It feels like only yesterday that we were talking about last year’s Autumn Budget, widely billed as a once-in-a-generation reset for the public finances. Back then, the challenge was plugging a £22 billion gap in the nation’s accounts.
Fast forward not even 12 months, and here we are again, only this time, the gap is even bigger! Labour’s own fiscal rules commit them to financial stability by balancing day-to-day spending with revenues by the tax year 2029/30, all whilst promising not to raise income tax, national insurance or VAT – their big manifesto pledge. But new analysis from the National Institute of Economic and Social Research suggests that rule could be broken, with the shortfall topping £41 billion, add in some wiggle room, and Reeves is likely to be searching for £50 billion!
How do you bridge a gap that big without touching the taxes you’ve sworn that you will protect? Breaking a key pledge to working people would be potentially toxic, but the alternatives aren’t exactly painless.
In this video, we’ll break down the tough choices facing Rachel Reeves, look at the options on the table, and explore what they could mean for you ahead of this year’s Autumn budget. This is the first of many videos we’ll be bringing you in the run-up to and after the budget, to keep you informed along the way.
Hello and welcome to the latest Insightful Planning with Astute video. I’m Elliot Unsworth, Head of Client Proposition at Astute Private Wealth, and in this video, we’re going to entertain some of the rumours circulating the mill and how they might impact your Financial Planning going forward.
Let’s start with the headline numbers.
According to the latest analysis from NIESR, the government aren’t on track to meet their target to make tax receipts
Now, it’s worth highlighting that Rachel Reeves will be working from the Office for Budget Responsibility’s (OBR) forecast, not NIESR’s, so the exact numbers are likely to shift. But with the OBR report not yet released at the time of recording this video, this NIESR analysis is our first real indicator – and it’s pointing to a pretty tough road ahead.
Where did the money disappear to? Well, let’s start with the £9.9bn of fiscal headroom that the government were forecast to have following the Autumn budget. Sky News reports of the NIESR report show that restoring the winter fuel payment and changing recent welfare reforms took that number down by £1.5bn and £13.7bn respectively, so we’ve already wiped out that headroom. Then we see a further £14.3bn from higher than expected costs, and another £22bn from weaker than expected economic growth and employment! This gives us our -£41bn. If Reeves wants to ensure there is some headroom – let’s say £9.9bn, which was forecast following the last budget, that’s over £50 billion that the government needs to find through cutting spending or raising taxes.
However, Labour has already made a mammoth manifesto promise, but one they can’t have made lightly. So how would the Chancellor find the money?
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Inheritance Tax
Inheritance Tax is always a tempting area for governments looking to raise revenue without directly hitting income, and it can be played with in many different ways. Some major changes have already been made in the previous budget. We won’t go into the full implications of the pension changes here, but they were big enough to spark our earlier “how to save IHT series”!
Inheritance Tax and Gifting
Another area that they may be looking at to raise inheritance tax revenues is gifting. You might have seen recently that the government may be considering some changes to lifetime gifting. One idea being discussed is putting a cap on the total amount you can give away in your lifetime before inheritance tax applies. Another is changing the seven-year rule.
Currently, there is no overall limit on lifetime gifts. In theory, you could give away millions, as long as you live for seven years after making that gift, it’s outside of your estate for inheritance tax purposes.
But if these changes were to go ahead, they could look very different. Let’s say you’ve been gifting your granddaughter £3,000 each year, and you’ve also been paying her private school fees from your surplus income. Under today’s rules, those payments aren’t subject to IHT, even if you were to pass away tomorrow, because they fall under the annual gift allowance and the “normal expenditure out of income” exemption.
If a lifetime gifting cap were introduced, or if the surplus income rule were tightened, those same gifts might be added back to your estate for tax purposes. And, if the seven-rule period were extended to, say, ten years, then larger gifts you make would stay in the IHT danger zone for longer, meaning you’d have to live even longer to ensure they escape the tax net.
These wouldn’t be headline-grabbing changes, but they could quietly help to bridge the £41 billion gap, with funds raised largely from families who have been carefully planning to reduce inheritance tax.
Freezing the Personal Allowance
One option that doesn’t technically break any manifesto pledge, but has a big impact, is fiscal drag. By simply freezing the personal allowance and higher-rate threshold, more people get pulled into paying tax, and more income is taxed at higher rates as wages rise. The current personal allowance is forecast to be frozen until at least 2028, but freezing this another year could save £5.8bn, according to the reports. Given inflation was 2% each year – the reason for the pay rise – she can buy less in real terms.
It’s stealthy, it’s politically quiet, and it allows the Chancellor to raise revenue without touching headline tax rates. But make no mistake: this does mean most people will pay more over time. Still, £5.8bn is a small dent in £50bn, so what else?
Flat Rate Tax Relief
There are whispers that the government could tighten the rules on how much tax relief higher earners can claim, particularly through salary sacrifice schemes. Currently, pension contributions benefit from tax relief, the amount largely depending on how much tax you pay. i.e., you get tax relief up to your marginal rate. So, a £100 pension contribution will cost you varying amounts, depending on your rate of tax. For a basic rate taxpayer, it would cost £80, but for a higher rate taxpayer, it would cost £60. There has been speculation that the Labour government could introduce a flat rate of tax relief, for argument’s sake, let’s say 25%. If this happened, it would cost £75 irrespective of tax band, a benefit to those paying basic rate tax, but not those paying more. Reports forecast that lowering pension relief could bring in £15bn!
Or they might limit how much can be sacrificed into pensions each year before tax advantages start to taper away.
This would directly affect many company directors and higher-earning professionals, people who’ve been using pensions efficiently to reduce their tax bills. It’s a technical area, but one that could raise meaningful sums without the political heat of direct tax rises.
Wealth Tax
What about a wealth tax? Some headlines are pointing that way, and a few Labour MPs have voiced support. But the truth is: nothing concrete has been proposed, and implementing a true wealth tax would be incredibly complex.
More likely is a continued focus on taxing returns on wealth. things like capital gains and dividends, rather than taxing the wealth itself. For now, it’s a topic that grabs headlines, but unless the government runs out of room, we believe a full-blown wealth tax looks unlikely this autumn.
There was speculation before the Mansion House speech that the cash ISA allowance could be reduced – we created a video on it here. Due to the huge unpopularity of the idea, Reeves decided not to go ahead in the summer, but did state that changes were under consideration. This could raise £1bn, so it’s something, but it doesn’t really touch the sides.
As we mentioned earlier, we know the government won’t want to break their pledge and raise taxes on working people, but if they did, they may see the path of least resistance being the reversal of the 2% national insurance cut announced by Jeremy Hunt in the Whilst it would surely be unpopular, it would be easier to spin a revert to 2023 levels than it would to, say, increase 20% income tax to 22%. This could raise £10.3bn.
Property Taxes
There have been reports that property wealth could be in the Chancellor’s sights this Autumn. Nothing is confirmed, but two ideas are reportedly under consideration.
Stamp Duty Revamp
One suggestion is that instead of the current system, people who own homes worth more than £500,000 might face a tax when they sell, rather than when they buy. That would certainly raise money from those who’ve seen big house price gains, but it could also hit people who’ve already paid hefty stamp duty on the property, taken out a mortgage, and then face another bill when they come to move.
Capital gains tax
Another idea being floated is charging CGT on someone’s main residence if it’s valued above a certain threshold. At the moment, your main home is exempt if it meets certain criteria. But, if this changes, homeowners could face up to 24% tax on the gain when they sell! That would be a big shift, especially for those who’ve lived in their home for decades. Reports suggest there may be a threshold, a property value of £1,500,000, say, but at this stage it’s all just speculation.
On the spending side, there’s pressure building from all directions. One big issue is welfare. As we mentioned earlier, Labour has already reversed some of the Conservatives’ proposed disability benefit reforms, scrapping cuts that would’ve saved over £5billion.
And campaigners are urging them to scrap the two-child benefit cap, which would cost another £3.6 billion once fully rolled out. These are big-ticket items and politically sensitive. Labour will have to choose carefully where it draws the line. Other departments like transport, defence, and local government may be squeezed instead. That means less money for public services, even as demand rises.
Any further tax hikes, particularly if they hit business rates, energy levies, or logistics, could feed straight through to consumers. The Chancellor has to balance the need for revenue and keeping to their fiscal rules against the risk of fuelling inflation, especially when interest rates are still relatively high, a pain point for borrowers.
The Autumn Budget is shaping up to be a defining moment for this new Labour Government. The choices are difficult. Stealthily raise taxes or break promises? Cut spending or risk borrowing too much? And while the headlines may focus on high-level numbers, many of the changes, whether it’s pension relief, tax thresholds, or gifting rules, could have a real and direct impact on you and your long-term financial planning.
That’s why we’ll be keeping a close eye on the Budget when it lands and we’ll break it down for you right here when it does.
See you next time.
