Autumn Budget 2024

With a new Labour Government in place and striking a downbeat pose indicating a tough Budget and possible tax rises, the Chancellor of the Exchequer, Rachel Reeves, will deliver her Autumn Budget on Wednesday 30 October 2024.

Tim Sarson and Sharon Baynham in the KPMG UK Tax Policy team share their insights on what tax measures could be revealed by the Chancellor.

Ever since the Chancellor of the Exchequer announced that there was an unexpected £22bn hole in the public finances, there has been unprecedented speculation about what we could expect in the Autumn Budget.

With all the speculation, it is easy to forget that there are policies that we already know about from the manifesto. There is also a tranche of tax changes implemented by the previous government that is still in the pipeline. So some tax rises will happen – not because they fill the ‘black hole’ - but because they have already been announced by Labour or legislated for by the Conservatives.

In addition, the Labour manifesto highlighted some significant areas of reform. The Budget could see some interesting announcements that map the direction of travel in some key areas. Among them is the unveiling of a Business Tax Roadmap offering more certainty and confidence for investors.

But without a doubt we will also see tax rises. With manifesto commitments not to increase the three main taxes, the Chancellor has somewhat limited options. But these are not unprecedented times. In the 1997, 2010, and 2015 elections the successful party managed to find tax rises of a similar magnitude to the challenge facing Reeves today having ruled out increasing many of the main levers.

So in this predictions article we will take you through what we already know. We will then set out our predictions for what announcements we might see for businesses, employers and individuals, highlighting where we expect updates on Labour’s tax reform agenda as well as where we think taxes will hold steady or be increased.

Finally, we will think about where there could be surprises. In line with the downbeat narrative, perhaps a scorpion in the shoe rather than a rabbit out of the hat.

Badged as ensuring ‘fairness’ in the system, several tax raising measures were proposed in the Labour manifesto: Replacing the non-dom regime with a Foreign Income and Gains relief, removing the tax exemptions for private schools, reforming the taxation of carried interest, extending the windfall tax on energy companies, and adding 1% to the rate of stamp duty paid by non-UK residents purchasing residential property in England or Northern Ireland (equivalent land taxes are devolved to Scotland and Wales).

Those measures together were expected to raise just under £4bn per annum by 2028/29. We expect the individual policies to go ahead, but the revenue is uncertain. The amounts are heavily dependent upon behavioural responses, and we are already beginning to see some exceptions being introduced that will dent revenues at the margins. 

According to the Labour manifesto, another chunk of revenue is to be obtained from closing the tax gap by putting more boots on the ground at HMRC and by investing in further digitalising the tax system. By 2028/29 those measures are expected to raise a net £5bn a year (after about £800m of investment). Closing the tax gap is an important ambition but it is an area where the revenue estimates are often optimistic.

Documents published in the run-up to the election stated that additional staff will focus on enquiry activity, particularly more complex cases, and will be supported by regulatory changes such as strengthening HMRC’s powers and requiring more disclosures of certain tax arrangements. The technology investments would target digitalisation to improve overall compliance as well as longer term investment to update technology.

At Labour conference Reeves announced a consultation on e-invoicing as well as a Digital Transformation Roadmap which will set out HMRC’s digital vision. These announcements may have pre-empted any Budget update, but this area remains one to watch.

Some tax rises were legislated by the previous government and will go ahead unless the new government takes positive action to stop them.

• Tax thresholds
  

Personal tax thresholds were frozen by the Conservative government until April 2028. It is highly unlikely that the current government will ‘unfreeze’ these; fiscal drag looks set to continue.

• Temporary reliefs
  

In March 2022 the Conservative government announced a 5 pence per litre temporary cut in fuel duty, which is due to expire in March 2025. The regime also includes an automatic annual inflationary increase. This ‘escalator’ has been cancelled for many years, but this requires positive action. Without this a hefty increase in fuel duties will happen from April 2025.

Two other temporary measures that will end in 2025 include English business rates relief for the retail, hospitality and leisure industry and a relaxation in certain stamp duty thresholds.

These amounts are not insignificant. The Resolution Foundation estimates that all of the tax rises planned by the previous Government add up to an estimated £24bn per annum.

The government forecasts produced at Spring Budget 2024 will have assumed these taxes rises go ahead. The new government is looking for another £20bn.

Positioning itself as the party of Business, Labour has adopted a narrative of continuing the status quo. But what will we see in practice?

In Labour’s manifesto they said they would cap the headline rate of corporation tax at 25% for the period of the parliament but might reduce it if competitiveness indicated that was needed. There’s nothing to suggest other major jurisdictions are moving their rates down, and indeed we might see the US rate rising again next year, so we wouldn’t suggest anyone gets their hopes up for a cut in the foreseeable future.

The government has said it will keep full expensing, although the manifesto was silent on extending that to leasing. Capital allowances, the R&D regime and the Annual Investment Allowance are expected to remain as generous as they were under the previous government.

The Labour manifesto promised a business tax roadmap; we expect this to be more focussed on corporate taxes rather than wider business taxes.

The government has confirmed that they will unveil this at the Autumn Budget. There may also be more detail on other proposals to increase certainty on the tax treatment of UK investments.

Many Heads of Tax grow misty-eyed when remembering the 2010 roadmap. Anything that can help promote certainty for business in the complex world of tax will be welcomed because it can boost confidence and promote investment, at little cost to the Exchequer, something that Labour are very keen to do.

But business will be keen for the roadmap to set out a direction of travel with a clearly articulated goal. Tax predictability does not mean that nothing changes, it means changes are well-managed and clearly signposted.

The apprenticeship levy came into effect on 6th April 2017, but is widely seen as no longer being fit for purpose. In February 2023 a report by City & Guilds and the 5% Club found that only 4% of businesses are spending the full levy that they can, and 96% of businesses want reform.

The Labour manifesto promised to replace the levy with a more flexible Growth and Skills Levy. The initiative was mentioned in the King’s Speech, meaning it should be a priority item for the new government. Some information was released at the time of the Labour party conference, but we may get more detail in the Budget.

Another common bugbear for business is the current business rates system in England which is seen as archaic and hampering growth, as well as creating distortions between digital businesses and bricks and mortar businesses.

Again, Labour promised to reform business rates in their manifesto (note business rates are devolved to Northern Ireland, Scotland and Wales). This will be welcomed by business, but it won’t be a magic bullet for the exchequer. The manifesto presented it as reform to reduce unfairness and promote growth, rather than an attempt to raise revenues.

In any case this is likely to be a slow burn. Reform of business rates has been consistently kicked down the road by successive governments. We may see more of the same with a short-term fudge but promises of longer-term change.

The question is whether the government will go against the grain of its pro-business narrative to raise some revenues.

There are two areas that have been the subject of some speculation.

Firstly, there has been some media noise around whether additional tax could be levied on banks. Labour was originally against cutting the rate of the banking surcharge from 8% to 3% when the headline rate of corporation tax was being increased from 19% to 25%, and so in theory this could be an area to watch. However, in December 2022, at the Labour Party Business Conference, Starmer said he would not increase the banking surcharge or impose a windfall tax on banks. In the run-up to the election this was reiterated by Reeves who said she did not see a need for further taxes on the banks, although the manifesto itself was silent on banking tax. Any move to increase the tax burden for banks would therefore potentially cut across fairly clear Labour statements on the matter.

Secondly, although the manifesto promised no increases in the rates of national insurance (NI) it was never clear whether this applied to both employees’ and employers’ NI contributions. Since the election the narrative has become slightly more nuanced, implying the commitment might only apply to working people.

A simple increase in the rate, or imposing NI on employer pension contributions, could raise significant amounts of revenue reasonably quickly and would be relatively easy to implement.

However, such a move would ultimately be borne by individuals: either workers, shareholders or customers. It would also worsen the distortion between the tax treatment of employed and self-employed workers. Having said that it might also encourage businesses to invest in capital assets which chimes with Labours narrative on increasing productivity.

Overall, however, we expect a relatively quiet Budget for business in terms of tax rises, but some interesting announcements on potential reforms.

With a quiet Budget expected for business and promises of not raising the main rates of tax, the speculation of tax rises inevitably moves to personal taxation and particularly the taxation of assets and wealth, although the Chancellor has recently ruled out a wealth tax.

The media is offering a smorgasbord of potential rises, so how do we cut through the noise?

With thresholds already frozen until April 2028 and the manifesto promise not to increase the basic, higher or additional rates of Income tax we are unlikely to see any changes to rates or thresholds unless it is to the rate on savings (note that changes to Scottish and Welsh taxpayers’ income will be announced in the relevant devolved Budgets).

It is difficult to see Labour ‘unfreezing’ thresholds and so fiscal drag is expected to remain for some time. It is possible the thresholds could be frozen still further and to the end of the forecast period. This would make the public finances a little rosier without changing the fiscal rules and without voters feeling the impact in the short term.

Various reforms are being speculated about on pensions; flat rate tax relief, limiting the tax-free lump sum, national insurance on pension contributions or on pension income, levying inheritance tax on pension pots, increasing minimum pension contributions and the reintroduction of the Lifetime Allowance (LTA). Pensions tax relief ‘cost’ the exchequer an estimated £66bn in 2022/23 according to the Fabian Society^[1], although it’s important to remember this relief is a deferral rather than absolution of the tax.

We think a fundamental change to the pensions tax system is unlikely, or at least unadvisable. Limiting the tax-free lump sum could have life-changing impacts for those approaching retirement, and potentially be seen as moving the goal posts after workers have saved for their entire careers. Any transitional rules to ease in a lower tax-free lump sum would delay tax revenues. Moving to flat rate tax relief would be devilishly complicated to apply to defined benefit pensions. This change would disproportionately impact the public sector already grappling with the remedy of historic pension changes.

Intentions around the LTA are unclear. Originally, Labour planned to reintroduce it, but to exempt certain categories of public sector worker (primarily NHS consultants). Later, Labour seemed to U-turn. If they decide to resurrect the LTA careful thought will be needed to avoid triggering a wave of early retirements and a loss of key skilled NHS workers. The annual allowance still caps annual pensions savings at £60,000, so the LTA may add more complexity and not raise much revenue.

There has been discussion of charging NI on employer pension contributions. This could bring an end to the core benefits of “salary sacrifice” arrangements, raising significant sums quickly, but this change would discourage employers from funding their employees’ pensions.

An alternative change would be to charge NI on pension income. This would reduce disposable income for a swath of pensioners who have no opportunities to make up the difference. Labour made a manifesto pledge not to change NI, but since the election there has been a refocussing of that commitment potentially to just employee NI, so they may argue this change would be in line with that.

Perhaps the easiest, and therefore the most likely, option would be to charge inheritance tax on all pension pots and income tax on inherited pension income, ending the current carve out for under 75-year-olds. The Institute of Fiscal Studies previously estimated this could raise nearly £2bn a year^[2]. This would result in a more level treatment of inherited assets, and not affect retirement incomes for current pensioners.

With pension savings among younger generations already inadequate and the state pension becoming increasingly unaffordable, changes which discourage pensions saving would seem a questionable long-term strategy. Increases to minimum auto-enrolment contribution levels would be more likely to improve retirement outcomes but would not support the government’s desire to raise funds.

On balance we consider that the pensions system will be largely unchanged at this Budget. Experts constantly comment that the system is already too complex and longer-term retirement saving needs to be encouraged, not hampered. We think it is an area the government will revisit at some point during the Parliament, hopefully after widespread consultation on the tax and non-tax consequences of what can be a very sensitive subject.

We expect to see changes to capital gains tax (CGT) but nothing too radical. Taxpayers are able to time disposals to their advantage and this behavioural impact makes the tax revenues from increasing CGT rates very uncertain.

Equalising CGT and income tax rates is unlikely as it would not raise much revenue. It would, we think, also require the introduction of some form of indexation or taper relief, which would make any change more complex and time-consuming to implement. We think the more likely scenario is that the rate of CGT is increased by a few percentage points.

If this happens, it will be interesting to see if the government pre-announces the increase, accelerating disposals and triggering higher receipts in the short term.

On reliefs, we could see the government reforming Business Asset Disposal Relief either to better target entrepreneurial behaviour, or perhaps a bigger reform that incentivises initial investment or scale-up rather than exit.

Some rumours have been circulating as to whether CGT might be charged on emigration as a so-called Exit Tax. Although possible, we think this is a step too far. It would be complex to implement and headlines about people leaving for sunnier, low-tax climes are often overblown.

Significant changes are already in the pipeline for some taxpayers with the ongoing reform of the non-UK domicile regime, this is particularly true in relation to the transition of IHT to a residence rather than a domicile basis from April 2025 where we are expecting to see more detail at the Budget. We are also hoping to see more information on the proposed changes to the taxation of offshore trusts.

But where else could the government look to boost revenues?

We think that it is highly likely that the Chancellor will announce that defined contribution pension pots which can sometimes be passed on tax-free on death, will be brought within the scope of IHT.

Whilst we don’t think the rate of IHT will be increased from its current 40%, we do think that the government may announce reform to some reliefs notably Business Property Relief and Agricultural Property Relief, possibly through introducing a cap or through targeting the reliefs more carefully.

Generally, therefore on capital taxes we anticipate seeing tax rises implemented through narrowing reliefs rather than increasing rates.

Following the governments manifesto pledge on VAT we are not expecting anything radical in this space. The registration threshold continues to represent a cliff-edge distortion in the system that hampers growth but reform, which would probably involve phasing the threshold in at a lower income level, would be politically unpopular among small businesses.

We could, however, see increased ‘sin taxes’; those taxes that are designed to change behaviours. We might see increases on duty on alcohol, cigarettes, air travel or increases to some environmental taxes.

Although not a sin tax per se, we might see the government targeting Insurance Premium Tax.

Fairly modest increases in some of these taxes might go largely unnoticed by voters after the immediate negative headlines but could raise valuable revenues as demand for all the underlying products are relatively inelastic.

There is a possibility we will see a measure out of left field. If you are going to inflict pain, the start of a new parliament is a good time to do it. It might be major reform, or it might be a tax grab (possibly a bit of both).

A major reform might be merging income tax and national insurance which would significantly simplify the tax system as well as remove the distortions between employment and self-employment, earned and unearned income, and the taxation of working people and pensioners. It would be a major upheaval and there would be winners and losers. But in the long term, it would improve the tax system.

Another radical reform would be to move taxation of roads and vehicles to a road pricing model and to phase out fuel duty. The temporary 5 pence per litre cut in fuel duty and the seemingly permanent suspension of the annual inflation escalator runs counter to the net-zero agenda. At the same time allowing the temporary cut to expire and the escalator to bite would be deeply unpopular with voters. Car and road taxation is often seen as needing reform. As drivers switch to Electric Vehicles (EVs), the country will need to wean itself off fuel duty revenues. At the same time, imposing a tax on EVs would disincentivise drivers from making the shift to greener forms of transport. A road pricing model could potentially remove these distortions.

After a few interesting updates on business tax reform, we expect the Budget to involve a lot of relatively small tax rises targeting wealth but primarily focussed on restriction of reliefs with few change to rates and thresholds. We think fuel duty and pensions may be areas to watch.

And watch out for that scorpion in the shoe: a tax grab or major reform? It’s anybody’s guess.

On 30 October we will be updating this page with our first reactions to the Chancellor’s announcements. Please come back in the afternoon to see what the announcements will mean for you and your business.

We will also be sharing our first impressions in a LinkedIn Live event at 4:00pm when Tim Sarson, UK Head of Tax Policy, will host a discussion on key announcements. Please register to attend via LinkedIn.

Our Autumn Budget virtual event will take place at 12pm on Friday 1 November 2024. Please register now to join our panel of experts for a deep dive into the Budget announcements and our insights on what the Budget means for the economy as a whole and the impact on businesses, employers and individuals from a tax perspective.