Ahead of tomorrow’s budget, here is the state of play as we understand it and some guesses as to what is in and out of the running

You can access a pdf version of this note here

Income tax

Increases ruled out in manifesto (Labour will not increase taxes on working people)

Thresholds unchanged, these have been frozen since April 2021 and are currently frozen until 2028. The budget may extend to 2030. This is a ‘stealth tax’ as wage inflation pushes more people into higher tax brackets.

• Income up to £12,570 is taxed at 0% (this is the personal allowance)¹
• Income between £12,571 and £50,270 is taxed at 20% (this is the basic rate of tax)
• Income between £50,271 and £125,140 is taxed at 40%² (this is higher rate tax)
• Income over £125,140 is taxed at 45% (this is additional rate tax)

Note 1) If your income is less than £17,570, you can benefit from an additional £5,000 of untaxed income from savings, but only to the extent that your up to £17,570 of income is not derived from wages, pension, or income other than from savings.

The Gov.uk website gives an example of this in practice:

Figure 1:      The personal savings allowance

Source: gov.uk

Note 2) The personal allowance falls by £1 for every £2 of earnings above £100,000 until it hits zero at £125,140.

NB Scotland has different income tax bands

• Income up to £12,570 is taxed at 0%
• Income between £12,571 and £14,876 is taxed at 19%
• Income between £14,877 and £26,561 is taxed at 20%
• Income between £26,562 and £43,661 is taxed at 21%
• Income between £43,662 and ££75,000 is taxed at 42%
• Income between £75,001 and £125,140 is taxed at 45%¹
• Income over £125,140 is taxed at 48%

Note 1) same tapering of personal allowance over £100,000 as rest of UK

Dividends

Taxes on ‘unearned income’ seem likely to rise

• Tax on dividends below £500 is zero
• The tax rate on dividends if you are a basic rate taxpayer is 8.75%
• The tax rate on dividends if you are a higher rate taxpayer is 33.75%
• The tax rate on dividends if you are an additional rate taxpayer is 39.35%

National insurance

Increases to personal national insurance payments ruled out in manifesto (Labour will not increase taxes on working people)

Employees

• Employees earning less than £123 (the lower earnings limit) do not pay national insurance.
• Neither do those earning less than the primary threshold of £242 per week (but these people do get national insurance credits)
• Between £242 per week (the primary threshold) and £967 per week (the upper earnings limit) employees pay national insurance at 8%
• On amounts above £967 per week employees pay national insurance at 2%

Employers

Increases to employers’ national insurance contributions widely rumoured

• Between £175 per week (the secondary threshold) and £967 per week (the upper earnings limit) employers pay national insurance at 13.8%¹
• On amounts above £967 per week employers pay no national insurance

Note 1) if the employee is under 21, no employers’ national insurance is payable on earnings up to £967 per week

Note 2) if the employee is classed as an apprentice and is under 25, no employers’ national insurance is payable on earnings up to £967 per week

Note 3) if the employee works in a freeport special tax site or an investment zone special tax site, no employers’ national insurance is payable on earnings up to £481 per week

Note 4) if you give a veteran of the armed forces their first job after leaving service, no employers national insurance is payable on earnings up to £967 per week

Self employed

Seems unlikely that Labour could raise NI contributions for the self-employed, given comments about working people

• Earnings of less than £6,725 per annum require a weekly Class 2 national insurance contribution of £3.45 per week
• Annual earnings between £12,570 and £50,270 require Class 4 national insurance contributions of 6%
• Annual earnings over £50,270 require Class 4 national insurance contributions of 2%

VAT

Labour has promised to leave VAT rates unchanged. Some recent stories have cast doubt on the date of the implementation of VAT on private school fees (currently expected from 1 January 2025.

Capital gains tax

It seems quite likely that tax rates on capital gains will change in the budget.

Payable on gains on the sale of personal possessions worth £6,000 or more (apart from cars).

Gains on the sale of your main residence are exempt (unless you have let it out, used a part of it exclusively for business purposes, its grounds are bigger than 5,000sqm).

The first £3,000 of net gains after allowable losses is tax free.

If you are a basic rate taxpayer, capital gains are taxed at 10% (or 18% on residential property and carried interest). You will pay 20% on any amount above the basic tax rate (or 24% on residential property and 28% on carried interest).

If you are a higher rate or additional rate taxpayer, you will pay:

• 24% on your gains from residential property
• 28% on your gains from ‘carried interest’
• 20% on your gains from other chargeable assets

Inheritance tax

It seems quite likely that there will be changes to inheritance tax in the budget

No inheritance tax is payable if the value of the estate is less than £325,000. This threshold has stayed the same since 2009. Had it increased in line with CPI inflation, the threshold would be over £500,000.

Bequests to a spouse, civil partner, a charity, or a community amateur sports club do not attract inheritance tax.

You can give your home to your children tax free if it is worth less than £500,000.

The standard rate of inheritance tax is 40%.

The standard rate of inheritance tax is reduced to 36% if you leave at least 10% of your net estate to charity.

Total gifts of less than £3,000 made in a tax year are tax free (unused gift amounts can be carried forward for one year). So too are birthday and Christmas gifts made from regular income, gifts of up to £250 per person, gifts of up to £5,000 for a child when they get married or civil partnered, £2,500 for a grandchild when they get married or civil partnered, or £1,000 for anyone else when they get married or civil partnered.

Regular gifts made out of regular income ‘normal expenditure out of income’ are tax free.

Gifts made more than seven years before death are tax-free.

Gifts made within seven years of death are subject to tapering relief:

Figure 2:      Taper relief

Source: Gov.uk

People whose permanent domicile is outside the UK only pay inheritance tax on assets in the UK.

Other reliefs

Certain assets do not attract inheritance tax. This seems like a likely area for reform in the budget

Property that is part of a working farm in the UK may qualify for agricultural relief. The relief applies to cottages and farmhouses if they are occupied by someone in farming, a retired farm employee, or the spouse or civil partner of a deceased farm employee. 100% relief is given if the person who owned the land farmed it themselves, the land was used by someone else on a short-term grazing licence, or it was let on a tenancy that began on or after 1 September 1995. 100% relief is also available to some property owned before 10 March 1981.

Business relief at 100% is available on a business or interest in a business, and shares in an unlisted company¹.

You can get 50% relief on a controlling (more than 50% of the voting rights) stake in a listed company, land, buildings, or machinery owned by the deceased and used in a business they were a partner in or controlled.

You cannot claim Business Relief if the company:

• mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments
• is a not-for-profit organisation
• is being sold, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of that company
• is being wound up, unless this is part of a process to allow the business of the company to carry on.

Note 1) as things stand, shares traded on Aim are classified as unlisted shares.

There has been much discussion on the likelihood of this relief being removed.

Tax breaks are available for investment in unlisted companies. These include

• Business Expansion Scheme (BES), and later
• Enterprise Investment Scheme EIS, which replaced BES from 1 January 1994, and
• Venture Capital Trusts (VCT).
• There are also units in Property Enterprise Trusts associated with Enterprise Zones (EZ).

There could be changes to the rules around these reliefs

Money accumulated in pension schemes is not subject to inheritance tax in certain circumstances.

There is a maximum limit of £1,073,100 if the deceased was under 75 when they died.

Income tax is payable if the deceased was over 75 when they died

ISAs

The maximum that can be saved into an ISA in the current financial year is £20,000.

You do not pay tax on interest on cash in an ISA, income or capital gains from investments in an ISA.

There are currently four different types of ISA for adults

• Cash ISA (savings in bank and building society accounts, some National Savings and Investments products)
• Stocks and shares ISA (shares in companies, unit trusts and investment funds, corporate bonds, and government bonds)
• Innovative finance ISA (peer-to-peer loans – loans that are given to other people or businesses without using a bank, ‘crowdfunding debentures’ – investing in a business by buying its debt, funds where the notice or redemption period means they cannot be held in a stocks and shares ISA)
• Lifetime ISA (cash, stocks and shares)

There could be changes to the ISA limit, and to what you are allowed to hold within the various types of ISA.

In addition, there are Junior ISAs which have an annual limit of £9,000 and can be invested in cash or stocks and shares.

Pensions contribution relief

Contributions to pension schemes registered with HMRC can be offset against income (see below).

Contributions cannot exceed the lower of 100% of earnings in a tax year, or £60,000.

That limit will be reduced if you earn over £260,000 by £1 for every £2 of excess income, with a minimum reduced allowance of £10,000.

Tax relief is given at your margin rate of tax.

It may be that the government decided to limit relief to the basic rate of tax.

Employers do not pay national insurance on the contributions that they make to employees’ pension schemes.

It has been suggested that the budget will impose national insurance on employer contributions to pensions.

The previous government abolished the lifetime allowance that capped the value of a pension fund that was protected from tax.

It may be that the budget reintroduces a lifetime allowance

Once you reach a certain age, you can take 25% of the amount in your pension a s a tax-free lump sump up to a limit of £268,275.

It may be that the budget reduces the tax-free limit or abolishes it entirely so that all distributions from pensions are taxable.

The government may try to mandate how pension schemes are invested – it is keen to encourage more investment in the UK (this could also apply to ISAs)

Stamp duty

The current SDLT thresholds are:

• £250,000 for residential properties
• £425,000 for first-time buyers buying a residential property worth £625,000 or less
• £150,000 for non-residential land and properties

These are planned to change from 31 March next year, reverting back to pre-COVID levels.

Figure 3:      Stamp duty land tax

Source: Gov.uk

Other

The rules around non-dom tax status may change.

The electricity generator levy will likely continue as is – 45% of excess earned above £75/MWh (adjusted for CPI). Need to be producing more than 50GWh/year and more than £10m of excess income.

Business rates and business rate reliefs may change.

Some change to vehicle tax could be made to reflect the gradual shift to EV (and the corresponding fall in fuel duties).