Autumn Budget Tax Speculation: Which Rises Are Being Discussed and What the Numbers Say

TAX · BUDGET WATCH

Why the speculation and what the fiscal numbers are

Speculation about tax rises ahead of the Autumn Budget stems from the fiscal position: the Office for Budget Responsibility (OBR) headroom against the Government's fiscal rules is narrow, and spending commitments are rising. The Budget must balance revenue with these pressures, but no specific tax changes are confirmed until the Chancellor's statement.

The OBR's latest forecast, published in March 2024, showed headroom of £8.9 billion against the target that debt must fall as a share of GDP in the fifth year of the forecast. That headroom is small relative to the size of the economy and can be eroded by changes in interest rates, growth, or spending decisions. Since then, the Government has announced pay awards for public sector workers, funded by spending reductions in other areas, and has committed to increased defence spending. These commitments put further pressure on the fiscal position, increasing the likelihood that tax measures will be needed to maintain credibility with financial markets.

The OBR's fiscal rules require that debt falls as a percentage of GDP by the end of a five-year forecast period. The headroom is the amount by which the forecast debt-to-GDP ratio is below the target. A smaller headroom means less flexibility for unplanned spending or tax cuts. The OBR also assesses the sustainability of public finances over a longer horizon, noting that an ageing population and rising health costs will put upward pressure on spending. The Budget must set out how the Government will meet its fiscal rules, and any tax changes will be judged against that framework.

Tax receipts in the 2023-24 financial year were £830 billion, according to HMRC data, with income tax, National Insurance contributions (NICs), and VAT accounting for the largest shares. The OBR projects that tax revenues will rise as a share of GDP over the coming years, partly due to fiscal drag from frozen thresholds. However, the Government has stated that it will not raise taxes on working people, which limits the scope for increases in income tax or NICs. This leaves other taxes, such as capital gains tax, inheritance tax, and property taxes, as potential targets for revenue-raising measures.

Any tax change must be announced in the Budget, which is scheduled for 30 October 2024. The Chancellor will present the OBR's latest economic and fiscal forecasts alongside the Budget, providing an updated assessment of the headroom. Until then, all proposals are speculative, and taxpayers should not act on rumour. The OBR's forecasts are based on existing policies, so any new tax measures will be incorporated into the next forecast, which will be published at the time of the Budget.

Property taxes: surcharge, levy or revaluation

Property tax changes under discussion include a high-value council tax surcharge, an annual levy on expensive homes, or a revaluation of council tax bands, which have been based on 1991 property values in England. A mansion tax was previously proposed but never enacted. Any change would affect owners of high-value properties, but no decision has been made.

Council tax in England is based on bands set in 1991, using capital values as of April 1991. Since then, house prices have risen significantly, but bands have not been updated, leading to distortions. For example, a property worth £1 million in 2024 might still be in the same band as a property worth £200,000 in 1991, if the relative values have changed. Revaluation would involve reassessing all properties, which is a major administrative task. The last revaluation in England was in 1991, and Wales had a revaluation in 2005. Scotland revalued in 2022, but that was for non-domestic rates, not council tax.

One proposal is to add a new high-value council tax band, sometimes called a 'mansion tax'. This would apply to properties worth over a certain threshold, such as £2 million. The tax could be an additional band, with a higher multiplier, or a separate annual levy. Historically, a mansion tax was proposed by the Liberal Democrats in 2010 and again in 2015, but it was not implemented. The idea has resurfaced as a way to raise revenue from wealth held in property. However, such a tax could be controversial, as it would affect homeowners who may have high property values but low incomes, such as pensioners.

Another option is to reform council tax by revaluing properties and updating bands. This would shift the tax burden from lower-value to higher-value properties, but it would also increase bills for many households. The Institute for Fiscal Studies has suggested that a revaluation could raise additional revenue, but it would require significant political will. The current system is regressive, with higher-value properties paying a lower effective rate. For example, a property in band H (worth over £320,000 in 1991) pays twice as much as a band D property, but its value may be several times higher.

Any property tax change would need to be announced in the Budget. The Government has not confirmed any plans, and speculation is based on reports and think tank proposals. Property owners should be aware that changes could affect them, but they should not make decisions based on unconfirmed rumours. The impact of any change would depend on the design, including thresholds, rates, and exemptions.

Capital gains tax: what changed and what might

In October 2024, the Government increased the main rates of capital gains tax (CGT) from 10% and 20% to 18% and 24%, respectively, while the annual exempt amount was cut to £3,000. Further changes are speculated, including aligning CGT rates with income tax rates, but no additional measures have been announced.

The October 2024 Budget made significant changes to CGT. The annual exempt amount, which had been £6,000 in 2023-24, was reduced to £3,000 for 2024-25. This means that individuals can only realise gains of up to £3,000 in a tax year before paying CGT. The rate for residential property gains, which was previously 18% and 28%, was changed to 18% and 24%, aligning it with the main rates. However, the rate for carried interest remains at 28%.

Before these changes, the main rates of CGT were 10% for basic-rate taxpayers and 20% for higher-rate taxpayers. The new rates of 18% and 24% represent an increase of 8 percentage points for higher-rate taxpayers. For example, a higher-rate taxpayer selling shares with a gain of £50,000 would have paid 20% on £44,000 (after the £6,000 exemption) in 2023-24, which is £8,800. In 2024-25, with a £3,000 exemption, the gain of £47,000 is taxed at 24%, resulting in a tax bill of £11,280, an increase of £2,480.

There is ongoing speculation that CGT rates could be further increased to align with income tax rates, which are 20%, 40%, and 45%. This would mean that gains would be taxed at the same rate as income, eliminating the preferential treatment of capital gains. Such a change would significantly increase the tax burden on investors and business owners. For example, a higher-rate taxpayer with a gain of £100,000 would pay 24% under current rules, which is £24,000. If aligned with income tax, they would pay 40%, which is £40,000, an increase of £16,000.

However, the Government has not announced any plans to align CGT with income tax rates. The October 2024 changes were part of a broader package to raise revenue, and further changes would require a new Budget. Taxpayers should be aware that CGT rates may change in the future, but they should not make decisions based on speculation. The current rates are set for the 2024-25 tax year, and any changes would apply from the next tax year.

Pension tax relief and salary sacrifice

Pension tax relief is given at the individual's marginal rate, meaning basic-rate taxpayers receive 20% relief, higher-rate 40%, and additional-rate 45%. Some propose a flat rate of relief, which would reduce the benefit for higher earners. Salary sacrifice arrangements could also be affected by changes to employer National Insurance contributions.

Under the current system, pension contributions are made from pre-tax income, and tax relief is given at the individual's marginal rate. For example, a basic-rate taxpayer contributing £100 to a pension would receive £20 in tax relief, making the total contribution £120. A higher-rate taxpayer would receive £40 relief, making the total £140. This system is seen as generous to higher earners, as they receive more relief per pound contributed.

One proposal is to replace marginal rate relief with a flat rate, such as 30% or 33%. This would mean that all taxpayers receive the same rate of relief, regardless of their income. For basic-rate taxpayers, a flat rate of 30% would increase their relief from 20% to 30%, making pensions more attractive. For higher-rate taxpayers, relief would fall from 40% to 30%, reducing the tax benefit. For additional-rate taxpayers, relief would fall from 45% to 30%. This change would raise revenue for the government, as the savings from reducing relief for higher earners would outweigh the cost of increasing relief for basic-rate taxpayers.

Salary sacrifice is a mechanism where an employee gives up part of their salary in exchange for a pension contribution from their employer. This arrangement reduces the employee's taxable income and also reduces the employer's National Insurance contributions (NICs), as employer NICs are not payable on pension contributions. Currently, employer NICs are 13.8% on earnings above a threshold. If the government were to change the rules on salary sacrifice, for example by limiting the amount that can be sacrificed, it could affect the tax efficiency of pension saving.

Another proposal is to align the tax relief on pension contributions with the tax treatment of employer contributions. Currently, employer contributions are not subject to income tax or NICs, but employee contributions are made from pre-tax income. Some have suggested that all contributions should be taxed at the same rate, which could be achieved by a flat rate of relief. This would simplify the system but could reduce incentives for higher earners to save.

Any change to pension tax relief would have significant implications for savers. The government has not announced any plans, but speculation is rife. The cost of pension tax relief is estimated at £48 billion per year, according to HMRC, making it a target for revenue-raising measures. However, changes would be politically sensitive, as they could affect millions of savers.

Inheritance tax: frozen thresholds and pensions from 2027

Inheritance tax (IHT) is charged at 40% on estates above the nil-rate band of £325,000, which has been frozen since 2009. From April 2027, unused pension funds will be included in the estate for IHT purposes. The residence nil-rate band adds £175,000 for a main home passed to direct descendants.

The nil-rate band (NRB) is the amount that can be passed on without IHT. It has been frozen at £325,000 since 2009, and this freeze is set to continue until 2028. This means that as property prices and asset values rise, more estates become liable to IHT. The residence nil-rate band (RNRB) was introduced in 2017, allowing an additional £175,000 to be passed on tax-free if a main home is left to children or grandchildren. The RNRB is tapered for estates worth over £2 million, reducing by £1 for every £2 over the threshold.

From April 2027, changes will be made to the treatment of pensions for IHT. Currently, unused pension funds are generally not included in the estate for IHT purposes, and they can be passed on tax-free if the member dies before age 75. From 2027, unused pension funds will be included in the estate, meaning they will be subject to IHT if the total estate exceeds the NRB and RNRB. This change will affect individuals with large pension pots, as they may face an IHT bill on their pension savings.

For example, an individual with an estate worth £1 million, including a pension pot of £300,000, would currently have an IHT bill of £270,000 (40% on £675,000 after the NRB and RNRB). From 2027, the pension pot would be included, increasing the taxable estate to £1 million, resulting in an IHT bill of £270,000 (40% on £675,000) if the RNRB applies. However, if the estate is above £2 million, the RNRB is tapered, increasing the bill.

Planning for IHT is complex, and individuals should seek professional advice. The changes to pensions from 2027 will require careful consideration of how pension funds are drawn down or passed on. The government has not announced any further changes to IHT rates or thresholds, but speculation continues. The IHT take is expected to rise due to the freeze, with HMRC projecting receipts of £7.8 billion in 2024-25.

What to do before the Budget

Before the Budget, individuals should avoid making rash decisions based on speculation. They can use existing allowances, such as the capital gains tax annual exempt amount and pension annual allowance, before the tax year ends. Key dates include the Budget on 30 October 2024 and the end of the tax year on 5 April 2025.

The Budget is scheduled for 30 October 2024, and any tax changes will take effect from the start of the next tax year, unless they are announced with immediate effect. Taxpayers should not act on rumour, as changes may not materialise or may differ from speculation. However, there are some steps that can be taken to use allowances that are available now.

The capital gains tax annual exempt amount is £3,000 for 2024-25. If you have unrealised gains, you could sell assets to use this allowance before the end of the tax year. However, you should consider the costs of selling and the potential for future gains. Similarly, the pension annual allowance is £60,000 for 2024-25, and you can carry forward unused allowances from the previous three years. Making contributions before the Budget could secure tax relief at current rates, but you should ensure you do not exceed the annual allowance.

For inheritance tax, the nil-rate band and residence nil-rate band are frozen until 2028. If you are considering making gifts, you can use the annual gift exemption of £3,000, and gifts to individuals are potentially exempt if you survive seven years. However, these rules are unlikely to change in the Budget, so there is no urgency.

It is also important to review your tax position with a professional adviser, especially if you have complex affairs. The Budget may introduce changes that affect your planning, so it is wise to wait for the announcement before making significant decisions. The end of the tax year on 5 April 2025 is a key date for using allowances, but you should not rush into actions that may not be beneficial.

When is the Autumn Budget?

When is the Autumn Budget?

The Autumn Budget is scheduled for 30 October 2024. The Chancellor will present the Budget to Parliament, alongside the latest forecasts from the Office for Budget Responsibility. Any tax changes announced will typically take effect from the start of the next tax year, unless stated otherwise.

What is the inheritance tax nil-rate band?

What is the inheritance tax nil-rate band?

The inheritance tax nil-rate band is the amount of an estate that can be passed on without paying inheritance tax. It is currently £325,000, and it has been frozen at this level since 2009. An additional residence nil-rate band of £175,000 is available for a main home passed to direct descendants.

Did capital gains tax go up in 2024?

Did capital gains tax go up in 2024?

Yes, in October 2024, the main rates of capital gains tax increased from 10% and 20% to 18% and 24%, respectively. The annual exempt amount was also reduced to £3,000. These changes apply to gains made in the 2024-25 tax year.

What is a high-value council tax surcharge?

What is a high-value council tax surcharge?

A high-value council tax surcharge is a proposed additional tax on properties worth over a certain threshold, such as £2 million. It could be an extra council tax band or a separate annual levy. This idea has been discussed but not implemented.

Are income tax thresholds frozen?

Are income tax thresholds frozen?

Yes, income tax thresholds have been frozen until 2028. The personal allowance is £12,570, and the basic rate band is £37,700. This freeze means that as incomes rise, more people may be dragged into higher tax brackets, increasing tax revenues.

LAST REVIEWED 3 SEPTEMBER 2026