Six Major Changes Set for Rachel Reeves’ Budget

As Chancellor Rachel Reeves prepares her first Budget, there is much speculation about the potential tax changes she could introduce to raise revenues, while keeping the Labor Party’s promise not to increase taxes on “working people”.

She claimed that the previous Conservative administration left her with a £22 billion “black hole” in the public finances and repeatedly warned that the country faced “difficult choices”.

But, speaking at the Labor Party Conference last month, she said: “It will be a Budget with real ambition, a Budget to set the foundations, a Budget to deliver the change we promised, a Budget to rebuild Britain.”

Here are the major changes likely to come to Reeves’ first budget and the things that could be left out:

What could be in Rachel Reeves’ budget

Tax attack on workplace pensions

Reeves has repeatedly ruled out increasing workers’ Social Security contributions, but there are other options for tax increases in this category that she could consider without breaking her promise.

Employers currently do not pay national security contributions on money invested in workplace pensions, but changing this could raise up to £18 billion a year for the Treasury.

The Chancellor is said to be considering these changes to raise taxes without breaking the Labor Party’s stated pledge not to raise rates for “working people”, and the Prime Minister has refused to rule out that this could be in the plans. .

Increasing employer national insurance rates

A second option for Reeves could be to increase the rate at which employers pay national insurance on their employees’ earnings, with just a 1% increase having the potential to generate almost £9 billion a year.

Currently, workers pay a rate of 8 per cent on their salary between £242 and £967 per week for national insurance and 2 per cent after this point. Meanwhile, employers pay a 13.8% rate on all earnings above £175 per week.

On Sunday, Business Secretary Jonathan Reynolds did not rule out changes to employer contributions when asked about tax rises. He said News from the sky: “That promise was taxes on workers, so there was specifically a reference to employees and income tax in the manifesto.”

Increase in capital gains tax

Reeves is said to be considering a significant increase in capital gains tax (CGT) as part of efforts to raise funds for public services.

CGT is currently charged on profits from the sale of assets such as second homes or business shares, with rates ranging from 10 to 28 per cent. These rates are much lower than income tax, which can reach 45%.

Another change the Chancellor could consider in relation to CGT is to tax unrealized capital gains at death, rather than eliminating historical gains, as the current system allows.

The Guardian reported that the Labor Party is exploring the idea of ​​increasing CGT to up to 39 percent, which would bring it closer to dividend tax rates. Analysts predict it could generate up to £9.5 billion a year in revenue for the Treasury.

Inheritance tax increase

Cross-party think tank Demos has urged the Chancellor to introduce a bundled system for inheritance tax. Currently, when a person dies, 40 per cent tax is charged on the part of their estate that is above the £325,000 threshold.

If your estate is passed to a direct descendant, the nil rate limit can be increased by an extra £175,000. Couples can also share their allowance, giving them a potential tax-free limit of £1 million.

Demos calls for the 40 percent flat rate to be replaced by a tiered system based on the value of the estate at death, with a 30 percent rate charged on assets valued at under £1 million, 40 percent on those between £1 million and £2 million and 45 percent on properties valued at £2 million.

Implementing this new regime would cost around £410 million, but the think tank predicts it could bring an additional £16 billion to the Treasury over the next five years.

Another think tank, the Resolution Foundation, has called on the Chancellor to scrap the extra £175,000 tax-free allowance, which suggests it could generate a further £2 billion a year.

Hiking fuel fee

Fuel duty has been frozen since 2011, and the 5p cut introduced by the Conservatives in 2022 has been extended in all subsequent budgets.

The current rate is 52.95pa liter, but there has been speculation that, after more than a decade, the rate could be increased for the first time.

The Chancellor could choose to reverse the 2022 5 cent cut, but some analysts have suggested she could announce a 10 cent rise, which would take the rate to a record high of 62.95 cents.

Simon Williams, head of policy at the RAC, said he believes the Chancellor will have “no option” but to consider an increase of at least 5 pence, adding that the Chancellor knows the 5 pence discount is “losing the Treasury £2 billion per year.” .

New loan rules

The Government has left the door open to changing fiscal rules in the next Budget to allow for more borrowing to boost public investment and growth.

Current fiscal rules require that the Government debt ratio decreases as a percentage of GDP by the anticipated fifth year. The rule itself is not expected to change, but the Government could look again at the way debt is calculated.

One option is to exclude the annual losses of £20 billion to £50 billion incurred by the Bank of England in ending its quantitative easing (QE) bond-buying programme.

Doing so would free up some leeway for the Chancellor, potentially allowing her to borrow to invest in growth-generating initiatives or public services.

Speaking to journalists last month, the Prime Minister did not rule out the possibility of allowing the Government to expand the scope of loans.

“There are different theories about economic growth. I always thought it was important to borrow money to invest. That was part of what we said before the election. This is not a new principle. But we have to make sure we have strong fiscal rules in place,” he said.

What won’t be in Rachel Reeves’ budget

Tax cuts for workers

The Labor Party has been clear, both in public and in its election manifesto, that it will not increase any taxes on workers.

The exact definition of “workers” has occasionally been the subject of debate, but we know that this compromise will include income tax, social security contributions and VAT.

Before the elections, the Government also said it would keep income tax payment rates frozen until 2028.

Due to a phenomenon known as “tax resistance,” this could lead to many workers being pulled into higher tax brackets as their wages increase, leading to higher tax rates for many.

Increases in corporation tax

Before the election, Reeves promised that the Labor Party would not increase corporation tax above its current rate of 25 percent during the next parliament.

Speaking at a conference in London in February, she said: “We believe a 25 percent rate strikes the right balance between the needs of our public finances and the demands of a competitive global economy. “The next Labor government will make the pro-business, pro-growth choice.”

She added that this promise also included maintaining the total expenditure policy instituted by the Conservatives. This has allowed companies investing in IT equipment and machinery to recover up to 100 percent of the cost of the investment, amortizing it in taxes on their profits.