The chancellor, Rachel Reeves, is planning to increase taxes in October’s budget in an effort to plug what she has described as a £22bn shortfall in the public finances.
The Labour election manifesto ruled out raising the rates of income tax, national insurance or VAT, but other personal taxes are in the firing line as official data published on Wednesday showed spending on public services and welfare pushed government borrowing to £3.1bn last month, more than double its level in July 2023.
Reeves is believed to be exploring how to raise more from inheritance tax and capital gains tax as well as getting tough on benefits. Last month, she scrapped winter fuel payments for most pensioners – and may resist pressure to lift the two-child benefit cap. Here we look at what the tax changes predicted in the autumn budget could mean for you.
Inheritance tax
What is it? This is the tax paid on someone’s assets after they die, but only if they leave enough money to go above a certain threshold.
It’s quite complicated, but you will definitely not pay tax if the estate is worth less than £325,000. Above that level you will not pay tax on anything you leave to your spouse, civil partner or charity.
If you leave your home to your children or grandchildren, and your estate is worth less than £2m, you can leave up to £500,000 tax-free, and any unused sum up to the threshold can be transferred to your spouse or civil partner to be used when they die.
The standard rate of tax on everything above the threshold is 40% but there are exemptions for agricultural land, businesses, shares in companies listed on the AIM market (rather than on other stock exchanges) and pensions.
Who pays it? In short not many people. In the 2021-22 tax year, 27,800 deaths resulted in an inheritance tax (IHT) bill – that’s 4.39% of all UK deaths that year.
Across all of those estates the average tax bill was £215,000 but the bills on large estates pull up the figure. For the 2,120 estates valued at between £300,000 and £400,000 the IHT bill averaged £13,500 (about 4%); for the 170 estates valued at more than £10m the average bill was £3.91m (about 20%).
How much is raised? £7.5bn was collected for 2023-24 financial year.
What could change? The various exemptions could be looked at.
For 21,800 estates above the threshold, the transfer of someone’s unused allowance to their spouse or civil partner was used to cut the bill. £15.5bn worth of allowance was transferred in total. Had these assets been taxed, the Treasury may have received an extra £6.2bn.
The residence relief, which effectively shields most homes from tax, reduced the tax take by another £2.6bn. However, changing this would be very unpopular. Looking at the reliefs offered to wealthier people would be more popular, and progressive.
Business property relief was used by 4,170 estates to shelter £2.9bn worth of assets from IHT in 2021-22, while agricultural property relief was used by 1,730 estates to shelter £1.6bn worth of assets. If these were removed an extra £1.8bn could be raised.
Capital gains tax
What is it? It’s a tax on profits you make when you sell – or give away – something that has increased in value and is worth more than £6,000.
You do not pay it when you sell your main home or your car, when you cash in a stocks and shares Isa or if you give something to charity or your spouse or civil partner.
Other than that, pretty much any profit on a one-off sale can count as a gain. You can make up to £3,000 in gains each tax year (April-end of March), and can reduce the total by offsetting any losses or sale costs you incur.
There are reliefs and exemptions. You do not pay capital gains tax (CGT) when selling: your main home; stocks and shares owned in Isas; or personal possessions with an expected lifespan of less than 50 years. And you can give things to your spouse, civil partner or charity without the tax.
How much CGT you face will in part depend on how much income tax you pay. If your gain and your annual income fall within the basic rate tax allowance (£12,571 to £50,270 a year) you will pay 10% on profits, unless they are from selling a residential property, in which case you will pay 18%.
If you are a higher or additional rate taxpayer you will pay 24% on gains from residential property or 20% on your gains from other assets. There’s a 28% rate linked to investment funds.
Who pays it? In the 2022-23 tax year 369,000 people paid CGT. They had between them made £80.6bn worth of gains.
A small number of people making large gains pay the bulk of the tax. In 2022-23, those who made £5m or more represented less than 1% of those paying CGT but paid 41% of the tax collected.
How much is raised? £14.4bn in 2022-23. This was 15% lower than in the previous tax year.
What could change? Rates could be brought in line with income tax, so higher-rate taxpayers would pay 40% on their gains and those with the biggest incomes would pay 45%.
Pensions: lifetime allowance
What was it? This limit on the amount you could build up in a private pension scheme was axed last year. Those with a pot worth more than the threshold had faced paying a tax of up to 55% on the excess money when it was withdrawn. The lifetime allowance was originally £1.5m when it was introduced in April 2006, but after steadily increasing was reduced to £1m in 2016.
Who paid it? Fewer than 1,000 people a year paid tax when the allowance was first introduced, rising to more than 11,000 in 2021-22, official figures show.
How much was raised? In 2021-22, £500m was paid, an average of just over £40,000 for each person paying a bill.
What could change? The government could reintroduce the cap. The Institute for Fiscal Studies suggests reintroducing it at the level it was when scrapped (just over £1m) could raise almost £800m.
Pensions relief
What is it? This isn’t a tax but a relief. When you pay into your pension – one offered at work or a personal scheme – the government boosts your contributions by giving you a tax break.
For basic rate taxpayers who pay 20% on their earnings that can mean paying £100 into your scheme only costs you £80. Higher rate and additional rate taxpayers get more relief as they pay more tax: 40% and 45% respectively.
The most you can pay in and receive tax relief on is your annual earnings, although there is a tax if you pay in more than £60,000 in one year.
How much is spent? £44.1bn went on pensions tax relief in 2021-22. It is estimated that 52% of total tax relief was provided to those with incomes in the 40% income tax bracket, and 6% was provided at the 45% additional income tax bracket.
What could change? The chancellor could reduce the relief available to higher- and additional-rate taxpayers to the 20% other workers receive or offer everyone the same tax relief at a level somewhere between 20% and 40%.
