Chancellor Rachel Reeves is set to deliver her first Budget in just a few weeks' time - which the government has warned will contain "difficult decisions" and be "painful".
Prime minister Keir Starmer has said there is no other choice given the "situation that we're in", and that those with the broadest shoulders "should bear the heavier burden", suggesting that we will likely see tax hikes in the Budget.
Back in July, Reeves launched a scathing attack on the economic inheritance left behind by the Conservatives.
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She accused the previous government of leaving a £22 billion black hole in the public finances, before introducing a string of immediate cuts to help plug the hole.
These included scrapping infrastructure projects like the Stonehenge tunnel; axing universal winter fuel payments in favour of a means-tested system; and shelving the NatWest retail share sale.
Both Reeves and Starmer have warned of more difficult decisions to come in the forthcoming Budget on 30 October.
There is plenty of speculation about what could be announced, from raising capital gains tax to slashing pensions tax-free cash.
The fiscal event will be the first Budget Labour has delivered in 14 years.
Despite the timing of the Budget - a day before Halloween - Reeves is unlikely to be handing out many treats. The reality is that a tough fiscal backdrop will make some nasty surprises more likely.
What could be in Rachel Reeves’s Budget?
The Budget – also known as the “red box” – is likely to contain information about some of Labour’s manifesto pledges, as well as other policies and tax changes. We take a closer look at the hints that have been revealed so far.
Working taxes
First, the good news. In the lead-up to the general election, Labour promised it would not increase taxes for "working people" (income tax, National Insurance and VAT), and Reeves and Starmer have both reaffirmed this pledge in recent months.
The bad news is that, even with income tax rates staying the same, taxpayers will still find themselves paying a larger bill thanks to the effects of fiscal drag. Frozen personal tax thresholds have conspired with high inflation in recent years, causing the tax intake to soar.
Capital gains tax
Labour has repeatedly insisted it will not hike National Insurance, income tax, VAT or corporation tax.
The party has offered no such assurances about capital gains tax (CGT) though, raising questions over whether these could be tweaked in the Budget.
William Stevens, head of financial planning at Killik & Co, comments: “With a refusal to acknowledge [that capital gains tax] won’t change, it remains a very real possibility that we see an increase to help fund any fiscal shortfalls elsewhere.”
Changes to CGT could include hiking rates so they're in line with income tax, or reducing the tax-free threshold further. The CGT allowance for 2024-25 is £3,000, half of what it was in 2023-23.
Inheritance tax
Inheritance tax (IHT) could also get a mention. For example, a government needing to raise revenue could increase the rate of inheritance tax, cut the tax-free allowance (known as the nil-rate band), scrap gifting allowances or axe IHT reliefs.
Another option would be to impose a “double death tax” by applying capital gains tax on top of inheritance tax when bereaved families receive assets after a loved one’s death.
Several think tanks have said this would make sense – however, it could take the total tax rate to 54%, according to the accountants RSM. We explore the topic in further detail in Could Labour impose a ‘double death tax’ of more than 50%?
Meanwhile, pensions are usually exempt from inheritance tax (IHT), but this could also change in the Budget. "Bringing defined contribution pension pots into someone’s taxable estate seems to be very much on the cards, as it can be portrayed as fixing an IHT 'loophole' and will have little impact on economic incentives," comments Ian Dyall, head of estate planning at the wealth manager Evelyn Partners.
State pension triple lock
A commitment to the state pension triple lock was an important manifesto pledge, and Reeves reaffirmed it in her statement to the Commons on 29 July.
The triple lock means the state pension rises each April in line with inflation, average earnings or by 2.5% – whichever is higher.
“While pensioners will continue to get decent increases to their state pension, they may face more tax. That’s because Labour did not promise to shield the state pension from income tax in the same way as the Conservatives have with the so-called ‘triple-lock plus’ pledge,” says Laura Suter, director of personal finance at the investment platform AJ Bell.
“It means that more pensioners could face tax on their retirement income, thanks to frozen tax bands.”
Private pensions
Pensions have been the topic of frenzied speculation in the run-up to the Budget. Making changes to pensions are a common way for chancellors to raise much-needed revenue.
Pension savers have been rushing to add money to their nest eggs in case Reeves reduces pension tax relief - however, the government is now believed to have abandoned these plans, according to media reports.
One policy change that is understood to be under consideration is reducing the maximum amount of pensions tax-free cash that savers are allowed to withdraw from age 55. Savers can typically take a quarter of their pots tax-free, up to a limit of £268,275 (which is 25% of the old lifetime allowance). But, this could be slashed to just £100,000.
Private school fees
Labour has confirmed that it will add VAT to private school fees from 1 January 2025 to help fund more teachers in the state sector, meaning costs could increase by up to 20%.
So, we could see more details about this announced by Reeves in the Budget.
According to calculations by Hargreaves Lansdown, the average fees for a private secondary school over seven years are likely to cost a total of £140,552, with 3.5% annual inflation factored in. However, if schools add the full cost of VAT to this, it could push up the seven-year bill to £168,633.
The government also said it will introduce legislation to close the pre-payment loophole, which would have allowed parents to avoid paying VAT by paying their children’s school fees in advance.
Although the new rules won’t kick in until 1 January, any fees paid in advance from 29 July (covering the term starting in January) will be subject to VAT.
Freedom to Buy
Labour’s flagship housing policy is the Freedom to Buy scheme. The party has pledged to help get 80,000 people onto the property ladder over the next five years, by making the current mortgage guarantee scheme – due to expire next June – permanent.
Myron Jobson, senior personal finance analyst at investment platform Interactive Investor, says first-time buyers will be waiting “with bated breath” to see whether this pledge sees the light of day. They will also be keen to understand how quickly the policy will be rolled out, he adds.
Stamp duty
Labour confirmed before the election that, if it formed the next government, the first-time buyer stamp duty exemption threshold would drop back to £300,000.
The threshold was raised in September 2022 from £300,000 to £425,000 and was due to be reversed in April 2025.
Reeves may mention this in the Budget, and possibly other changes to stamp duty. The exact changes will depend on whether Labour’s priority is to raise money or to help home buyers.
Non-dom status
Labour has been clear for a long time that it would launch a crackdown on tax avoidance and loopholes, including abolishing the non-dom status. Many tax professionals agree that the concept of domicile is outdated for tax purposes.
Further details were published shortly after Reeves’s spending audit in July. The government confirmed it would remove preferential tax treatment for non-doms from 6 April 2025, replacing the current system with “an internationally competitive residence-based regime”.
Under the new rules, new arrivals to the UK will not have to pay tax on any foreign income and gains for their first four years of tax residence, provided they have not been a UK tax resident in any of the 10 consecutive years prior to their arrival. After this point, these earnings will fall within the tax net.
IHT will be subject to the new residence-based system. The government also confirmed it will end the use of excluded property trusts, formerly used to shield assets from IHT.
However, it was recently reported that some of the plans to abolish non-dom tax status are being reconsidered, amid concerns less money than expected would be raised for public services. We will hopefully find out exactly what is happening with the non-dom rules in the Autumn Budget.
British ISA
The British ISA was absent from the Labour manifesto – and it has been reported that Reeves will formally drop the British ISA in the Budget.
The proposal from the Conservative government was that savers would get an extra £5,000 tax-free allowance each year that they could invest in UK assets.
Critics say the British ISA will make the ISA regime more complicated, and have little impact on the economy.
Air passenger duty
According to the accountant RSM, air passenger duty (APD) is "one of the more substantial tax levers" open to a chancellor in search of ways to raise revenue.
It says that with the government also focused on decarbonising transport, an increase in air passenger duty for domestic flights "may be under consideration to discourage domestic air travel and fund rail improvements".
RSM adds: "Raising APD would not be a new move by Labour, but an extension of the previous government’s policy. Back in January 2024, Labour took issue with Rishi Sunak’s plans to increase APD rates on all flights, except for private jets.
"As it stands, the lowest APD rate for domestic flights is £7 per flight. Illustrative figures suggest that if APD was increased by £1 for all passengers in economy class, it would raise an additional £130 million in 2025/26."
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