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Pre-budget overview and how The Chancellor may ‘plug the gap’
This article is not intended as Financial Advice. This article contains speculation that we are currently seeing from the media, which in no way validates it’s accuracy. Outcomes from the Autumn Budget will only truly be known following the Chancellors speech on the 26 November.
In June 2024, the Labour party won the general election, having made a key promise not to raise taxes on working people. On 26 November at 12pm, The Chancellor of the Exchequer Rachel Reeves will carry the iconic red briefcase to the House of Commons to deliver a highly anticipated budget update; one surrounded by extensive public and media speculation over how the government intends to close the fiscal gap while honouring its pledge.
Last year’s budget, held in October 2024, aimed to be a ‘one and done’ effort. To plug the fiscal ‘black hole’ that Labour inherited from the Conservative party, Labour set out to raise taxes by £40 billion, which saw the largest tax increase coming from a £25 billion rise in the employer aspect of National Insurance (NI). Labour claimed that this did not break the election promise, because it did not directly impact working people. A year later, however, that fiscal black hole still looms. Following subsequent downgrades in the UK’s long term productivity growth and Reeves’ desire to increase her fiscal buffer, economists predict that she will have to raise taxes or cut spending. This gap was initially estimated at around £30 billion, but updated forecasts suggest it could be closer to £20 billion.
On Tuesday 4 November, the Chancellor held a ‘pre-budget’ speech in Downing Street, where she intended to set the tone for what’s to come. Reeves insisted that she ‘must deal with the world as I find it, not as I’d like it to be’, and when commenting on the future of Britain’s economy, she also stated that ‘if we have to build the future of Britain together, we will all have to contribute to that effort’. The speech (which was criticised by Conservative Party leader Kemi Badenoch as being a ‘waffle-bomb’) did little to confirm or deny any of the speculation, with many also interpreting Reeves’ comments as preparing the country for the first income tax rise in over 50 years – a move the government has since indicated it does not intend to pursue, and may instead address by freezing current thresholds beyond 2028.
How could Reeves plug the gap?
The Chancellor faces some important decisions as to how she will close the fiscal gap, with earlier speculation of an income tax rise now apparently ruled out. The media frenzy continues, filled with speculation. Some of this may come to fruition, though much of it may not.
Some of the most discussed speculation about how the Chancellor may plug the gap include:
- Changes to income tax – Although now unlikely, many interpreted Reeves’ 4 November speech as preparing the country for the first income tax rise in 50 years. A one percent increase in the basic rate could raise £8.5 billion by 2029/2030.
- Changes to income tax, offset by NI – A rise in income tax could be offset by a reduction in employee National Insurance Contributions (NIC), allowing the potential argument that she is protecting working people. This would effectively raise taxes on pensioners, the self-employed, and landlords.
- Freeze income tax thresholds – However, this would do little to plug the gap as it is now.
- Target pensions – There are many ways tax could be raised via pensions, such as reducing tax-free cash (which Treasury officials now reportedly say is off the table), introducing a simple flat rate of 20% relief on pension contributions, and potentially capping the relief employers can claim through salary sacrifice.
- Inheritance tax – The seven-year rule could be extended to ten years.
- Wealth tax – Introduce a new tax on large wealth/ inheritance.
- Mansion tax – Annual tax on property above a certain threshold. Introducing these above properties worth over £2 million could raise roughly £1.7 billion, but would be difficult to implement.
- Exit tax – Would apply to individuals ceasing UK tax residency, but would be a change dependant on behaviour, and the revenue raised is uncertain.
As ever, the build up to the Autumn Budget is surrounded by lots of speculation and differing opinions on the changes that Reeves could unveil on 26 November. It’s therefore important to consider what you hear and read surrounding the budget carefully, to avoid detrimental decision making.
It’s also important to remember that, historically, the government has not retrospectively implemented charges or taxes, as these are usually enshrined in law. Plus, much like the pension changes announced last year, these require a consultation, a bill drafted by parliament, and the Finance Act to be enacted.
At Attivo, our Lifestyle Financial Planners will be monitoring the Autumn Budget announcement carefully to plan for any potential changes, and to provide you as our client with comprehensive advice on any changes that may be required for your strategy as a result. If you have any questions in the meantime, please do not hesitate to contact your dedicated Attivo Lifestyle Financial Planner.
This article is not intended to provide financial advice. We recommend consulting your Financial Planner before making any changes to your financial plans. Attivo is authorised by the FCA, however the FCA does not regulate tax planning.