Anticipating Rachel Reeves’ Budget: Tax Hikes and Key Policies

After months of speculation and debate, all eyes will be on Rachel Reeves this Wednesday as she prepares to unveil her budget in Parliament. As the Chancellor of the Exchequer, Reeves faces the daunting task of revitalizing the UK economy, which has been significantly impacted by recent global events. To raise an additional £40 billion annually, she has signalled that tax increases will be a prominent feature of her fiscal strategy. Let’s explore some of the anticipated policies set to be announced in this critical budget.

A Freeze to Income Tax Thresholds Until 2030

One of the most significant proposals likely to be announced is the continuation of the freeze on income tax thresholds until 2030. This move would effectively push more taxpayers into higher tax brackets as their salaries increase with inflation, raising billions of pounds for the treasury without actually increasing income tax rates.

Currently, individuals begin paying the basic rate of income tax at £12,570, with higher rates kicking in at £50,270 and £125,140, thresholds that have been frozen since 2021. By extending this freeze, Reeves aims to navigate around Labour’s manifesto commitment not to raise income tax directly while still attempting to bolster government revenue.

An Increase in National Insurance for Employers

Reeves has also indicated that increases in national insurance contributions paid by employers are likely on the horizon. With the existing employee national insurance contribution standing at 8% and employer contributions at 13.8%, potential changes could involve raising these rates or a new levy on pension contributions made by companies. Business leaders have expressed concern, stating that such increases may deter hiring and further slow economic recovery.

Increase to Fuel Duty

Fuel duty, which has been frozen since 2011, is another area under scrutiny. After years without a hike, Reeves may propose reversing previous cuts or even implementing a 10p increase—bringing the rate to a record 62.95p per litre. Analysts are raising alarms about the economic implications, as this step could add strain on households already facing rising living costs.

A Reduction to the Pension Tax-Free Lump Sum

Currently, individuals can withdraw 25% of their accumulated pension pots as a tax-free lump sum. However, there are emerging suggestions from the Institute for Fiscal Studies (IFS) to potentially revise this amount, reducing it significantly. While Reeves has previously indicated no plans to change, the financial pressures may force her hand on this issue.

Changes to Capital Gains Tax

Proposed adjustments to capital gains tax (CGT) could also emerge in the upcoming budget. With suggestions to raise the CGT rate back to 28% or to equalize it with income tax rates, the implications for investors could be significant. Reeves might also consider removing certain reliefs currently available, impacting business owners and property investors alike.

Potential Reductions in Inheritance Tax Reliefs

Changes could also occur within the realm of inheritance tax (IHT). Currently, estates valued up to £325,000 can pass to heirs without incurring tax; however, there are whispers of lowering this threshold. Additionally, potential revisions to the treatment of pensions in the context of IHT—making them subject to estate valuation—have been discussed, offering a broader tax base for the Treasury.

Gifting Rules for Inheritance Tax

Modifications to gifting rules may also be on the table. Under the current system, gifts made less than seven years before one’s death can attract tax. Lobbying efforts are calling for the abolition of taper relief on these gifts, which would allow more revenue to flow to the state upon an individual’s passing.

Cuts to Sickness Benefits

Likely linked to efforts for long-term economic recovery, cuts to welfare spending, particularly concerning income-related sickness benefits, have been considered. The Chancellor is understood to seek ways to lower the welfare bill by helping individuals transition back into work more efficiently, which could involve significant reforms to the Personal Independence Payments system.

Adjustments to Tax-Free Savings

Reeves may also seek to modify the Individual Savings Account (ISA) allowance, currently capped at £20,000. To enhance taxation revenue, potential cuts to this limit could be proposed, thus impacting individual savings strategies across the country.

Doubling the Building of Social Housing

On a more optimistic note, reports suggest that Housing Secretary Angela Rayner may secure substantial funding for social housing, potentially reversing a troubling trend of declining housing supply. This initiative aims to bolster the construction of new social housing units, addressing long-standing shortages and potentially stabilizing rental prices.

Changing Debt Rules to Boost Investment

Speculation is rife that Reeves could alter the Government’s self-imposed fiscal rules to allow for increased borrowing aimed at infrastructure investment. By shifting calculations around debt to include a broader range of financial liabilities, the Chancellor might facilitate substantial spending on public projects.

Pay-per-Mile Car Tax Introduction

A controversial proposal that might be unveiled is a pay-per-mile tax system. This could penalize high-mileage drivers while rewarding those who drive less, fundamentally altering how vehicle taxation is structured. Environmental concerns may push such reforms, but the impacts on lower-income individuals and those residing in rural areas could provoke significant pushback.

Changes to the Lifetime ISA

The Lifetime ISA, designed to assist first-time homebuyers, may also see reforms. Calls to remove the existing withdrawal penalty or raise the property price ceiling have echoed through financial discussions, indicating a need for increased flexibility for younger savers.

Raising Alcohol Duties

Lastly, an increase in alcohol duty might be on the agenda, responding to rising consumption levels and potential health-related policy initiatives. Currently rising with inflation, a hike could reflect economic shifts and overall fiscal strategy.

As Rachel Reeves prepares to stand before Parliament, the awaited budget could signal significant shifts across various sectors of the economy. The proposed changes reflect the complex interplay between ensuring government revenue and fostering economic growth, and the anticipated reactions—from businesses to households—will shape the dialogue long after the budget is revealed.