Tax Rises in October Budget – Starmer Warns of ‘Painful’ Budget

02/09/2024 - 8 minutes read
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Tax rises in October Budget has been a frequently asked question by our clients since the prime minister, Keir Starmer warned that the October Budget will be ‘painful’.

Tax rises in October Budget are widely expected and the chancellor, Rachel Reeves is expected to look at pensions, CGT and IHT as part of a package of measures to boost the Treasury.

Tax rises in October Budget – When is the Budget?

Rachel Reeves announced that she will hold a Budget on Wednesday 30 October, on 29 July this year.

The threat of tax rises comes after Reeves warned of a £22bn black hole in the country’s finances, and she is widely expected to announce significant changes to plug that gap.

Which taxes are likely to be increased?

Whilst we await confirmation in the October budget, the following taxes are likely to be increased:

Landlord tax rises in October Budget

Currently, rental profits are subject to income tax but there is no national insurance charge on rental profits as part of the proposed tax rises in October Budget.

The Chancellor, Rachel Reeves, is being urged to charge landlords National Insurance on their rental profits.

The City minister, Tulip Siddiq called for a national insurance raid on landlords in a speech before taking power, it can be disclosed, as ministers were urged to impose the tax on rental income for the first time.

Tax Rises in October Budget - Starmer Warns of 'Painful' Budget

Rachel Reeves is set to announce tax rises in her first budget on 30th October 2024

Capital gains tax rises in October Budget

Capital Gains Tax is charged on the profit made from the sale of an asset that has increased in value, with some examples including stocks that are not held in ISAs or second homes.

CGT is payable by individuals, but also self-employed sole traders, partners in business partnerships and company owners, among others.

It starts at a rate of 10% (or 18% on residential property) on profits above £3,000. It then rises to 20% on any amount above the basic tax rate, or 24% on residential property.

The current government is likely to bring capital gains tax rates in line with income tax rates or at the very least, increase the CGT rates substantially.

Dividend tax rises in October Budget

The number of people paying dividend tax has doubled over three years, according to HMRC figures, as more have been dragged into its net.

The dividend tax-free threshold has been cut over recent years, from £2,000 to £1,000 in April 2023, and then to just £500 from April 2024 for this tax year.

Above this dividend tax rates are 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.

The freeze in tax thresholds also means more investors are dragged into higher rates. This means that many normally basic rate taxpayers, who only just breach the allowance, are required to file a tax return.

The previous government made huge changes to the thresholds and Reeves could cut this further to as low as £250, or equalise the rates with income tax levels.

Pensions

When people or their employers pay into private pension pots, they receive tax relief on these contributions, up to set limits.

The relief allows some of a person’s earnings that may have been taken by government in tax to go into their savings for retirement instead.

Under the current system, savers receive tax relief at the same rate as their income tax – meaning basic rate taxpayers receive relief at 20% and higher rate taxpayers at 40% or 45%.

Reeves is expected to consider a proposal by Treasury officials for a flat 30 per cent rate of pension tax relief.

The Treasury could also look to restrict people’s entitlement to tax-free cash when they access their pension pot.

Most people can take up to 25 per cent of their fund tax-free from the age of 55, which is due to rise to 57 in 2028.

Reeves also need to consider the impact of the corporation tax relief received by employers if they make an “employer-only” pension contribution to the employee’s pension pot and whether there will be any changes required to that tax relief.

Inheritance tax rises in October Budget

Inheritance tax, currently paid at a rate of 40%, is charged on the part of a deceased person’s estate above a threshold of £325,000.

But it only applies to fewer than one in 20 estates.

No tax is paid if the estate is valued at less than £325,000, or if anything above this threshold is left to a husband or wife, civil partner, charity, or a community amateur sports club.

And if a home is part of the estate and a person’s children and grandchildren stand to inherit it, the threshold can go up to £500,000.

Ms Reeves could raise the rate of inheritance tax, or curb the relief available on certain inherited assets.

These include agricultural land and pension savings, which can both be inherited tax-free.

There are also allowances for unquoted shares, which are shares in a business not listed on the stock exchange.

Employers National Insurance rises in October Budget

Employers pay ‘secondary’ Class 1 National Insurance contributions (NICs) on their employees’ earnings. Primary Class 1 NI contributions are an employee National Insurance contribution (also collected through PAYE).

The amount payable depends on how much the employee earns and their National Insurance category letter.

The employment allowance reduces the amount of employer NICs payable by some businesses up to the allowance limit (currently £5,000 per year). The reduction is only available to organisations with a total NIC bill below £100,000. This means at least 90% of small businesses can claim the employment allowance.

Reeves is likely to consider an increase in the current employers national insurance rates a potential increase of 1% to bring the Employers NI rate up to 14.8%.

How can MCL Accountants help you with your queries on Tax rises in October Budget?

Contact MCL Accountants on 01702 593 029 if you would like us to review your current tax affairs before the Tax rises in October Budget or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC