Summer break is over, as is the honeymoon period for the new government. On 30 October 2024, Rachel Reeves delivered her first Budget as Chancellor, which was momentously the first ever Budget delivered by a woman. Aside from that there was worry in advance that the Budget would achieve very little, and simultaneously cries from the media of the untold levels of destruction that would be caused by Labour unnecessarily raising taxes on hard working British workers.
Both turned out to be true, at least in some respects. In some ways this Budget started the journey of addressing the many problems we have with our economy that weren’t fixed by the free market as we were promised repeatedly by the Conservatives. In others, the changes made didn’t go far enough to properly redress the gross inequality that we as a country have developed.
I am going to be focusing my thoughts in this blog from a political perspective. If you would like to read my thoughts on what this means from a financial planning perspective, my professional blog is available here.
What We Welcomed
There was a lot to welcome in this Budget, not least of which was the fact that it was the first ever delivered by a female Chancellor. Beyond that, it took steps towards repairing our broken economy, with increases to Capital Gains Tax, restrictions on Inheritance Tax and confirmation that the Non-Domiciled Status would be abolished.
Capital Gains Tax, the tax on realised gains from assets bought and sold, was increased from 10% to 18% at the basic rate and from 20% to 24% at the higher rate. This is still not a return to the heady days when Capital Gains Tax was 40%, but 24% is actually the rate that would have been paid on the longest-term capital gains once the maximum effects of Taper Relief were applied (Taper Relief was an effort to accommodate inflation so that people weren’t paying the full rate of tax just due to rising costs). As such, this is a reversion to an old rate of Capital Gains Tax, at least for the higher-rate taxpayers, and it is fair to say that during that time there were still calls for major reform to that particular tax for equality purposes.
In particular, it is quite disappointing at first glance to see an increase of 8% for basic-rate taxpayers and 4% for higher-rate taxpayers, but it is important to remember that there will be very few basic rate taxpayers actually affected by this given it is a tax paid predominantly by the very wealthy. The combination of cumulative ISA allowances of £20,000 per person per year and the fact that basic-rate taxpayers would need to be earning under £50,000 a year means they are unlikely to pay Capital Gains Tax at all.
Inheritance Tax tightening is welcome, in particular the anomaly that is the unlimited relief from inheritance tax for “unquoted” shares (which perversely includes companies quoted on the Alternative Investments Market, or AIM, which includes several companies worth over £1 billion) after a holding period of 2 years. This was essentially a huge gift to those wealthy enough to make large investments into fairly high risk ventures without worrying about their financial future. It was also available for “working farmland”, which would have included some very large hereditary estates used for things like grouse shooting.
These reliefs have been curtailed, with the full relief only available on £1 million of assets, with the excess limited to 50% relief. This might have an enormous long-term effect on the strategies used to sidestep inheritance tax for larger estates, but is very unlikely to stop the process altogether because there are many other workable strategies, including simply gifting large swathes of the estate and surviving for 7 years.
Inheritance Tax is largely already considered “optional” once an estate gets sufficiently large, and while it is nice to partially redress some of the oddities in the tax, this is far too little to expect any meaningful results.
The abolition of the Non-Domiciled Status is welcome. Essentially this was an option for wealthy individuals from overseas to come and live in the UK but not pay tax on their worldwide assets in the way that a resident born here would have to. This essentially came from the idea that wealth would trickle down, i.e. if we managed to attract wealthy people to the UK through low tax, they would benefit the country by spending their money here. In reality it led to a large industry of overseas trusts and careful management of family finances to pay as little tax as possible whilst enjoying the status of being full UK taxpayers.
The overall combination of these changes is expected to be a significant increase in tax take, and from that the Chancellor announced increased budgets for the NHS, justice and education systems, all of which are welcome. Whether these increases are sufficient to fix the various problems within each of these remains to be seen.
Also announced were official redress schemed for those affected most by several scandals over the years, including the Post Office Horizon scandal and the infected blood scandal. Frankly these are long overdue, and it is genuinely awful that it took a change in government to get these properly funded.
What Was Missing
Unfortunately there was a lot missing in the Budget.
You would have to have been hiding under a rock not to have heard the calls for a wealth tax, whether as a one-time payment or as an ongoing annual tax, but this was conspicuous by its absence. An effective wealth tax is the only means to address wealth inequality, and whilst Inheritance Tax is a form of wealth tax, as mentioned above it is far from effective. Given this, the changes to taxes in this Budget feel like wallpapering over major structural defects in the UK tax system. Increased Capital Gains Tax might feel like it goes some way towards addressing this, but it is important to remember that assets held until death are exempt from CGT altogether. As such, someone inheriting a large estate, living in it all their life and then leaving it to their heirs will never pay this increased rate of CGT. It is possible they will now have to pay somewhat more Inheritance Tax, but the impact is likely to be far less than is needed.
This was also an opportunity to look again at Universal Basic Income. This would be a means of incorporating the benefits system into the tax code itself to ensure that every UK citizen would have sufficient income to meet their basic expenditure. It could replace the state pension, low income benefits, most sickness benefits, child benefit, housing benefit, etc, if taken to its logical conclusion, and it would go some way towards starting the transition from a fully employed to a partially automated workforce. Where UBI has been trialled elsewhere in the world it has generated very positive results, and it is depressing that the party ostensibly of the worker didn’t look at this in any seriousness.
Finally, this was an opportunity to look at the valuable input to our economy that comes from our social carers. These amazing volunteers often do the work that ought rightly to be done by government, and they do so with insufficient or even no pay. Frankly we should be doing far more for these crucial members of our communities, and it is sad to see them once again left unassisted.
What Was Wrong
There was far less outright wrong material in this Budget than previous Conservative ones, where unfunded tax breaks for the wealthy were the norm, but there is still one major issue worth talking about in this Budget, as well as something that deserves mention despite currently being light on detail.
During the General Election campaign, Labour promised repeatedly not to increase Income Tax or National Insurance. This Budget breaks both promises. National Insurance is directly going up, with Employer National Insurance increasing from 13.8% to 15%. Make no mistake, this is a tax that will ultimately end up hitting the pocket of workers, because whilst the bill itself might be paid by employers, it will be factored in when deciding how much to pay staff. This essentially takes the total Income Tax on a worker to 47% for basic rate taxpayers, made up of 20% Income Tax, 12% Employee National Insurance and 15% Employer National Insurance (make no mistake, National Insurance is a form of Income Tax, it just has a different name). Once again, this is a tax on workers because a government is afraid to target the wealth hoarders.
In terms of Income Tax, the rates themselves are not increasing, and the bands are unchanged, but this is an example of fiscal drag. In essence, this means that the bands gradually become less and less valuable as inflation takes effect, which gradually pushes more non-taxpayers into basic-rate tax and more basic-rate taxpayers into higher-rate. This is subtle, and Labour will likely argue that they haven’t put the tax rates up at all, but the reality is that this fiscal drag is very real, and it will impact far more people than might even realise it.
The less certain issue is the change to pension death benefits. The Budget announced that these would now be subject to Inheritance Tax where before they were subject to no tax if the member die before age 75 or to income tax in the hands of the recipient if the original member died after age 75. Quite how this will now be treated remains to be seen. There is some speculation that both inheritance tax and income tax might apply, which would be a huge change to how people perceive pensions, but I am not sure that both taxes will apply. Nevertheless, the uncertainty around the tax treatment of people’s hard-earned pensions is very unwelcome.
Conclusion
Overall, this was far better than recent Conservative budgets for addressing inequality, but was hugely disappointing for a supposedly left-wing party in government. Hopefully it is the first of many steps towards a fairer society, but given how long Labour have had to plan this Budget in opposition, it is very conservative (small c) in nature rather than being truly progressive.
