Which taxes could go up in the Autumn Budget?

“There’s a Budget coming in October, and it’s going to be painful,” prime minister Keir Starmer warned the country today. In a speech delivered from the Downing Street garden, he said he would be turning to the electorate and making “big asks” that they accept “short-term pain” in the name of “long-term good”.

The prime minister’s speech was light on detail when it came to taxes, however this was to be expected with a Budget statement just around the corner. Chancellor Rachel Reeves will unveil full details on her plans for spending and taxation on 30 October .

The good news is that Labour has previously promised that it will “not increase taxes on working people”, which means no hikes to income tax rates, National Insurance or VAT. The party has previously said it will not increase corporation tax either.

Due to frozen personal tax thresholds and the effect of fiscal drag , the bad news is that workers and pensioners will find themselves paying a larger tax bill regardless.

Thresholds have been frozen since 2021 – an attempt to balance the state’s books after an intense period of government spending during the Covid pandemic. They are set to remain at current levels until 2028, despite the intense period of inflation we have experienced in recent years.

The Office for Budget Responsibility (OBR) highlights the widely-felt impact of fiscal drag in a recent report. It says: “By 2028-29, there are expected to be around 3.7 million more taxpayers overall, 2.7 million more higher-rate taxpayers, and 600,000 more additional-rate taxpayers than if all allowances and thresholds had been indexed to inflation, and the additional rate kept at £150,000.”

What’s more, speculation is rife that a string of other tax hikes could be in store in the Autumn Budget to help refill the government’s depleted coffers. Reeves recently accused the former Conservative government of creating a £22 billion black hole in the public finances .

Will Labour scrap the 25% pension tax-free cash?

In the lead-up to the general election, the Conservatives accused Labour of planning to introduce a retirement tax . In reality, this was largely a case of mudslinging after Labour said it didn’t plan to match the Conservatives’ promise to unfreeze the personal allowance for pensioners.

However, it is possible that some of the tax benefits currently enjoyed by pensioners could come under the microscope as Reeves considers ways to boost the country’s finances.

Those with a private pension are currently allowed to draw 25% of their pension pot tax free . After this point, they will start paying income tax on any withdrawals at their marginal rate. However, as contributing editor Ruth Emery argued in a recent article, the government could raise revenue by cutting this perk to say 20%, or even axe it completely.

The maximum amount you can withdraw from your pension before paying tax is currently £268,275, known as the lump sum allowance (LSA). Labour could also consider cutting this in an attempt to raise money.

“Following the abolition of the Lifetime Allowance, the LSA is no longer linked to any wider legislation and therefore the government could easily reduce the amount of tax-free cash individuals can take from their pensions,” says Nicholas Nesbitt, partner at audit, accounting and consulting group Forvis Mazars.

That said, it is important to remember that Labour hasn’t announced any plans to change the rules just yet. Withdrawing your lump sum in one go isn’t always a good idea, so pensioners should avoid making any rash decisions.

Drawing your tax-free cash in instalments can be the better option for many once they hit retirement age, allowing them to benefit from potential investment growth on the portion that they don’t need right away. See our article: “ Should you take your 25% tax-free pension lump sum in instalments? ”

Will pension tax relief be cut?

Another area of speculation is whether Reeves will change the rules on pension tax relief . Under current measures, savers are entitled to tax relief on money they pay into their pension pot. This is essentially a refund at your marginal rate. If you are a basic-rate taxpayer, you will get 20%, while higher and additional-rate taxpayers are entitled to 40% and 45% respectively.

This is a generous benefit which encourages pension saving. Most people are entitled to tax relief on contributions up to the value of £60,000 each tax year – although this includes employer contributions and the HMRC rebate as well as your own contributions.

However, recent figures from HMRC revealed this measure cost the government £48.7 billion in 2022/23. Almost two thirds of this was enjoyed by higher and additional-rate earners. Against this backdrop, former pensions minister Steve Webb says there is “no doubt that the chancellor will be eyeing up the large price tag”.

There are a range of routes available to the government if it decides to go down this route, from introducing a flat rate of pensions tax relief (say 30%) to cutting the annual tax-free pension allowance from its current level (£60,000).

The former option could prove challenging to implement for reasons related to defined benefit public sector pension schemes. We explore this in further detail in a recent piece: “Will Labour change the rules on pension tax relief?”

Are inheritance tax reforms on the way?

Inheritance tax is another area that has been in the spotlight. Many Conservative voters were hoping the previous government would cut the tax, with speculation mounting ahead of Jeremy Hunt’s 2023 Autumn Statement and in the lead-up to the general election.

Laura Suter, personal finance director at AJ Bell, doesn’t think Reeves will hike the rate of inheritance tax given it is already one of the highest tax rates at 40%. “What’s more likely if Ms Reeves did want to change this tax is cutting allowances or whittling away certain reliefs to increase the amount some estates pay,” she says.

Any cuts to the existing tax-free allowances (known as the nil-rate bands) would be unpopular given inheritance tax receipts have soared in recent years. The government collected a record sum of £7.5 billion last year, and is on track for another bumper intake this year.

The current tax-free allowance is £325,000, with an additional £175,000 available to those leaving the family home to their children or grandchildren. The £325,000 allowance has been at this level since 2009, while the £175,000 residential nil-rate band was phased in between 2017 and 2020. It has been held there ever since, despite the fact that house prices have risen considerably since then.

Will Labour hike capital gains tax?

Capital gains tax (CGT) could be another area of focus in the upcoming Budget. In an interview with Bloomberg earlier this month, Reeves refused to rule out a CGT hike when asked about the tax. “We've got a Budget on October 30 and we will set out our policy then, but it's always important when you're deciding tax policy to strike the right balance,” she said.

Basic-rate taxpayers pay 10% CGT on investment gains and 18% on gains from the sale of additional residential properties. Meanwhile, higher and additional-rate taxpayers pay 20% on investments and 24% on second properties. The CGT allowance means some profits are tax free, but this has been slashed in recent years from £12,300 to £3,000.

One radical step that the government could take would be to equalise CGT rates with income tax. “The Office for Tax Simplification, now disbanded, has previously argued the CGT exemption was too high and that the disparity between rates of CGT and income tax distorts decision making,” Suter explains.

However, the government is keen to boost private investment in UK companies and higher capital gains tax rates could be seen as a deterrent. What’s more, Suter points out that a CGT hike might not be as much of a cash cow as you would expect. “The government’s own figures show that a big increase in CGT rates could backfire and actually lead to lost revenue,” Suter adds, with investors expected to change their behaviour to avoid paying the tax.

Another step the government could take would be to charge bereaved families capital gains tax on inherited assets, resulting in a combined tax of up to 54%. We delve into further details in a recent piece: “ Could Labour impose a double death tax? ”