During this week's Labour conference, the Chancellor stressed during her speech that the Labour government will not increase the basic, higher, or additional rates of income tax, national insurance, or VAT. Corporation tax will also be capped at its current level. These were key election pledges which were reiterated.
That said, Reeves confirmed the party will extend the Energy and Profits Levy on oil and gas producers, as well as end non-dom tax loopholes and crack down on tax avoidance and evasion. The introduction of VAT on private schools was also confirmed.
Despite Reeves's commitment to not raise specific taxes, other options remain on the table. These include policies that change the way inheritance tax, capital gains tax, as well as pensions work. There was no mention of these taxes during Reeves' recent speech, but potential tax rises or reforms were not ruled out previously either.
Media outlets have been publishing various predictions on what the new policies could look like, but it's important to note it's mostly speculation at this point. That said, here is a round-up of the top Labour Budget predictions gaining the most attention.
1. CGT rates could be aligned with income tax rates
The Chancellor has previously said that some taxes are likely to go up as part of the October Budget. Reforms to Capital Gains Tax are one possibility. Currently, everyone is exempt from paying CGT on the first £3,000 with rates then ranging from 10% to 28% depending on your circumstances.
One option is that CGT rates could be aligned with income tax rates resulting in gains taxed up to 45% for the highest earners. This was a recommendation first made by the Office of Tax Simplification (OTS) back in 2020.
Myron Jobson, Senior Personal Finance Analyst at Interactive Investor, added: “Our calculations show that CGT liability for investors across the income spectrum could double, at best, if CGT rates are aligned with income tax."
Should this happen, additional rate taxpayers may see tax charges of more than £21,000 on a £50,000 capital gain on investments outside tax wrappers according to calculations by Interactive Investor. This would be nearly £12,000 more than the existing tax they would pay on the same amount which would be around £9,400. Basic rate taxpayers could also see increases, where the CGT rate increases from 10% to 20% essentially doubling the CGT tax burden.
It's difficult to estimate how much this would raise in tax each year. The OTS' rough numbers suggest that this could raise an additional £14bn per year for the Exchequer, at least in theory. But, it is quick to note that the figure will likely be much lower in practice due to behavioural effects such as people delaying asset disposals and other policy changes that could be enacted to mitigate the full impact of this move.
2. Potential changes to CGT could bring about a "double death tax"
"Double death tax" refers to the idea that CGT could be reformed whereby when a person dies, this is treated as the disposal of assets they own which then become liable for capital gains tax. When the capital gains tax is paid, the net value of the assets is added to the estate for inheritance tax purposes where it is once again taxed. As such, assets are essentially taxed twice resulting in a "double death tax".
The IFS argues in its report on reforming inheritance tax, "this is both correct and intentional" adding: "On death, if an asset has accrued gains, it is appropriate to tax these just as much as it would be if the asset were sold the day before death, where it is currently being taxed."
Currently, when someone dies, the accumulated gains of their assets are disregarded for tax purposes. Instead, the beneficiaries of the estate acquire the asset at its current market value. When the asset is eventually sold, only the gains from the date of death are then taxable. This essentially means the gains made previously are wiped out.
The IFS estimates that in 2021/2022, around £8bn worth of gains were forgiven on death which, assuming a 20% CGT rate, suggests the government foregoes around £1.6bn in tax a year.
3. The tax-free lump sum from pensions could be reduced
Currently, you are entitled to withdraw up to 25% of your pension pot tax-free up to £268,275 once you're 55 years old. During the election campaign, then leader of the opposition Keir Starmer stated that the current system would need to be reviewed when asked whether the tax-free lump sum would remain prompting fears that it could be removed altogether. The party later clarified that the tax-free lump sum would remain. However, this still opens up the possibility that it could be reduced.
Helen Morrissey, Head of Retirement Analysis at Hargreaves Lansdown, said: "Any attempts to reduce the amount of tax-free cash people can take from their pension would prove hugely unpopular. People have plans for this money, whether that’s paying off their mortgage or making home renovations.
"Any changes risk throwing long-standing plans into chaos. The danger is that this results in people pulling their tax-free cash out early, in an attempt to avoid any such raid, which could lead to poor outcomes."
However, figures by the IFS suggest that reducing the maximum tax-free amount that retirees can take to £100,000 rather than the current £286,275 could raise around £2bn a year in the long run with any losses concentrated among the relatively wealthy with larger pension pots. To put this into context, the current 25% tax-free lump sum allowance has an estimated annual cost of £5.5bn with 70% of the relief handed to the top fifth of earners.
4. Flat tax relief on pension contributions could be implemented
Currently, when you contribute to your private pension, you get tax relief on your contributions based on your marginal rate of income tax. This could be 20%, 40% or 45%. However, one possible move that previous governments have toyed with is introducing a flat tax relief on pension contributions ranging between 25% to 30%. This would be good news for basic rate taxpayers, but not so great for higher-rate taxpayers who will receive less in tax relief.
That said, there are significant savings on the table for the government should this policy be implemented. A report by the Fabian Society estimated that if a flat rate of 25% for every £1 was introduced, this would reduce the cost of income tax relief on Defined Contribution pensions by 22%. Based on tax relief paid out in 2022/23, this would have saved the government £5bn. The 30% tax relief proposal would result in a reduction of costs by 6% resulting in a £1.4bn saving for the government.
The worry with this move is that higher earners would be less incentivised to save towards their retirement as a result. Steven Cameron, Pensions Director at Aegon, added: “A big unknown is how individuals will react to such a change. While basic-rate taxpayers are likely to continue as is, some higher and additional-rate taxpayers might see pensions as less attractive. Faced with paying tax on employer contributions, some could even leave their schemes entirely, storing up real challenges for the future. So the change could be ‘friend’ to some but ‘foe’ for others.
“The decision comes while the government is keen to encourage defined contribution pensions, with their billions in funds, to invest more in UK growth companies to support the growth agenda. But saving on tax relief means less money going into pensions, and this could be made worse depending on how higher paid individuals reacted."
Another issue with the implementation of a new flat rate tax relief system is how it would be implemented when employees make pension contributions via salary sacrifice. In this instance, the pension contribution is made out of gross salary which effectively gives the employee tax relief on their pension contributions at their marginal income tax rate. If there were separate income tax rates and pension tax relief rates this would cause an administrative headache and new tax reporting burden for employers and employees.
5. Pension funds could be included within your estate for inheritance tax purposes
Pension funds do not currently count towards your estate for inheritance tax purposes. If you die before you're 75, you can pass on your entire pension fund to your beneficiaries tax-free. If you die after you're 75, you can still pass on your pension fund to your beneficiaries, but income tax will apply on withdrawals.
One possible move could be to make pension funds a part of people's estates for inheritance tax purposes. This could significantly increase people's estates for inheritance tax purposes as figures from Charles Stanley suggest that the average UK pension pot for a man in his 60s is £228,200 while women of the same age have around £152,600 on average.
But even if this were to happen, it's unlikely it'll be applied retroactively to current pensioners. Implementation would likely be a long and costly process. Tom Selby, director of public policy at AJ Bell, commented: "As is often the case with pensions, applying any new tax on death – or bringing pensions into the IHT net – would come with substantial challenges. The biggest of those would be around how to treat people who have made decisions about their retirement pot based on the pensions death tax rules as they are today...
"If all of a sudden that money became subject to a new pension death tax, those people would, understandably, feel like the rug has been pulled from under them. It is therefore possible a complicated protection regime would be needed to ensure people are not subject to unfair and arguably retrospective tax measures. This would inevitably reduce the money the Treasury could potentially raise from such a move."
However, according to data from the IFS, if Labour does choose to shut down pension pot exemptions, along with exemptions on business assets and agricultural land for IHT purposes, the government could raise around £2bn a year.
What's coming up in the Labour Budget
The Chancellor has promised a Budget with "real ambition". That said, "tough decisions" will need to plug the £22bn spending hole the Chancellor states she has inherited from the previous government. Certain policies, such as making the winter fuel allowance means-tested, have already been implemented. Others, such as introducing VAT on private schools and ending non-dom tax loopholes, have been confirmed.
We know that income tax, National Insurance, and VAT will not be affected. That leaves the potential to reform the way inheritance tax, capital gains tax, and pensions work. And while the predictions above have been discussed widely by experts and media outlets, they remain speculation. We won't know for sure what the Budget will bring until October 30 other than that it'll be "painful" and involve "tough decisions".
Labour Budget: Frequently asked questions
Below, we answer some of the most frequently asked questions about the upcoming Labour Budget.
When is the Labour Budget?
The first Labour Budget will take place on Wednesday, October 30, 2024. The Budget typically begins at around 12.30 pm and is presented by the Chancellor of the Exchequer (currently Rachel Reeves).
Will Labour tax state pensions?
The state pension will only be taxed if it rises above the personal allowance. The personal allowance is currently £12,570 and it is likely to remain at this level until April 2028 as the previous Conservative government froze personal tax thresholds until then.
The state pension, however, is protected under the triple lock so it may rise above £12,570 before April 2028. It is currently £11,502 a year (for the full new state pension) and is due to go up by around £460 a year from April 2025. As such, if Labour does not unfreeze the personal allowance and maintains the state pension triple lock, it's entirely possible that the state pension could be higher than the personal allowance in the next few years and therefore subject to income tax.
That said, this isn't a specific Labour policy but rather a consequence of frozen personal tax thresholds and the triple lock.
Is Labour going to introduce an inheritance tax on pensions?
There has been speculation that pension funds could become a part of a person's estate for inheritance tax purposes, but the Labour Party has not indicated that this will happen. Even if a policy like this is announced during the upcoming Budget, it's unlikely that it will be implemented immediately or retrospectively meaning current pensioners may not be affected.
What is the double death tax?
The double death tax is a concept which emerged from speculations that capital gains tax could change where when a person dies, their death is treated as a disposal of assets for CGT purposes meaning that CGT would need to be paid on the assets. Following this, the net value of the assets would still be part of the estate for inheritance tax purposes resulting in double taxation at death. While changes to CGT are possible, it's not yet clear what this will look like.
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