Budget 2024 Preview: Chancellor Reeves’ Tough Choices to Fill £22 Billion Gap

Budget 2024: Predictions for Chancellor Rachel Reeves' Announcement

Chancellor Reeves has highlighted the urgent requirement to address the estimated £22 billion deficit in the country's budget. Sky News explores potential measures she might adopt to bridge this financial shortfall.

Thursday, October 17, 2024, 10:

Labour is set to present its first budget in over a decade on October 30, and according to Rachel Reeves and Sir Keir Starmer, it's expected to be a tough one for the public to accept.

The Chancellor and Prime Minister have been setting the groundwork for a challenging budget for months, indicating probable tax increases to address the £22 billion deficit that Ms. Reeves reported finding upon her arrival at 11 Downing Street.

During the election campaign, Labour pledged not to raise taxes on working individuals, yet the chancellor's ambiguous statements have sparked speculation as the budget approaches.

Sky News examines potential inclusions in the upcoming budget and their implications.

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Employer contributions to national insurance

According to the Institute for Fiscal Studies (IFS), national insurance contributions rank as the second-highest source of tax revenue in the UK, with projections indicating they will generate nearly £170 billion in 2024-25, accounting for approximately one-sixth of all tax income.

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These are contributions made by both employees and self-employed individuals based on their income, as well as by employers based on their employees' wages, at a rate that is higher than what the employees pay themselves.

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During the election campaign, Labour consistently vowed not to raise "working people's" taxes, which include VAT, national insurance, and income tax. However, they did not dismiss the potential of hiking employer national insurance contributions.

Currently, employers contribute 13.8% of their employees' wages as part of a payroll tax, but this tax does not extend to pensions for employees. The chancellor might consider changing this in the upcoming budget, according to the Institute for Fiscal Studies, which estimates that such a move could generate £17 billion annually.

The Conservative Party has charged the Labour Party with reneging on their electoral commitment to not raise national insurance rates, despite Labour's assertion that they had adequately differentiated between the rates for employees and employers.

Laura Trott, serving as the shadow chief secretary to the Treasury, stated, "Back in 2021, the chancellor referred to the hike in employer national insurance as a 'tax on workers'."

"This is why, according to her own statements, it goes against Labour's campaign commitment to avoid raising taxes on working individuals."

Alterations to Retirement

It is said that the chancellor is also contemplating a reduction in the amount that can be withdrawn tax-free from pensions.

Currently, individuals aged 55 and older can withdraw a maximum of 25% of their pension fund tax-free, with this amount capped at £268,275.

The Telegraph reports that government authorities have requested a prominent UK pension provider to explore the consequences of reducing the limit to £100,000.

It is reported that financial advisers are experiencing an increase in inquiries from clients eager to withdraw their 25% tax-free lump sum before the budget announcement.

In an effort to increase government revenue, Ms. Reeves might consider several adjustments to pension schemes. These could include applying national insurance contributions to private pension incomes, imposing income tax on inherited pensions, and treating pension funds as taxable assets under inheritance tax rules, similar to other types of property.

Estate tax

Currently, the inheritance tax, which the Conservatives refer to as "the most despised tax," is levied at a rate of 40% on estates valued over £325,000.

However, there are exemptions that apply, meaning it's typically only levied on higher-value estates.

When transferring a primary home to children or grandchildren, an additional £175,000 allowance can be applied, raising the threshold to £500,000 before inheritance tax becomes applicable.

The government may raise the tax rate or decrease the threshold for inheritance taxes. Additionally, certain exemptions, such as those for agricultural land and family-owned businesses, might be removed.

Tax on capital gains

Following the government's commitment to keep the three primary taxes unchanged, there is speculation that Labour might instead focus on adjusting the capital gains tax.

Capital gains tax applies to earnings from selling assets that have increased in value, such as second homes, stocks, business assets, and personal items valued at £6,000 or above, excluding cars.

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Currently, individuals are exempt from taxation on the initial £3,000 of earnings, while trusts receive an exemption for the first £1,500.

The exemption limit might be eliminated, leading to the taxation of currently non-taxable assets.

In another approach, there's the option to raise the tax rate. Currently, individuals in higher income brackets pay a capital gains tax ranging from 20-28%, but this could potentially surge to 39%, as reported by The Guardian.

When questioned on the possibility of increasing the capital gains tax to 39%, the prime minister seemed to downplay such speculation, suggesting that many of the rumors surrounding the budget were inaccurate.

Municipal

Another approach the government might consider is to revise the council tax system by altering the existing tax bands.

At present, council tax is determined by categories that rely on the 1991 property values, a system that the Institute for Fiscal Studies has criticized as "absurd" and the Institute for Government has described as "incredibly poorly designed."

During the election campaign, ex-shadow minister Jonathan Ashworth assured Sky News that Labour had no plans to alter council tax bands. However, there have been indications that the government might consider substituting the current banding system with an annual property value tax of 0.5%.

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For instance, an individual owning a £350,000 property would be liable for an annual payment of £1,750.

There were rumors that the government might eliminate the 25% reduction in council tax for homes with only one resident, but this idea has since been dismissed.

Transaction tax

Stamp duty is charged on property purchases above £250,000, with higher rates applicable to second homes and buyers who are not UK residents.

First-time homebuyers currently receive financial assistance to facilitate their entry into the housing market, a benefit that is slated to be reduced starting April next year.

Labour has announced that the stamp duty threshold for first-time homebuyers will revert to £300,000, following its increase to £425,000 in 2022 under Rishi Sunak.

Labour may consider revising the tax structure to emphasize an annual tax on land value rather than basing it on transactions, although this proposal might face resistance within the party.

Taxation on gambling

According to a recent article in The Guardian, it has been indicated that the government may be planning to increase taxes on products deemed more harmful, such as internet casino games. The Institute for Public Policy Research, a progressive think tank, estimated that this action could generate as much as £3.4 billion by 2030.

According to the newspaper, the current 15% tax on profits made by traditional bookmakers might increase to 30%, and the tax on online gaming could rise sharply from 21% to 50%.

Gasoline Tax

In 2022, Mr. Sunak implemented a 5p reduction in fuel duty, which is set to last until

The RAC has suggested that discontinuing this could save the Treasury around £2 billion annually.

The tax on fuel has remained unchanged for over ten years.

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