Title: A Pivotal Moment for Labour: What to Expect from the Upcoming Budget
On 30 October 2023, Rachel Reeves will unveil the first Labour Budget since 2010, heralding a potentially transformative moment for the party and the nation. In the run-up to this significant event, the Chancellor has signalled that the nation should brace for "tough decisions" on tax and spending that could reshape fiscal policy for the foreseeable future.
While the Labour Party has firmly ruled out tax increases on "working people," this leaves Reeves with a limited array of options for generating additional revenue. Below, we explore some of the most probable candidates for tax hikes and their potential economic implications.
Capital Gains Tax (CGT)
One of the most talked-about options is an increase in capital gains tax. The Chancellor could garner substantial revenue by adjusting CGT rates, yet opinions among economists vary widely on the potential outcome. Estimates for aligning capital gains and income tax rates suggest a possible revenue boost of £16 billion. However, some experts caution that behavioural changes resulting from such hikes could diminish overall tax receipts. According to Goldman Sachs, any increase in CGT may be modest, potentially generating "at most a few billion a year." Other measures, like eliminating business asset disposal and ending capital gains forgiveness upon death, could each yield an additional £1.5 billion annually.
What to Do
In anticipation of a CGT increase, investors may want to consider strategically liquidating assets with significant gains to avoid impending tax hikes. Selling such assets sooner rather than later could allow for tax-efficient reinvestment opportunities. Also, gifting assets to family members could be a wise move, especially for those whose value has surged since acquisition. Remember that current capital gains tax exemptions can mitigate your tax burdens if assets are gifted.
Taking advantage of tax wrappers, like the Individual Savings Account (ISA) and pension allowances, is another prudent strategy. Investors can sell assets in their general accounts and reallocate in tax-advantaged wrappers immediately, mitigating potential tax impacts of a future CGT increase.
Inheritance Tax (IHT)
Changes to inheritance tax are anticipated, with proposals to streamline allowances and exemptions that could result in substantial annual revenue growth. Scrapping the residence nil-rate band and capping agricultural and business reliefs might generate around £1.8 billion and £2.2 billion, respectively. Revisions to lifetime gift allowances could emerge, especially as Labour aims to target high earners and revise long-standing tax exemptions.
What to Do
For individuals nervous about potential revisions, making full use of existing allowances is wise. It’s an optimal moment to initiate conversations about family wealth and legacy plans. Those holding AIM shares with existing business relief should carefully consider their options, as premature selling may result in unnecessary tax liabilities on potential gains.
Pensions Taxation
Pensions have long enjoyed attractive tax treatment; however, this may be under threat in the upcoming budget. A reduction in tax relief on pension contributions is a strong possibility. By implementing a flat rate of tax relief, Labour could raise various funds, though changes to the tax-free lump sum may stir discontent among savers.
What to Do
For workers nearing retirement or those with limited pension pots, this might be the time to maximize pension contributions while leveraging carry forward allowances from previous years. However, anyone contemplating a withdrawal should consider carefully the implications of such decisions.
Other Revenue Generators
Freezing Income Tax Thresholds
One of the less controversial strategies worth considering is extending the freeze on income tax thresholds. The Resolution Foundation estimates that extending this freeze could net the government an additional £7 billion by 2029-30. However, this approach may create friction with Labour’s stance on avoiding tax increases for working people.
Employer National Insurance Contributions
A rise in employer national insurance contributions could align with Labour’s aim to uphold its pledge against taxing working individuals. Increasing the rate by just two percentage points could potentially raise £17 billion, thus providing significant funding for government initiatives while minimally affecting employees directly.
North Sea Tax on Oil and Gas
Labour’s proposal to boost North Sea taxes aims to raise an extra £6 billion by adjusting tax rates and capital allowances for energy firms. While discussions around maintaining current investment levels and long-term sustainability of the North Sea are rife, Labour’s strategies in this area will be closely monitored.
Employment Law Changes
With the proposed Employment Rights Bill coinciding with the budget, significant changes are anticipated regarding employee rights and protections. Labour’s plans suggest establishing fundamental rights, such as bereavement leave and fair dismissal protections, aiming to strengthen job security in various sectors.
Conclusion
As Rachel Reeves prepares to present the Labour Budget, the decisions made on tax and spending will likely have profound implications for both the party and the country. With a landscape rich in complexities and diverse opinions, it remains to be seen how Labour will balance maintaining their pledges with the pressing fiscal requirements of the moment. Investors and businesses alike watch closely, eager for clarity on policies that will impact their financial landscapes and the broader economy in the years ahead.
