GK Strategy Pre-Budget Briefing: GK Associate Hugo Tuckett takes a look at what we’re expecting to see in the government’s first Budget on Wednesday 30 October
Political Context
The government will hold its first budget on Wednesday 30 October. Ministers will want to use it as an opportunity to reset the political agenda given the turbulence of recent weeks which has seen the Prime Minister lose his Chief of Staff Sue Gray and pay back more than £6,000 in gifts after a row over donations.
Labour’s election manifesto was light on tax and spend measures. The Party identified four revenue raising levers to utilise to fund its reforms to public services. These are: further reforming non-dom tax loopholes, applying VAT and business rates to independent schools, ending the carried interest tax loophole and increasing stamp duty on purchases of residential property by non-UK residents. The Party estimated this would raise just over £7 billion in additional revenue for the exchequer.1 The manifesto also included a commitment not to increase national insurance, the basic, higher or additional rates of income tax, or VAT. Given these represent approximately two-thirds of tax revenue, this forces the Chancellor to focus on maximising returns from a series of smaller pots to fund Labour’s spending priorities.
In July 2024, the Treasury completed an audit of public spending which identified a £22 billion black hole in the public finances. The government said this represents an in-year overspend and does not constitute an estimate of how much additional funding might be allocated to departments moving forward or how much additional borrowing may be required.2 The Chancellor will therefore have to pursue a series of tax rises to close this gap in the public finances and support additional investment in departments moving forward.
Potential Measures
The following list sets out a series of measures that GK has assessed are likely to be included in the upcoming budget:
Employer pension contributions: The pushback the Chancellor received following her decision to end winter fuel payments for pensioners not in receipt of pension credit (which cut the relatively small amount of c.£1.5 billion from the government’s annual welfare bill) reduces the likelihood of her pursuing a large number of small tax rises to balance the books. Instead, the government is likely to target 3-5 measures which collectively bridge the gap in the public finances. GK’s assessment is that the Chancellor is likely to reform the NICs treatment of employer pension contributions by levying employer NICs on employer pension contributions. If levied at the full rate (13.8%), this would raise around £17 billion per year. This covers approximately three-quarters of the £22 billion figure identified in the Treasury’s audit of public spending and would end what the Institute for Fiscal Studies (IFS) describes as “the generous NICs treatment of employer pension contributions… [which are] opaque and poorly targeted.”3
Inheritance tax: The government is likely to close several loopholes in the inheritance tax system. Politically, Labour is not as sensitive about reforming inheritance tax as previous Conservative administrations. This provides the Chancellor with a freer hand to make changes without encountering pressure from her Party’s backbenchers. Reforms to the inheritance tax system are likely to include ending reliefs for business assets (including those held in the AIM market), agricultural property, and gifts to charities. This is estimated to raise c.£2.4 billion in revenue.4
Capital gains tax: We expect the Chancellor Rachel Reeves to increase rates of capital gains tax. This is, however, likely to constitute a shift of only a few percentage points given concerns about maintaining the UK’s international competitiveness. Unlike the Conservatives, Labour did not commit to freezing capital gains during the election campaign. As the Party has ruled out increases to income tax, national insurance and VAT, it has few levers to pull to raise revenue to fund its spending commitments. Capital gains tax is an attractive revenue raiser for the government given it is paid by a small number of individuals each year (who broadly sit outside Labour’s electoral base) and it fits with its wider commitment not to raise taxes on “working people”.5
Carried interest: Reforms to the tax treatment of carried interest which would see rates align with the higher rate of income tax (45%) are unlikely to be contained in the upcoming budget. Instead, we expect a compromise agreement to be reached whereby rates are lifted, albeit not significantly, to fulfil the Party’s manifesto commitment to “close this loophole”.6 Although it was one of Labour’s few tax raising measures it committed to pre-election, internal Treasury analysis has now revealed that the policy could have a “net cost to the exchequer”. This is because wealthy individuals could choose to leave the UK rather than pay the money and deter investment. Treasury civil servants estimate the rise could cost as much as £350 million per annum after five years.7
Debt measure: The Chancellor is likely to reform the UK’s debt measure to support public investment in infrastructure projects. Speaking at Labour Party Conference in October 2024, Rachel Reeves said that “it’s time the Treasury moved on from just counting the costs of investment in our economy to recognising the benefits too.” This suggests that the Treasury’s fiscal rules will be altered to allow the government to offset “assets”, against the wider national debt, thereby freeing up more money for investment. This is likely to amount to c.£50 billion worth of additional headroom.8 Importantly, the move will not allow Reeves to increase day to day spending, as Labour has said this must be met entirely from annual tax receipts.
1 Labour Party, Change, 13.06.24
2 HM Treasury, Fixing the foundations: public spending audit 2024-24, 02.08.24
3 IFS, Raising revenue from reforms to pensions taxation, 11.09.24
4 IFS, Raising revenue from closing inheritance tax loopholes, 18.04.24
5 Financial Times, IFS urges Labour Party to make ‘serious reforms’ to capital gains tax, 06.10.24
6 Labour Party, Change, 13.06.24
7 The Times, Labour poised for U-turn over tax plans for investment gains, 04.10.24
8 The Times, Rachel Reeves hopes for £50bn windfall with fiscal rules rejig, 26.09.24
