Daniel Hilton
Higher taxes on the wealthy will be “part of the story” in chancellor Rachel Reeves’ second Budget, she has said.
With just one day to go until she stands up at the dispatch box on Wednesday (26 November), speculation is mounting about what that will mean for millions of taxpayers.
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Which taxes could go up?
If the government sticks to its promise not to raise the three main working taxes – National Insurance, income tax and VAT – Reeves will need to look for other areas that remain untapped.
1. Extending the tax threshold freeze
It increasingly looks like the chancellor will row back on her decision to end the freeze on personal tax thresholds, according to reports in The Times.
Reeves seems to be set to abandon her pledge to let the threshold freeze expire in 2028 and instead extend it to 2030. Doing this is forecast to raise around £50 billion by the 2029/30 tax year, according to data from the Institute for Fiscal Studies (IFS).
Extending the freeze to 2030 could mean high earners find themselves paying thousands more in income tax compared to 2021, when thresholds were first frozen, according to calculations by Rathbones.
Someone who earned £100,000 in 2022 could pay £7,000 more in tax than if thresholds had kept pace with inflation. The additional tax burden would be £5,600 for someone on £80,000, and £4,600 for someone on £50,000.
The figures assume wage growth in line with the Office for Budget Responsibility’s data and forecasts, and 2% inflation in 2030.
2. Salary sacrifice
A clampdown on salary sacrifice schemes could be announced, according to reports, in a bid to raise between £3 billion and £4 billion. This is set to be done by reducing the amount employees can sacrifice from their wages to put into their pensions without having to pay National Insurance.
Under current rules, employees can give up a slice of their pay in exchange for a benefit, such as a pension contribution. It is a tax-efficient arrangement, because it means you pay less income tax, and both you and your employer pay less National Insurance.
3. Investments
Dividends seem to be under threat of increased taxation in the Budget, according to The Telegraph.
Reeves is reportedly considering bringing the amount of tax due from income derived from dividends closer to the amount due from earnings, potentially raising around £2 billion.
A hike to capital gains tax could also be on the cards. A report in The Guardian in August claimed the Treasury is considering increasing rates by “a few percentage points”. This would supposedly be accompanied by some kind of CGT allowance for investors who put money into British businesses, as the government seeks to revive UK markets.
4. Property taxes
A possible replacement of stamp duty with a new levy on the sale of properties worth more than £500,000 could be introduced in the Budget, it is rumoured. Such a policy would shift the tax burden from property buyers to sellers.
Meanwhile, the Treasury is supposedly also thinking about replacing council tax with a new local property tax in an attempt to boost struggling local authorities. The Telegraph reports that properties in council tax bands F, G, and H will be targeted, representing around 10% of all English homes.
Finally, landlords could also be in the Treasury’s line of sight. Labour insiders supposedly told The Times that officials are considering charging National Insurance on property income in the hope of raising £2 billion.
5. Inheritance tax
Inheritance tax was a significant focus in the last Budget, but further measures could be on the cards this year, according to The Guardian.
The Treasury is considering tightening up gifting rules, potentially by introducing a lifetime cap on the value of gifts someone can pass on before they die, or by changing the rules on taper relief (also known as the seven year rule).
6. Business taxes
The government has promised not to raise corporation tax above its current level of 25% for the duration of this Parliament. However, businesses could be impacted in other ways.
At last year’s Budget, the government said it would reform business rates to boost struggling high streets. Reeves promised to introduce lower rates for retail, hospitality and leisure properties, paid for by increasing rates for more valuable properties (those with rateable values above £500,000). The government is due to give an update at this year’s Budget.
The British Retail Consortium (BRC), a trade association, has praised the chancellor’s plans to cut rates for retail, hospitality and leisure properties, but suggests 400 large stores could close if forced into a higher tax band, potentially resulting in 100,000 jobs lost. Aldi UK, the supermarket chain, has also warned that any measures which increase costs for businesses could result in higher food prices.
7. Cash ISA cut
Cash ISA savers are reportedly in the chancellor’s crosshairs with the amount of the overall £20,000 ISA limit you can allocate to cash savings set to be reduced.
Rumours of this policy have circulated since the start of the year, but reports now suggest it will be announced in the Budget, with the cash ISA limit reduced to around £12,000. The overall £20,000 limit is not expected to change.
8. Income tax
In recent weeks, Reeves appeared to indicate she would raise income tax in the Budget, but seems to have since rowed back from this position. However, as no official confirmation came either way, it remains an option open to her on Wednesday.
9. Wealth tax
A wealth tax is another area of speculation, but would be seen as an extreme move, with even Reeves saying in September she is “not even sure it would work”.
A wealth tax is effectively a levy on an individual’s total wealth rather than just their income. It could be applied as a percentage payable by individuals with assets over a certain level. Some of the Parliamentary Labour Party support the policy, and campaigners have previously suggested a 2% wealth tax for individuals with wealth over £10 million.
Should you act on Budget rumours?
Rumours can incite panic but it is important to stay calm and avoid knee-jerk reactions that can leave you worse off over the long run.
Last year, Reeves was widely expected to cut the amount of tax-free cash retirees could take from their pension – a rumour which prompted many to access their pension pot earlier than previously planned. The policy never materialised and some savers were left with regret. Leaving the money invested for longer could have allowed their tax-free lump sum to grow further.
That said, there are some sensible steps you can take as part of your ongoing financial planning to guard against Budget changes:
- Tax-efficient investing: If you want to invest and are looking to protect yourself from CGT and dividend tax, Coles says using a stocks and shares ISA is a “no-regrets move”. If you already have investments but hold them outside of an ISA, moving them inside a tax-efficient wrapper is also a good idea. This process is known as a ‘Bed and ISA’ transfer.
- Cash ISA: You can use a cash ISA to avoid a tax bill on your savings interest. Basic-rate taxpayers become liable for tax as soon as they earn £1,000 in savings interest. Higher-rate taxpayers can earn just £500, and additional-rate taxpayers have no allowance at all.
- Boost your pension: Boosting your pension contributions is almost always a good idea, as a pension is one of the most tax-efficient ways to save.
- Salary sacrifice: Salary sacrifice allows you to swap a portion of your salary for a benefit, such as a pension contribution, and helps both you and your employer pay less tax. For higher earners who would otherwise lose means-tested payments like Child Benefit, it reduces their take-home pay without actually leaving you worse off overall.
- Lifetime gifts: Under current rules, to avoid paying IHT you need to outlive the gift by seven years. Alternatively, regular gifts made out of surplus income become tax-free immediately. For example, you could contribute a regular amount to a grandchild’s junior ISA. To qualify, these gifts cannot be made from capital (i.e. savings or the sale of assets) and must not compromise your standard of living.
The problem with tax hikes
The chancellor undoubtedly is facing a challenging economic outlook at the Budget, needing to fill a budgetary black hole of around £22 billion, according to the Institute for Fiscal Studies (IFS).
At the same time the most recent GDP data shows that the economy grew by just 0.1% in the three months to September, while unemployment, inflation, and borrowing costs all remain high.
The easiest way to raise the £22 billion needed would be to raise taxes, but the problem is the tax burden is already at a record level.
Personal tax thresholds have been frozen since 2021, and inflation has been high. This means many find themselves in a higher tax bracket thanks to fiscal drag alone.
Furthermore, Labour’s general election manifesto promised not to raise income tax, employees’ National Insurance or VAT, but a challenging fiscal backdrop meant Reeves had to look for other ways to balance the books last October.
The 2024 Autumn Budget put the burden on businesses. Tax hikes worth £40 billion were announced overall, with the majority being funded through an increase to employers’ National Insurance contributions.
We are now starting to see the economic impact. Survey data from the Office for National Statistics (ONS) suggests some firms are not recruiting new workers or replacing those who have left. Businesses warned this would be a consequence of higher payroll taxes.
Taxes on wealth were another focus last autumn, with policies on IHT, capital gains tax (CGT) and pensions being announced. Reports suggest this may be prompting some wealthy individuals to leave the UK for more tax-efficient shores.
The IFS suggests proper reform of the tax system would reduce the “disincentive effects” that taxes currently have on investment and the drag that they have on growth.
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