Budget Rumours: Chancellor casting the net widely for tax rises

Current top lines

• Tax raising Budget widely expected
• Income tax thresholds likely to remain frozen, but no increase in rates
• Pension contribution salary sacrifice expected to be capped
• ‘Mansion tax’ on most valuable homes anticipated
• Business rates and VAT ‘de minimis’ changes also expected

Context / public finances

New Office for Budget Responsibility forecasts reportedly show a smaller deterioration in the public finances than previously expected, according to the Financial Times, the BBC and others, meaning a smaller than previously expected (though still large) gap to fill in the government’s finances at the Budget.

Lower productivity expectations had previously led to an expectation that there would be a deterioration of around £30 billion in the government’s finances compared to the time of the spring forecast. However, the BBC says, “more recent assessments from the OBR appear to have increased the projected strength of wages and tax receipts in the coming years and offset several billion pounds of that gap, taking it closer to £20bn.”

In addition to this there is the question of whether the Chancellor will seek to increase her amount of ‘headroom’ – that is, her wiggle room against breaking her fiscal rules (primarily the rule that UK net debt as a share of GDP must be forecast to fall within five years). According to the FT, Downing Street officials have told them the Chancellor wants to add at least £5bn to her previous headroom of £9.9bn.

Income tax and national insurance

The updated forecasts appear (though some economists are sceptical) to have prompted the abandonment of plans for an increase in income tax rates. Today’s FT reported that the Prime Minister and Chancellor have “ripped up” plans to raise the basic and higher income tax rates at the Budget. According to the FT the decision was communicated to the Office for Budget Responsibility on Wednesday in a submission of “major measures” set to be announced in the Budget.  

The FT suggests that Rachel Reeves is now exploring a “smorgasbord” of measures to fill the fiscal hole. The paper’s initial report suggested this included cutting the thresholds at which people pay different rates of income tax. However a later story quoted sources as saying that Reeves is not planning to lower personal tax thresholds. The Chancellor is still expected to extend the freeze on personal tax thresholds – including income tax and national insurance – for another two years until 2030. This is expected to raise £8bn to £10bn a year. The IFS says it would lead to the number of higher-rate income tax payers in the UK exceeding 10 million for the first time.

According to the Telegraph the Chancellor is “poised to increase” the tax rate on earnings from shares. The paper says it understands Reeves will put up the rate of dividend tax as part of a drive to tax income from wealth more equally to earnings made from work. While noting suggestions that the rate be doubled the paper says it understands Reeves will not go that far and suggests she could opt for “a middle ground”, raising the basic rate by four points to 12.75 per cent, bringing in around £1.5bn.

The Chancellor is also said to be looking to cut again the tax-free dividend allowance, even though this has already been cut to £500. The Telegraph notes that former deputy prime minister Angela Rayner suggested this in her leaked tax memo. This would raise around £325mn.

Savings income may come under pressure if, as rumoured, the Chancellor cuts the annual Cash ISA allowance. The FT reported last week that the Treasury has privately floated a level of £12,000 a year, down from the current £20,000 but higher than Reeves’ initial £10,000 proposal. This is part of efforts to encourage people to invest more in stocks and shares.

Reports over the summer that the Treasury is considering applying national insurance to landlords' rental income continue to be given credence and have not been debunked by government sources.

However proposals to put national insurance or an NI-like levy on the income of members of limited liability partnerships do appear to have been dropped. Today’s Times reports that the Chancellor has abandoned the plans after Treasury modelling indicated that partnerships would bring forward profits to avoid the new charge before its introduction. Reeves was reportedly considering the introduction of a charge of about 7%.

Pensions and tax

Recent media reports, including in the Times, have sparked speculation that the Chancellor may target salary sacrifice pension schemes in the Budget. There is currently no limit on how much money an employee can put into their salary sacrifice pension scheme before they are taxed. But Reeves is reportedly considering a new rule that would cap tax-free contributions at £2,000 annually. Any amount above this threshold would be subject to national insurance payments— 8% for salaries under £50,270 and 2% for income above that. Employers would also see changes, as their contributions currently avoid a 15% NI charge.

Meanwhile, officials have confirmed that the Chancellor will not reduce the tax-free pension lump sum limit in the Budget. Currently, individuals can take up to 25% of their pension tax-free, capped at £268,275 once they reach 55. This confirmation came after reports of ‘panicked withdrawals’ from retirement funds amidst fears of potential changes.

Property taxes and capital gains tax

The Chancellor is widely reported to be planning a new tax on high value properties (dubbed a ‘mansion tax’). The proposal is thought to be for a tax on properties valued over £2 million, imposing an additional 1% charge, potentially costing owners £10,000 annually for a £3 million home. According to ‘The I’ owners of expensive homes on modest incomes are likely to get the chance to defer the tax until the property is sold or they die. 

Rumours also continue to swirl that sellers of the most valuable residential properties could have to pay capital gains tax with private residence relief being curtailed. In August The Times suggested this might happen for properties worth more than £1.5 million.

However the Chancellor is reported to have abandoned plans for an "exit tax" on wealthy individuals due to concerns it could lead to a mass departure of millionaires from the UK. The proposed levy aimed to tax entrepreneurs selling assets before leaving the country. A source told The Telegraph the exit tax could potentially set a warning to others that the UK is "less welcoming" to entrepreneurs. They added: "Introducing an exit charge would risk signalling that the UK is less welcoming to entrepreneurs and global talent, and that’s not something the Chancellor wants to do."

Could further increases in CGT rates be on their way? While this is much speculated about there have been no authoritative looking rumours that it is on the cards. There were of course increases in CGT rates in last year’s Budget.

Inheritance tax

The rules on lifetime gifting are reportedly under scrutiny, with two main changes rumoured: a lifetime cap on tax-free gifts (potentially as low as £100,000 or even £50,000), and changes to the seven-year rule. The Telegraph has suggested that the residential nil rate band might be removed. However there has been no reporting that changes will be made as opposed to just being under consideration.

Another possibility is changes to the proposals announced in last year’s Budget to restrict business and agricultural property reliefs and to bring unused pension pots within the scope of IHT. Again there is nothing authoritative, but it would be surprising if there is no mitigation of the proposals on APR and BPR in particular following strong campaigns which have cross-party support in Parliament. Possibilities with widespread support include changes to transitional arrangements for older farmers in particular and an increase in the level of the allowance. More radically some variation on CenTax’s proposal for a “minimum share rule” (at least 60% of the deceased’s estate be made up of qualifying farmland or business assets to claim full relief, with farms retaining full relief up to £5 million per person) remains a possibility. 

Business rates

We know there will be something on business rates at the Budget after the Chancellor told MPs last week: “We will be setting out more information on our reformed business rate system to help our high streets and help our small businesses on 26 November”.

The interim report on business rates reform published in September commits to exploring a move from a "slab" to a "slice" approach (moving from a single multiplier applied to the full rateable value to increasing rates for successive bands). According to the FT the Chancellor is set to backtrack from plans to put large retailers in the top business rates band following complaints by retailers who warn it would push up inflation on food.

Other business taxes

There has been relatively little speculation around increases to business taxes at this Budget, recognition perhaps that the increase in employer national insurance announced a year ago has left very limited capacity to add further to the business tax burden.

One measure widely expected is increased taxes on the gambling industry. The Telegraph has reported that these are expected to raise about £1 billion but they will exclude horse racing.

It is believed that the Chancellor won’t target banks with tax increases in the Budget. A close source to Rachel Reeves told the FT: “There’s obviously a list of possible tax measures, but raising taxes on banks is a long way down that list”.

VAT

The Treasury is expected to ditch the “de minimis” rule, which currently allows overseas retailers to send goods worth £135 or less directly to UK consumers without paying customs duties or VAT. One government official said closing the ‘loophole’ was “nailed on” for the Budget, while another said: “You can expect to see some movement on this.” The US and EU have recently tightened or abolished similar rules.

It's understood that the government may step in to help lower energy costs, potentially by scrapping the existing 5% VAT on energy or cutting back on some of the regulatory charges included in energy bills.

It has been reported that the government is set to impose a flat 20% VAT fee on all private hire bookings, which would significantly increase costs for passengers using services like Uber and Bolt.

There were reports in August that Rachel Reeves was contemplating raising the VAT registration threshold from £90,000 to stimulate economic growth. But other reports around the same time suggested there was pressure from within government for the threshold to be reduced. Anything is possible but the likeliest outcome is probably no change.

Other indirect taxes and levies

Drivers of electric vehicles (EVs) could face the prospect of a new pay-per-mile charge, the Telegraph reported last week. According to the paper, there will be a consultation but EV drivers could be charged 3p per mile, on top of other road taxes. Drivers of hybrid cars would also be charged, but at a lower rate.

The Chancellor is contemplating an increase in alcohol duties, reports City AM. Any change could potentially align with the RPI inflation rate of 4.5%. But industry representatives are lobbying against the possible rise, arguing it threatens jobs and businesses.

There have been predictions that changes will be made to landfill tax reform proposals, following strong criticism of the costs the proposals will add to new building.

Tax administration and compliance

We can expect to hear updates on the government’s tax compliance work in the Budget.

One particular measure that is expected to be announced in the Budget, according to the FT, is a ‘US-style incentive scheme’ for whistleblowers of large-scale tax fraud. The paper says HMRC is set to launch the reward scheme later this month and could pay as much as 30 per cent of any taxes collected as a result of tip-offs from informants.

Budget speculation updates produced by the CIOT External Relations Team