UK Chancellor of the Exchequer Rachel Reeves is set to deliver the first budget from a Labour government in 14 years, but what will it entail? Apparently, “difficult decisions” have been made in the Autumn Budget 2024, but how will the wealthy, private banking and the markets react? PBI asks the experts
Susannah Streeter, head of money and markets, Hargreaves Lansdown
The FTSE 100 looks set to open lower, as uncertainty swirls about the contents of the UK Budget, the first from a Labour Chancellor in 14 years. UK investors are braced for a shovel of tax hikes to fill a yawning black hole in the UK government’s finances. There is speculation that Rachel Reeves will try to find ways to raise revenue and cut spending to cover a shortfall of up to £40bn. What seems certain is that low earners will escape any tax hikes, with yesterday’s announcement of an increase in the minimum wage, indicating the priorities for the government. Prime Minister Keir Starmer has promised the payslips of working people will be protected, so there’s an expectation that employers may bear the brunt of tax rises, most likely through increases in National Insurance.
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Investors with equity holdings may also be targeted through a higher capital gains tax or the ending of inheritance tax relief on small cap firms, quoted on AIM. There are concerns that this may be counter-productive to the government’s aim to stimulate investment in UK assets. Retail investors are enthusiastic participants in the London stock market, and CGT tax nudges also risk disincentivising investment, which could make it harder for UK-listed firms to grow.
But Ms Reeves is likely to railroad such criticism with initiatives for a bazooka of investment spending to boost UK growth. The details of how debt rules will be changed to enable the government to borrow more without breaking its self-imposed borrowing limits are set to be announced. This strategy has been widely trailed to avoid a temperamental attitude from bond investors breaking out, and so far, it appears to have done the trick, although institutions financing government borrowing will keep a keen eye trained on what the swelling investment budget will be spent on. Already her expected Budget plans have been judged by bond dealers to push UK government bond issuance towards £300bn this year, around a 6% increase on the existing target.
Any sign of profligacy may well be punished by investors demanding a greater return to hold UK debt. Already nervousness has increased, with UK gilt yields pushing higher to around 4.3%, but they are still lower than levels reached in July. Part of this rise has been down to changing interest rate expectations and overall, markets still appear quietly confident that the Chancellor will keep focusing on carving out a reputation for prudence and responsibility. It’s looking unlikely that investment pledges announced today will max out the government’s new borrowing facility under the rule change.
While housebuilders, construction firms and companies providing the backbone for renewable energy are likely to benefit from increased investment spending, businesses in the gambling sector have been steeling themselves for fresh duty hikes. An increase in remote gaming duty is looking likely and although it will pile fresh pressure on companies already facing stricter regulation aimed at limiting problem gambling, it’s unlikely to be a huge game changer for the industry.
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By GlobalDataDaniel McAfee, head of legal operations, Lawhive
The Chancellor may consider increasing CGT rates to raise additional revenue, particularly as the government seeks to address budget deficits and fund public services. Aligning CGT with income tax rates could also be viewed as a step towards a more equitable tax system, addressing concerns that the current regime disproportionately benefits wealthier individuals who derive a significant portion of their income from capital gains rather than employment income.
Aligning CGT with income tax rates could significantly increase the tax burden on high-net-worth individuals and business owners. These groups often rely on capital gains from investments, business sales, or property disposals. A higher tax rate might discourage investment, reduce the attractiveness of entrepreneurial activities, and lead to more aggressive tax planning or even relocation to more tax-favourable jurisdictions.
Reintroducing tapering for longer-term gains could incentivise long-term investments by reducing the tax burden for assets held over extended periods. This approach encourages stability in the investment market and rewards patience, potentially leading to a more stable economy. The US model, where short-term gains are taxed at higher rates than long-term gains, demonstrates the potential effectiveness of this approach.
Reducing CGT exemptions, such as placing a cap on private residence relief, could have a significant impact on homeowners, particularly those with high-value properties. This could lead to a slowdown in the high-end property market as homeowners may be reluctant to sell properties that exceed the exemption threshold, thereby reducing market liquidity. Additionally, this could place downward pressure on property prices, particularly in areas where property values are high.
Introducing CGT on disposal upon death, in addition to inheritance tax (IHT), could substantially affect estate planning strategies. The combination of CGT and IHT would reduce the value of inherited assets, making it crucial for individuals to reassess their estate planning approaches. This change could lead to a greater reliance on lifetime gifting strategies, the use of trusts, and other tax-efficient structures to minimise the combined tax burden.
Claire Trott, divisional director retirement Planning and holistic planning, St. James’s Place
The government’s increase in the national living wage to £12.21 an hour (£22,222 pa) will drive a rise in Auto-enrolment contributions for those impacted and will also reduce the increase in pay in their pocket a little as individuals will not only have to pay tax and national insurance on the increase but also £70 of pension contributions a year (35 hours a week worker). Having said that, they will benefit from an additional £42 a year from their employer.
It should be noted however that many employers offer more generous pension schemes, and these figures would therefore be different.
Lily Megson, policy director, My Pension Expert
It’s vital that government tread carefully with this Budget, particularly with regards to one of people’s most important assets: their pensions.
Rumours have flurried in recent weeks over the barrage of aggressive fiscal policies Reeves could use to boost tax revenues. The has led to a real anxiety amongst savers about what the future holds, with many still reeling following years of financial instability. This instability paired with policy whiplash has bred a culture of fear among Britons that must not be underestimated.
Raiding our already-eroded savings and pension pots to claw back tax revenue is not the answer. Yes, balancing the books is essential, but so is savers feeling secure and confident in their financial and retirement planning. Policymakers must remember that short-term fiscal gains cannot come at the cost of long-term consumer security.
With this Budget, if the government enacts pension policy shifts mindfully and with restraint, it has a rare opportunity to begin restoring public confidence, rather than instead increasing their financial burden and fuelling resentment. Let’s make sure this Budget strengthens, rather than weakens, the public’s faith in their financial future.
Nick Homer, Head of Market Management – Corporate Risk, Zurich Insurance
Additional measures that help people that have suffered long term sickness back into the workplace are clearly welcome. As revealed in our report with the CEBR earlier this year, long term sickness is set to cost the economy more than £66bn a year by the end of the decade unless more is done to help people back to work.
Mental Health accounts for almost half of all long-term sickness in Britain, yet we know that getting back into work can help mitigate mental health challenges for people. And while getting people back to work is an important step in helping their recovery, it is important to ensure that more employers provide vocational rehabilitation services to ensure that once someone returns to work, they are able to stay in work. But in highlighting the importance of vocational rehabilitation, it is also vital that the Government recognise how employers access this often via group income protection insurance, rather than purchase a virtual reality service directly themselves.
Gilbert Verdian, founder and CEO, Quant
The imagined ‘mass entrepreneur exodus’ makes for a good headline, but it is more rhetoric than reality. There are many, many more of us entrepreneurs who are committed to staying put and paying our fair share. Nowhere else can match London when it comes to talent, capital raising, and stable regulation. These advantages have been built up over centuries of competitiveness and innovation and – regardless of tax tweaks – are here to stay.
It may be painful in the short-term, but this is the budget we need to have. We need to remember that in the long run, this will increase government investment in large infrastructure projects and public services, boosting the health of the whole economy. Ultimately, the Budget can be seen as a catalyst for future growth.
Russell Andrews, head of wealth & asset management EMEA, FIS
The host of new tax changes in today’s budget will no doubt be causing high levels of stress for investing Brits. Updates, like the rise in capital gains tax, will be leaving them wondering how their portfolios and finances will be impacted.
Wealth and asset managers should be on hand at this time to provide much needed advice and clarity. This could involve proactively reaching out to clients, helping them fully understand the implications of the budget, as well as helping them reassess their planning with long-term goals in mind. Additionally, now is the time to help prevent any ill-advised reactionary decisions.
This should be a straightforward task for the wealth and asset management industry. The changes in today’s budget have been expected for a few weeks, meaning managers should already be well positioned to advise customers, as well as reassure them that plans have been made to ensure their long-term goals have been kept on track.
Sarah Coles, head of personal finance, Hargreaves Lansdown
The change is a blow for investors. This could have been worse, with suggestions of a doubling of the rate, but it’s scant consolation for anyone hit with a bigger tax bill.
This doesn’t just affect those who are hit with a far bigger bill, it also makes investment less attractive for newcomers who don’t want to have to get to grips with a new tax risk. Already far fewer people in the UK invest than elsewhere in the world, and this could compound the problem. For existing investors, there’s a danger this will drive investor behaviour, and people will focus on tax considerations, rather than the investments that make the most sense for their circumstances. There’s also a danger they may hoard the assets – possibly until their death.
It comes on top of the slashing of the tax-free allowance over the past couple of years from £12,300 a year in 2022/3 to just £3,000 in the current tax year. Investors also have to cope with the fact that frozen income tax thresholds have pushed more people into higher rate tax – automatically pushing up their capital gains tax rate. A combination of all these things means more people face paying more of this tax.
Talking about things like capital gains tax as ‘wealth taxes’ obscures the fact that many people on average incomes, who’ve invested carefully throughout their lives, can face a tax bill when they rebalance their portfolio or sell up to cover their costs later in life. The annual allowance of £3,000 doesn’t stretch particularly far when you’re selling an investment you’ve held for 30 years or more, so investors should consider how to protect themselves.
The government has said it’s committed to driving growth and investment in the economy, and investors holding shares in companies are a critical part of this picture – not least because UK retail investors are enthusiastic holders of UK equities: 26.4% of assets managed in the UK are held directly for retail investors. The tax environment should be built to encourage investment for the long term, supporting investment in growing businesses and returns for investors, to boost long-term resilience.
It’s disappointing the government has decided to hike this tax without considering counteracting it with changes to taxes on investors more broadly. It means on top of this new tax blow, they pay 0.5% stamp duty on buying shares, one of the highest rates in the G7. Profits made by the company invested in are subject to corporation tax. UK stocks are often popular for income, but dividend tax allowance has been slashed to £500. Meanwhile, the capital gains tax allowance has been reduced to £3000 for individuals (just £1,500 for Trusts), the lowest rate since 1982.
If capital gains tax is on your radar now, bear in mind that by investing through a stocks and shares ISA, you can avoid capital gains tax completely. Money paid into a pension will also grow free of CGT – plus you get tax relief on contributions into the bargain.
