GOV.UK, Direct effects of illustrative tax changes bulletin (June 2024), 28 June 2024

³ MoneyWeek, Inheritance tax receipts rise again as rumours persist about Budget changes, 21 August 2024

⁴ MoneyHelper, A guide to Inheritance Tax

⁵ The Labour Party, Labour Party pensions policy, 9 June 2024

⁶ BBC Labour drops plans to reintroduce pensions savings cap, 10 June 2024

⁷ Financial Times Starmer admits to ‘old fashioned mistake’ on tax policy, 28 June 2024