The Labour Party put an end to 14 years of Conservative rule on 4 July 2024 when they won the general election with a landslide victory.
The new government promised to implement drastic changes and revitalise the country. As such, the party’s ambitious plans could be very costly.
Additionally, chancellor Rachel Reeves said that Labour has inherited a dire financial situation from the previous government. Shortly after coming to power, Labour halted several public infrastructure projects, cancelled planned reforms to social care funding, and announced that they would means test the Winter Fuel Payment.
Reeves said these measures would go some way to plugging the £22 billion “black hole” in the public finances, but there would be more difficult decisions to come.
Starmer and Reeves have repeatedly committed to not raising taxes paid by “working people”. As such, they likely won’t increase Income Tax, National Insurance, or VAT.
However, according to Sky News, Keir Starmer said: “I will be honest with you, there is a Budget coming in October and it’s going to be painful”. This suggests that tax increases of some kind are likely.
As such, you may be concerned about the potential changes the government could announce on 30 October 2024, and how they might affect your financial plan.
Read on to learn about three important changes we could expect to see in the upcoming Budget.
1. Increases to Capital Gains Tax
As the government pledged not to increase taxes on working people, it has limited options if it wants to raise more revenue. This is why many people predict that Labour could make changes to Capital Gains Tax (CGT), and there are several ways it could do this.
CGT is a tax on profits made from selling or transferring ownership of qualifying assets including:
- Stocks and shares held outside of an ISA
- A property that isn’t your main home
- Personal possessions worth more than £6,000 (excluding your car)
- Certain business assets.
In the 2024/25 tax year, you can earn up to £3,000 in profits before paying CGT. This is known as your “Annual Exempt Amount”.
You may pay tax on any profits that exceed your Annual Exempt Amount and the rate that you pay depends on your marginal rate of Income Tax. In 2024/25, you may pay:
- 10% if you’re a basic-rate taxpayer (18% for a property that isn’t your main home)
- 20% if you’re a higher- or additional-rate taxpayer (24% for a property that isn’t your main home).
The government could raise additional funds from CGT by increasing the rates you pay to bring them in line with Income Tax bands. Alternatively, they could reduce or remove the Annual Exempt Amount, so you pay tax on a larger portion of your capital gains.
While we don’t yet know if the government will choose either of these options, or adjust CGT in other ways, this is one area to keep an eye on.
2. An overhaul of Inheritance Tax rules
Labour has already announced changes to the way that “non-domiciles” – UK residents who reside outside of the country for tax purposes – are treated. This includes making assets held in trusts outside the UK liable for Inheritance Tax (IHT).
The government could make further changes to IHT rules to raise more revenue.
For instance, they could reduce the “nil-rate band” – the amount you can pass on to your beneficiaries without triggering a tax charge. In the 2024/25 tax year, this stands at £325,000. You may also benefit from an additional “residence nil-rate band” of £175,000 when passing your main home to a direct descendant such as a child or grandchild.
If the government reduces the nil-rate bands, your loved ones may pay IHT on more of your estate.
Alternatively, the government could increase the rate at which you pay IHT or remove certain exemptions.
For example, in 2024/25, you can gift up to £3,000, which is automatically exempt from IHT. This is known as your “annual gifting exemption”. Additionally, any further gifts may fall outside your estate provided you survive for seven years after giving them.
Wealth in your pensions is also normally exempt from IHT.
If Labour changes or removes some of these exemptions, it could be more difficult for you and your family to mitigate a large IHT bill in the future.
3. Changes to pension tax relief
In the lead up to the election, Labour was notably unclear about their stance on pension tax relief rules.
For instance, the previous Conservative government abolished the “Lifetime Allowance” (LTA) – the total amount you could accrue in your pensions in your lifetime without triggering an additional tax charge. When the policy was first announced, Labour said it would reverse this change if elected.
However, the party later said it would not reinstate the LTA. As such, the government’s policy is not clear and there is speculation that the chancellor could announce changes to pension tax relief rules in the upcoming Budget.
The government could do this by reinstating the LTA. Labour could also reduce or remove the “Annual Allowance” – the total amount you can accrue in your pension each year without triggering an additional tax charge.
Reeves may even change the rate of tax relief the government pays on pension contributions.
In the 2024/25 tax year, you automatically receive 20% tax relief on your pension contributions. This means that a £100 contribution effectively “costs” £80 with the other £20 coming from the government in the form of tax relief.
If you’re a higher- or additional-rate taxpayer, you can claim an extra 20% or 25% through self-assessment.
In the future, Labour could change tax relief rules, possibly by creating a flat rate. This might mean that, if you’re in a higher tax bracket, the amount of tax relief you benefit from falls.
Any of these changes could affect the amount of tax-efficient contributions you can make to your pensions. This might make it more challenging to reach your retirement savings goals.
Get in touch
You may be concerned about how the upcoming Budget could affect your ability to reach your financial goals. We can help you review your financial plan so you can prepare for any changes and continue building wealth for the future.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning or tax planning.
Approved by the Openwork Partnership on 13/09/2024
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