The chancellor’s upcoming budget may introduce changes to inheritance tax, capital gains tax, and pensions to tackle a growing public finances shortfall

Chancellor Rachel Reeves is set to unveil a series of personal tax increases in October’s budget as part of her strategy to address a significant £22 billion shortfall in the UK’s public finances. This move comes amid a backdrop of rising government borrowing, which reached £3.1 billion in July—more than double the figure from the same month in 2023.

Despite the Labour Party’s election manifesto promising no hikes to income tax, national insurance, or VAT rates, Reeves is exploring other avenues to bolster the Treasury. Among the taxes under review are inheritance tax and capital gains tax, alongside possible restrictions on welfare benefits. Reeves recently eliminated winter fuel payments for most pensioners and may resist pressure to lift the two-child benefit cap.

Inheritance Tax

Inheritance tax (IHT) is levied on an estate’s value after a person’s death, but only if the estate exceeds a certain threshold. Currently, estates valued under £325,000 are exempt from tax, and transfers to spouses or charities are tax-free. Estates worth less than £2 million can pass up to £500,000 tax-free if the home is left to children or grandchildren. The standard rate on amounts above these thresholds is 40%, with various exemptions including agricultural land and business assets.

In the 2021-22 tax year, only 4.39% of UK deaths resulted in an IHT bill, with the average bill being £215,000. However, the wealthiest estates see significantly higher tax bills. The total IHT collected in the 2023-24 fiscal year was £7.5 billion. Reeves is contemplating adjustments to exemptions and reliefs, which could include targeting business property relief and agricultural property relief. Changes could potentially generate an additional £1.8 billion.

Capital Gains Tax

Capital gains tax (CGT) applies to profits made from selling assets that have increased in value. Exemptions include sales of main homes, cars, stocks and shares ISAs, and charitable donations. For gains exceeding £6,000, the tax rate varies: 10% for basic rate taxpayers and 20% for higher rate taxpayers, with higher rates for residential properties and investment funds.

In the 2022-23 tax year, CGT contributed £14.4 billion, a 15% drop from the previous year. Reeves may propose aligning CGT rates with income tax, potentially increasing rates for higher and additional rate taxpayers to 40% and 45%, respectively.

Pensions

The lifetime allowance for pensions, which was scrapped last year, previously taxed excess pension savings at up to 55%. Reintroducing a cap at the previous threshold of £1 million could raise nearly £800 million, according to the Institute for Fiscal Studies. Additionally, the government might adjust pension tax relief, which cost £44.1 billion in 2021-22. Currently, higher and additional rate taxpayers receive more relief than basic rate taxpayers. Revisions could standardize relief or reduce it for higher earners.

The Telegraph

Chancellor Rachel Reeves is preparing for potential tax increases to address a £5 billion borrowing surge, which has raised concerns about the impact on jobs and economic growth. Recent figures revealed that government borrowing exceeded forecasts by £4.7 billion in the first four months of the financial year, with July alone seeing £3.1 billion in borrowing, far above the anticipated £0.1 billion.

Reeves, alarmed by the fiscal situation, has indicated that difficult decisions are imminent to stabilize Britain’s finances. The potential increase in employers’ national insurance contributions—a key revenue source for the government—has emerged as a possible measure. Although Reeves had previously promised not to raise national insurance, her chief secretary to the Treasury, Darren Jones, hinted that an increase might be considered, though this remains unconfirmed.

Business leaders have expressed concern about such a tax hike, arguing it could reduce hiring, lower wages, and adversely affect economic growth. The Recruitment and Employment Confederation warned that higher national insurance would increase employment costs, while the Federation of Small Businesses criticized the move as a breach of Labour’s manifesto promises.

The borrowing surge follows significant public sector pay increases, including a 22% rise for junior doctors, which has been criticized for exacerbating the fiscal deficit. Opposition figures, such as Laura Trott MP, accuse the government of mismanaging public finances and potentially using these issues as a pretext to break tax pledges.

Economists warn that increasing national insurance contributions, or freezing the wage threshold, would discourage employment and impact job growth. The Treasury has yet to confirm specific tax policy changes, with further details expected in the Autumn Budget.

Sky News

As Chancellor Rachel Reeves prepares for October’s budget, there are growing concerns about the UK’s fiscal outlook. Despite recent positive economic indicators, such as low inflation and strong GDP growth, public finances show a troubling picture. Official figures reveal that government borrowing surged by nearly £5 billion more than anticipated in the first four months of the year. Spending exceeded expectations significantly, while tax revenues fell short.

The Office for National Statistics (ONS) reported that while tax revenue was slightly below forecast, government expenditure was £9 billion higher than expected. This overspend has created a narrow margin, equivalent to the “headroom” the government has before breaching its fiscal rules. With this context, Chancellor Reeves is expected to announce tax increases and spending cuts in the upcoming budget.

There is speculation that Reeves might consider increasing employers’ national insurance contributions, a move that could raise substantial revenue but also potentially lead to reduced hiring and lower wages. Business leaders and opposition parties have expressed concern, noting that such tax hikes would contradict Labour’s manifesto promises and exacerbate economic challenges.

Additionally, the Chancellor might adjust fiscal measures, potentially by altering the debt metrics used to assess financial health, to create more headroom. However, any such changes are unlikely to mitigate the anticipated austerity measures, with more difficult decisions on the horizon as the government seeks to address its budgetary shortfall.