5 “painful” reforms Labour could include in the upcoming Autumn Budget

Labour is scheduled to deliver its first Budget in over 14 years on 30 October, with the chancellor Rachel Reeves warning of “tough choices” on the horizon.

As the government aims to fill the £20 billion black hole it claims to have found in the public finances, the BBC reports that Keir Starmer has signalled that the upcoming Budget is “going to be painful”, and that the country should be prepared to “accept short-term pain for long-term good”.

The chancellor has already unveiled a series of cuts, including scrapping public infrastructure projects and the Winter Fuel Payment for many pensioners, while also introducing spending measures aimed at addressing public sector strikes.

In addition to these initial announcements, analysts predict significant financial reforms in the forthcoming Budget, with Reeves expected to prioritise key areas of tax relief.

Read on to discover five “painful” reforms Labour could include in the upcoming Autumn Budget.

1. Labour may reform pension reliefs

Research by LCP reveals that pension tax relief in the 2022/23 tax year cost the government £48.7 billion in total. Given the substantial size of this figure, pension tax relief may be a focus for reform in the upcoming Budget.

Labour has committed to maintaining the State Pension triple lock for the duration of the next parliament.

But even with changes to the triple lock off the table, there are still several potential reforms the chancellor could introduce in the Budget. For example, she could:

· Implement a flat rate of pension relief in place of the current system where you benefit from relief at your marginal Income Tax rate

· Reinstate the Lifetime Allowance (LTA), which restricts the level of pension savings you can accumulate before further tax charges are due on withdrawal

· Eliminate the National Insurance or Income Tax relief employers receive on money paid into the pensions of their employees

· Alter the 25% tax-free lump sum that you can withdraw from your pension, or reduce the upper limit from £268,275

· Charge Income Tax on inherited pensions in all cases, rather than exempting some if the holder dies before 75

· Include pensions as part of your estate, making them subject to Inheritance Tax (IHT).

Many of these reforms would be challenging to implement and legislate. Not only would they require significant political will, but some of the individual measures may not raise substantial revenue.

Furthermore, any changes to benefits like tax-free lump sums could impact those who have already accrued larger amounts, which may mean transitional protections would be put in place to avoid penalising savers who have planned under the current system.

However, if Labour implements any of these reforms, it may be beneficial to consult with a financial planner to ensure your pension remains in line with the new regulations and continues to support your long-term retirement objectives.

2. “Fiscal drag” could increase the tax burden without taxes on working people rising

Labour consistently promised during the election campaign and in their manifesto not to raise taxes on working individuals, explicitly ruling out increases in National Insurance, Income Tax, and VAT.

However, it is unlikely that Labour will alter the previous Conservative chancellor Jeremy Hunt’s commitment to freeze Income Tax thresholds until 2028. If these thresholds remain frozen, you could face a higher tax bill due to "fiscal drag."

This phenomenon occurs when rising earnings combined with a frozen Personal Allowance threshold, results in a larger portion of your income being taxed, even if the tax rates and thresholds themselves do not change.

So, while Labour is unlikely to increase taxes on working people, the tax burden will probably rise.

3. There could be reforms to Inheritance Tax

Labour has not committed to preserving the current rates, reliefs, and thresholds for IHT, and there is a strong possibility that this will be among the areas reviewed in the upcoming Budget.

To increase revenue from IHT, the chancellor could:

· Raise the IHT rate from 40%

· Reduce the nil-rate band from £325,000, or the residence nil-rate band from £175,000

· Modify or remove certain IHT reliefs, such as Business or Agricultural Relief

· Eliminate the gifting allowance

· Introduce a “double death tax” by levying Capital Gains Tax (CGT) on inherited assets as well as IHT, if the assets have appreciated in value.

If Labour enacts these reforms, it may be advisable to revisit your estate plan to ensure it remains tax-efficient and your legacy adequately supports your beneficiaries.

4. Private school fees may no longer be exempt from VAT

In its manifesto, Labour pledged to eliminate the VAT exemption on private school fees, which is expected to be addressed in the Autumn Budget.

This change could result in an increase of up to 20% in the cost of sending your children to private school.

Labour estimates that this measure will generate an additional £1.5 billion annually, which it will reinvest into the state education sector.

Although the chancellor is likely to confirm the implementation date in the Budget, these changes are expected to take effect in January 2025 and will apply to fees paid in advance starting from July 2024.

However, Sky News reports that Labour could face legal challenges in its attempt to remove the VAT exemption, so it could be harder to implement than first thought. 

5. There could also be reforms to Stamp Duty and Capital Gains Tax (CGT)

The chancellor may also introduce reforms to Stamp Duty and CGT.

The previous Conservative government temporarily raised Stamp Duty thresholds in 2022 with plans to revert them to previous levels by April 2025.

As a result, the Stamp Duty threshold is set to decrease from £425,000 to £300,000 for first-time buyers and from £250,000 to £125,000 for regular buyers.

Labour has indicated it will adhere to this reversion, and the chancellor is likely to confirm this in the Autumn Budget.

Regarding CGT, Labour has not made any specific commitments beyond assuring that individuals selling their primary residence will continue to be exempt from this tax.

However, because Labour did not pledge to maintain the current CGT rates in its manifesto, there is speculation that an increase may be on the horizon.

Some analysts have suggested that the chancellor might align CGT rates with Income Tax, meaning you would pay the same tax rate on capital gains as you do on your regular income.

The previous government also considered this policy, which perhaps makes it one of the more likely reforms to be included in the upcoming Budget.

Get in touch

A financial planner can help you maintain your tax efficiency and keep you on track to achieve your goals in the wake of the significant reforms likely coming in the Autumn Budget.

To speak with a financial planner, get in touch.

Email info@mlpwealth.co.uk 020 8296 1799.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.