Tax rises expected in Autumn 2024 Budget?

One of the Labour Party’s main assurances before the 2024 general election was that it would not raise taxes on working people. By this, it committed to not increasing income tax, national insurance or VAT. However, this doesn’t mean the party has ruled out all tax rises. Indeed, after Chancellor Rachel Reeves’ spending audit on 29th July, it looks very likely that we’ll be seeing certain tax rises in the Autumn 2024 Budget.

The spending audit

The 2024 general election took place on 4th July. On 8th July, the Chancellor instructed Treasury officials to undertake a rapid audit of public spending. The results indicated that departmental spending is expected to be £21.9 billion higher than the totals set by the Treasury at the Spring Budget. This is the £21.9 billion ‘black hole’ that has been widely reported in the press.

Why is there such a large overspend?

The spending audit identified four key areas that are responsible for the so-called financial ‘black hole’. These are:

• Unfunded policy announcements. These include things like extending the Household Support Fund and additional support for bus services.
• The impact of inflation. High inflation has meant that departmental spending budgets have dipped at least £15 billion in real terms compared to the 2021 Spending Review plans.
• Pressures due to recent events. These include extra military and civilian support for Ukraine, higher than expected asylum costs, plus weaker demand for rail services since the COVID-19 pandemic.
• Public sector pay. Recommended pay rises are £11.6 billion higher than budgeted for.

Short-term actions

In order to bring down the overspend, Rachel Reeves has announced a number of immediate actions. These are:

• Scrapping Winter Fuel Payments for pensioners who don’t receive pension credit or means-tested benefits.
• Scrapping the Rwanda migration partnership – something Labour had already committed to.
• Cancelling the Investment Opportunity Fund which has not yet supported any projects.
• Scrapping adult social care charging reforms. These would have capped how much people in England pay for social care.
• Cancelling some transport commitments such as the A303 Stonehenge tunnel.
• Cancelling the Advanced British Standard, a new qualification that would have replaced A-levels and T-levels.
• Reviewing the commitment to open 40 new hospitals by 2030.
• Cutting back on departmental spending. This will include stopping non-essential consultancy and reducing communication and marketing budgets.

Public sector pay rises

Proposed public sector pay rises account for more than half of the financial ‘black hole’, but the government clearly doesn’t have an appetite for that particular fight.

Instead, the government has accepted recommendations for above-inflation pay rises. Part of the justification is that strikes are expensive for the economy and reduce productivity. About 1.3 million NHS workers, plus some 500,000 teachers are in line for a 5.5% pay rise. Junior doctors will get an average of 22.3% extra over two years. Armed forces staff will see a 6% pay rise, while civil servants will get about 5%.

Tax rises ahead?

Given that the government hasn’t plugged the financial ‘black hole’ with the recently announced cuts, it does raise the strong possibility of tax rises. We already know about some of these, including:

• Private school fees to be subject to 20% VAT from January 2025.
• Abolition of the non-domiciled tax status regime. This will be replaced by a residence-based regime from April 2025.
• A 3% increase in the energy and gas company windfall tax from November 2024.

However, the Chancellor has said that she will need to make ‘difficult decisions’ about ‘spending, welfare and tax’ in her Autumn 2024 budget. In order not to break Labour’s manifesto commitments, she won’t be able to raise income tax, national insurance or VAT. This may mean that she looks at raising more through capital gains tax and inheritance tax. It’s also possible that she makes changes to pension tax relief, restricting the higher reliefs available to higher and additional rate taxpayers.

Of course, the Chancellor can also raise money reasonably uncontroversially via ‘sin taxes’ on tobacco and alcohol. Raising fuel duty, which has been frozen at 5% since 2011, is another possibility.

Preparing for tax raises

It’s difficult to prepare for tax rises unless you know what they will be. We will, of course, give you more details as they become known. However, if you are going to be affected by known tax rises, such as VAT on school fees, we recommend you talk to one of our tax specialists. They’ll be delighted to help you with your tax planning.