Rachel Reeves' Budget is coming: What are accountants seeing in their crystal balls?

As the UK awaits Chancellor Rachel Reeve’s Autumn Budget on October 30th, 2024, accounting firms are forecasting sweeping changes to the tax landscape. With the new Labour government facing a reported £22 billion shortfall in public finances, accountants are bracing for potential reforms across multiple tax areas.

This budget marks a significant moment, as Peter Sedgwick, writing for OMFIF, notes: “It will also be the first time since the International Monetary Fund programme in 1976 that Labour will propose significant tax increases or public spending cuts.”

Capital Gains Tax (CGT) Under Scrutiny

Capital Gains Tax is at the forefront of predictions. BDO, a leading accounting firm, suggests that “increasing [CGT rates] seems a likely option.” They outline several possibilities, including “taxing all capital gains at income tax rates as if they were just another form of income (ie up to 45% for high earners)” or “taxing gains at one fixed rate below the top rate of income tax.”

The firm also raises the possibility of “reintroducing some form of tapering for longer term gains and taxing short terms gains more heavily as is the case in the USA.” More drastically, they suggest the potential for “introducing CGT on disposal on death (in addition to IHT) – perhaps at a lower rate/s than lifetime rates.”

The prospect of CGT changes has already sparked action among investors. TC Group reports, “Wealth managers and tax experts say fears of a capital gains tax hike in the upcoming October Budget have triggered a surge in asset sales among business owners, property investors, and shareholders.” They add that “advisors report that clients are selling assets to external buyers and exploring alternative strategies, such as selling into family trusts or gifting assets to younger generations.”

Inheritance Tax (IHT) Reform on the Horizon

Inheritance Tax is another area ripe Reeve’s for reform. Gerald Edelman predicts potential changes such as “removing the IHT exemption for residuary pension funds on death” and “introducing progressive bands of IHT starting at say 25% and perhaps rising to 50% for the largest estates.”

BDO expands on this, suggesting the possibility of “abolishing the Residence Nil Rate Band and increasing the main Nil rate band to £500,000 per person, (£1m per couple).” They note this “would be a welcome simplification at relatively low cost.”

However, they warn that such changes might come with other measures to increase the IHT take from wealthier taxpayers, potentially including “reducing and/or capping 100% business relief (BR), and agricultural relief (AR)” and “tightening the BR and AR qualification criteria (eg removing the relief for AIM shares and less active farmers).”

Pension Tax Relief in the Crosshairs

Pension tax relief, a significant cost to the chancellor’s government, may also be targeted. BDO estimates the current cost at “around £50bn a year” and suggests the Chancellor might consider “limiting income tax relief on contributions to a fixed rate” or “reintroducing the Lifetime Allowance on total pension saving in some format.”

Other potential changes include “limiting the tax-free cash that individuals can take from their pension pots” and “imposing an annual maximum to the NIC exemption from employer pension contributions – for example by charging employers’ NIC on annual contributions per employee above say £10,000 or 20% of earnings.”

Business Taxation: A Mixed Bag

For businesses, RSM UK anticipates that the budget will include “a roadmap for business taxation” within six months of the election. They expect pledges to “freeze corporation tax at 25% and retain full expensing capital allowances” to be confirmed.

However, they warn that “it will not be good news for all businesses,” with potential increases in windfall taxes for certain sectors. “We can expect the increased windfall tax on oil and gas companies to be confirmed. Similar proposals to increase the bank tax surcharge for a fixed period may be announced,” RSM UK states.

BDO adds that “sector specific proposals may also be imposed, for example a specific ban on water company dividends until sewage spills are under control. An increase in the rate of residential property developer tax may also be announced so that developers effectively fund a greater share of the cost of tower block cladding replacement.”

Employment Taxes and Rights

Employment taxes are also under scrutiny. Caroline Harwood, Partner and National Head of Employment Tax at BDO, notes that while employee National Insurance rates are set to remain unchanged, there’s “some concern that this was only referring to employees NIC.” This leaves open the possibility of a rise in employer’s NIC.

BDO also highlights potential changes to the National Minimum Wage (NMW), stating, “We would expect the LPC’s report on the 2026 increases in the NMW to be published at the Budget.” They add that “Labour also committed to replacing the Apprenticeship Levy with a more flexible ‘growth and skills levy’ and it is possible that a formal consultation on this will be published at the Budget.”

RSM UK echoes this, mentioning “new day one rights for employees” and suggesting that “we would expect more details on implementation of these to be published by Budget day at the latest.”

The Role of the Office for Budget Responsibility (OBR)

The role of the Office for Budget Responsibility will be crucial in this budget. Sedgwick, in his OMFIF article, points out that “The OBR may forecast modest effects for these and as a result, some modification or even withdrawal of proposals could occur before the budget.”

He adds, “The difficult and controversial forecasting judgments will be about the extent and speed with which investment (particularly in infrastructure) will be stimulated by budget decisions, the size and timing of any increase in growth due to extra investment, and the effect on government revenues and economic activity of tax measures designed to increase fairness.”

Other Potential Changes

Several other areas may see changes. RSM UK mentions that “Labour has committed to create a formal industrial strategy for the UK for the next ten years and lay out its proposals for supporting growth in different areas of the economy.” They also note that “Labour’s pledge to implement full gigabit broadband and national 5G coverage by 2030 may also be fleshed out in the Budget with funding details.”

BDO raises the possibility of changes to fuel duty, suggesting the Chancellor “may choose to underline this green move by reinstating the fuel duty escalator or a similar regime to ratchet up the economic pressure on consumers to go electric.”

On property taxes, RSM UK states, “The Labour manifesto committed the new government to increasing the SDLT supplement charged to overseas nationals buying UK residential property by 1% to help prevent the sale of new builds to overseas buyers. It is also possible that new ultra-high thresholds with high SDLT rates could be created.”

Preparing for Change

As accountants prepare for these potential changes, the overarching message from firms is clear: be ready for significant reforms. As Jon Hickman, Corporate Tax Partner at BDO, summarizes, “Having ruled out adjustments to the rates of the UK’s major taxes (income tax, NIC, VAT and corporation tax) there are few big revenue raisers left to target, so we can perhaps expect a plethora of small measures that, in total, can fill the ‘£22bn black hole’ claimed in the government’s finances.”

Nina Skero, Chief Executive at the Centre for Economics and Business Research, provides a broader economic context: “Despite a better than expected first half of the year and an interest rate cut, Cebr expects the economy to grow just 1.2% over the year as whole, with an uptick to 1.5% in 2025. Achieving higher growth rates will require more decisive action on productivity in both the public and private sectors.”

With the budget day approaching, accountants across the UK are gearing up to navigate what could be one of the most impactful fiscal events in recent years. The challenge will be to balance the need for increased revenue with the government’s stated focus on growth, all while navigating the complexities of an evolving tax landscape.