Budget Day will be on the 30th October 2024. With warnings already given on tax increases/changes coming!
Even the new PM Keir Starmer has said it is going to be painful, so watch out their coming for even more of your money.
Our economy has all but flatlined and the Labour Government is looking to introduce several tax increases, meaning significant financial adjustments are on the way.
For many, this means a potential increase in tax liabilities unless you stay informed and prepare now.
I aim to help you understand some of the muted upcoming changes and offer insights to avoid the unexpected financial burdens they may well cast over you.
Labours Reasoning
The Labour Government believe the way to address the nation’s financial challenges is to increase certain taxes, think they will be popular with more people than those not so keen,
Their stated goals include:
● Reducing the deficit: Addressing the shortfall between government spending and revenue by boosting compliance activities at HMRC.
● Funding public services: Making sure there's enough financing for essential services like healthcare, education, and roads.
● Addressing economic inequalities: Implementing measures to promote fairness and reduce the wealth gap across the nation.
But will these changes along with other annoucements drive growth in our economy?
Inheritance Tax (IHT): What Could Change?
Inheritance Tax (IHT) has long been a contentious issue, often seen as a levy on the wealth passed down through generations. Currently, estates above a certain threshold are taxed at 40%. However, this could be about to change, with significant implications for your children/beneficiaries and not in a good way.
Potential Increase in IHT Rates
One of the most discussed changes is the potential increase in IHT rates.
If the standard rate is raised higher, the adjustment would predominantly affect larger estates, increasing the tax burden on significant inheritances, but what will be the starting point, especially as a lot of wealth is locked up family homes, businesses, etc.
Changes to IHT Thresholds
In addition to rate hikes, changes to IHT thresholds are also on the table. The Labour Government may lower the threshold at which estates become liable for IHT. This shift would pull more estates into the taxable bracket, impacting middle-class families who might not have previously faced IHT concerns.
So in the end not so wealth families along with the wealthier families will pay even more. Potentially leaving your estate to pay considerably higher IHT bills, making the need for meticulous estate planning to mitigate these effects ever more important and urgent.
Adjustments to Capital Gains Tax (CGT)
Capital Gains Tax (CGT) is another area under scrutiny. Currently, the rate for profits above £3,000 from investments is 20% for higher-rate taxpayers. For additional property sales that are not your main residence, the rate is 24%. Proposed changes aim to increase these rates and adjust exemptions.
Higher CGT Rates on Investments
The proposed higher CGT rates are set to impact individual investors and financial markets significantly. The Labour Government is looking to raise the rates to be more in line with income tax rates.
Although this change could potentially raise £16.7 billion in a year, it could also make investing less attractive, leading to a slowdown in market activity and affecting portfolio values.
Changes in CGT Exemptions
Another critical area under review is CGT exemptions. Potential changes to CGT exemptions, such as reducing or eliminating the annual tax-free allowance, could affect property owners and business sales by increasing the taxable amount on gains from asset sales.
Pension Reforms: What to Expect
Pension taxation involves tax relief on contributions and taxation on withdrawals. Currently, individuals receive tax relief on pension contributions based on their income tax rate.
Reduction in Pension Tax Relief
The proposed reduction in tax relief on pensions aims to generate additional revenue by lowering the relief available to high earners. This change could be challenging as it would involve dismantling public sector schemes and might discourage pension saving.
Changes to Lifetime Allowance
The lifetime allowance, which caps the amount you can save into a pension without incurring extra tax charges, may be lowered, affecting those with substantial pension pots. This would require savers to rethink their contributions and possibly seek advice on tax-efficient savings vehicles.
Other Potential Tax Increases
Beyond IHT, CGT, and pension reforms, the budget could introduce several other tax changes that will affect a broad spectrum of taxpayers.
VAT on Private School Fees
Labour plans to start charging VAT on private school fees. This is expected to generate £3.8 billion over the next four years. The goal is to make sure that private schools contribute more to public funds by aligning their tax obligations with those of other private businesses.
Business Rates for Private Schools
In addition to VAT, private schools will lose their business rates exemption, generating an additional £475 million over the same period. This policy underscores Labour's focus on increasing revenue from traditionally exempt or lower-taxed sectors.
Carried Interest
Carried interest tax rates for private equity funds will increase by 12 percentage points under Labour’s plans, potentially raising £3.3 billion in additional revenue. This change aims to create more equitable taxation of private equity profits compared to other income forms.
Corporate Tax Rate Cap
Corporation tax will be capped at the current level of 25% for the entire parliament, with adjustments if international tax changes affect UK competitiveness. This provides stability and predictability for businesses.
Income Tax Rate and VAT Adjustments
Labour pledged not to increase National Insurance, Income Tax rates, or VAT for “working people” in their 2024 manifesto. However, they do plan to make changes to tax policies in other areas. Bearing this in mind could they decide to get creative in other areas or even introduce new types of taxes?
Personal Savings Allowance
The allowance on the amount of interest you can earn before tax has been reduced at previous budgets so this could be the year it is abolished completely!
And with savings interest rates low additional tax it not going to encourage a savings culture.
Stay Proactive to Avoid Extra Costs
In our humble opinion, the October Budget 2024 could substantially change a lot of tax areas, from inheritance and capital gains to pensions and income tax.
It is very rare for a Government to make retrospective changes to tax legislation, so if you have been thinking about selling an asset/s that would attract CGT or putting in place a plan to pass you estate on to children/beneficiaries tax efficiently do it now, you have limited time.
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