With Labour’s first Budget on the horizon, the Government is facing financial pressures, with Sir Keir Starmer already describing it as a Budget that will be ‘painful’.  

Labour has highlighted a £22 billion shortfall left by the previous Conservative Government, raising the likelihood of tax changes aimed at filling this gap.

Here, we explore some of the key areas likely to be targeted in the Autumn Budget and what these changes could mean for individuals and businesses alike.

Capital Gains Tax

One of the most discussed potential changes is to Capital Gains Tax (CGT), with speculation that rates could be aligned with Income Tax bands.

Currently, CGT stands at 20 per cent on most assets and 28 per cent for gains on residential property, which is significantly lower than Income Tax rates for higher and additional rate taxpayers.

Matching CGT to Income Tax rates could mean a much higher tax bill for investors, property owners, and business sellers.

Additionally, there are concerns that the tax-free CGT allowance which is currently £3,000 (£1,500 for trusts), might be reduced or eliminated altogether.

These changes could lead to a reassessment of investment strategies as more assets become taxable.

Business owners may also be affected by the possible removal of Business Asset Disposal Relief, which offers a 10 per cent tax rate on the first £1 million of qualifying gains.

Without this relief, selling a business could become much less attractive, possibly restricting entrepreneurship.

Inheritance Tax

Inheritance Tax (IHT) reform is another potential area of focus.

The current IHT rate is 40 per cent on estates valued above £325,000, with several exemptions, including agricultural property and family businesses.

There is growing speculation that Labour could reduce these exemptions or lower the tax-free threshold, bringing more estates into the IHT net.

If exemptions are reduced, families with long-held agricultural land or businesses may face higher tax bills, potentially forcing them to sell assets to cover the liabilities.

Similarly, changes to the seven-year rule, which currently allows gifts made more than seven years before death to be exempt from IHT, could result in higher tax exposure for many families.

Extending this period would pull more gifts into the IHT calculation, increasing the burden on beneficiaries.

Pensions

Pensions could also see reform in the Budget.

The current system allows tax relief at marginal rates, meaning higher earners receive more relief on their contributions than basic-rate taxpayers.

One possibility is the introduction of a flat rate of tax relief, potentially set around 30 or 33 per cent.

This would make pension saving more attractive for those on lower incomes but could reduce the incentive for higher earners to contribute as much to their pensions.

However, this possibility seems to be less likely now, as it has been reported in The Telegraph that Chancellor Rachel Reeves has dropped this idea.

Another potential change could be to the annual pension allowance, currently set at £60,000.

Reducing this limit would restrict the amount that individuals can contribute to their pension with tax relief, particularly affecting higher earners who are already maximising their contributions.

Additionally, there is speculation that the 25 per cent tax-free lump sum on retirement could be reduced or capped, leaving retirees with larger tax bills when accessing their pension savings.

Dividend tax

Dividends have long been a tax-efficient way for business owners and investors to receive income, but this could be set to change.

Dividend tax rates, currently at 8.75 per cent for basic-rate taxpayers, 33.75 per cent for higher-rate taxpayers, and 39.35 per cent for additional-rate taxpayers, are already close to matching Income Tax rates, leaving little room for further increases without discouraging investment.

The more likely target for reform is the dividend allowance, which has been reduced from £5,000 to £500 in recent years.

Further cuts, possibly to £250, are being speculated, which would likely prove unpopular among investors who rely on dividend income outside of ISAs and pensions.

A cut in the dividend allowance would particularly impact business owners and investors who have already used up their ISA and pension allowances.

Inflation

Finally, inflation remains a critical concern.

This is despite the inflation rate recently dropping to 1.7 per cent, the lowest it has been in three years.  

If the Chancellor opts to raise taxes and cut spending in the Budget, it could reduce inflationary pressure by dampening demand.

However, such measures might also slow economic growth, leading to a delicate balancing act between controlling inflation and encouraging investment.

Higher taxes on areas such as CGT or IHT could reduce consumer spending and investment, potentially easing inflation in the short term.

However, if the Government is seen as not doing enough to address financial issues, inflation could continue to rise, complicating efforts by the Bank of England to manage the economy through interest rate cuts.

As we approach Budget Day, many of these ‘what ifs’ could soon become reality.

If you are concerned about how these potential changes could impact your personal or business finances, please speak with us today.