Painful Budget on the horizon

Keir Starmer warned that ‘things will get worse’ before they get better in his first major speech since becoming Prime Minister. Mr Starmer repeated his party’s claim that they have inherited a £22 billion blackhole and warned of a ‘painful’ Budget to come on 30 October. Following this warning tax increases look a certainty this autumn. Here we look at some of the Chancellor’s options for raising revenue.

Manifesto commitments

Chancellor Rachel Reeves has already confirmed to Parliament that she will stick to Labour’s manifesto pledge and ‘will not increase National Insurance, the basic, higher or additional rates of income tax or VAT’.

The Chancellor will have to look elsewhere for tax-raising measures.

Fuel Duty

The 5p cut on fuel duty could be scrapped with even the RAC saying drivers are not gaining any benefit.

Fuel duty has been frozen since 2011 but in 2022 the then Conservative Chancellor Rishi Sunak cut it by 5p per litre. That was extended until March next year.

The UK's competition watchdog recently found that drivers were still paying too much for fuel, costing them £1.6 billion in 2023.

The RAC has claimed that retailers have failed to pass on lower petrol and diesel prices to motorists and instead have boosted their own profits.

No option

Simon Williams, Head of Policy at the RAC, said Chancellor Rachel Reeves ‘knows the 5p discount is losing the Treasury £2 billion a year’ and ‘has no option but to put fuel duty back up’.

Mr Williams adds: ‘We’d normally be against any increase in duty. But we’ve long been saying drivers haven’t been benefitting from the current discount due to much higher-than-average retailer margins.’

Corporation Tax

Corporation Tax (CT) is one of the biggest revenue generators at the Chancellor’s disposal, currently netting around £100 billion a year for the Treasury.

Labour has said it won’t raise the top rate of CT, which is currently 25%. However, there is a complex system of tapered relief in place for smaller businesses. This could be reduced or even removed to increase revenues.

Pensions Tax Relief

Higher rate taxpayers currently benefit from 40% tax relief on contributions. There have been press reports that the Chancellor is considering a flat 30% rate of relief. This would impose a 10% hike on the higher rate band that save into a pension.

Ms Reeves may also look at reinstating the Lifetime Allowance that was abolished at the beginning of this tax year.

CGT

Capital Gains Tax (CGT) is payable by individuals, but also self-employed sole traders, partners in business partnerships and company owners, among others, but the rate paid depends on the income of an individual and the type of asset being sold.

Critics point out that the current rates are substantially lower than income tax rates and tend to benefit wealthier people.

For higher earners, CGT is currently 24% on gains from residential property or 20% on gains from other assets. Meanwhile, income between £50,271 and £125,140 is taxed at 40%, while the top rate of tax for the highest earners is 45%.

The Autumn Budget

The Chancellor will deliver the Autumn Budget to Parliament on 30 October. 

Whatever changes are made Mercia’s tax experts will be watching and will provide detailed analysis of the day’s announcements. Keep your clients up to date with our range of digital and printed products.