Prime minister Keir Starmer has “laid the groundwork for tax rises” with talk of a “painful” October Budget, according to financial experts.
Starmer said that since taking office, the new government had “discovered a £22 billion black hole in the public finances”, during a speech about fixing the foundations of the country, delivered in Downing Street’s rose garden.
He said: “And before anyone says ‘oh this is just performative’ or ‘playing politics’, let’s remember [that] the OBR did not know about this. They wrote a letter saying they didn’t know.”
With MPs due to return to parliament on 2 September, after summer recess, and the autumn Budget set for Wednesday 30 October 2024, the prime minister said the country was facing an “economic black hole” and a “societal black hole”, with the latter typified by the riots earlier this month.
Broadest shoulders
“There’s a budget coming in October and it’s going to be painful,” the prime minister said. “We have no other choice given the situation that we’re in.
“So those with the broadest shoulders should bear the heavier burden. And that’s why we’re cracking down on non-doms.”
Commenting on what would be required to fix these problems, Starmer said: “I’ll have to turn to the country and make big asks of you as well. To accept short term pain for long term good. The difficult trade-off for the genuine solution.”
Adding fuel to the rumours
Laura Suter, director of personal finance at AJ Bell, said: “In perhaps the most compelling indication yet of which taxes could be on the table in the October Budget, Starmer said that those with the ‘widest shoulders should bear the heaviest burden’, adding fuel to rumours around increases to capital gains tax and inheritance tax, while also doubling down on Labour’s manifesto commitment not to tinker with income tax, national insurance or VAT.
“His comments will also reignite the rumours of a specific ‘wealth tax’ to be paid by the wealthiest in the UK. This could just take the form of increasing existing taxes for investors and the top earners, or it could be a new, standalone tax on those with the biggest pockets.”
Pension perks
Tom Selby, director of public policy at AJ Bell, added: “Pretty much every major fiscal event over the last two decades has been preceded by feverish speculation that the axe could fall on pension tax perks.”
Outlining three key options for pension tax changes, he said that “most controversially”, the government could move to restrict people’s entitlement to tax-free cash when they access their retirement pot.
“Currently, most people can take up to 25 percent of their fund from age 55 tax-free, with this minimum access age due to rise to 57 in 2028. The amount of tax-free cash most savers can take over their lifetime is capped at £268,275. Starmer and Reeves could, in theory, lower the amount of tax-free cash Brits are entitled to – or even abolish the entitlement altogether.”
But this option would be “deeply unpopular and fundamentally undermine wider government efforts to boost long-term investing, including in UK PLC”, he said.
Higher-rate relief
Selby said the most common pre-budget pension tax relief speculation centres on the future of higher-rate pension relief and the potential to introduce a flat rate of pension tax relief.
“At the more extreme end, this measure could see pension tax relief restricted to the basic rate of 20 percent for all, with advocates suggesting this could raise billions of pounds of extra revenue for the treasury,” he said.
The third option would rethink the tax treatment of pensions on death. Selby said this “will be viewed by many as low hanging tax fruit ready to be picked”.
Under existing rules, it is possible to pass on your retirement pot completely tax-free to your nominated beneficiaries if you die before age 75, he explained. If you die after age 75, any inherited pension is taxed in the same way as income. Crucially, pensions usually don’t form part of people’s estate for inheritance tax purposes.
“This is undoubtedly a generous set of rules and something which could easily be reviewed by the new government.”
Timing of pension tax
Calum Cooper, head of pensions policy innovation at Hymans Robertson, agreed that pension tax changes could be on the budget agenda come the autumn.
However, Cooper said that changing the timing of pension tax, rather than how much or who gets what, could increase the amount the government can invest into UK growth by over £20 billion a year. The strategy, outlined in the firm’s ‘Pensions plan for the new government‘ would add up to £100 billion over five years, he added.
“We must invest in the UK for growth, and adjusting the timing of pension tax in this way is simply bringing forward public monies for that end, without impacting the pockets of current or future pensioners. In addition, it reduces the cost to government of increasing auto enrolment contributions which means that we improve the adequacy of pensions too. This is essential if pensions are to provide dignity and financial independence, in later life, for all.”
