As the UK's October budget for the 2025/26 tax year approaches, there are several potential tax changes that might be introduced under Chancellor Rachel Reeves and the new Labour government.
How might Labour change UK tax rules in the UK October Budget 2024?
We've been paying attention to what Labour have been signalling, and what they might be considering.
Here are five possibilities based on their current plans:
1. Changes to Pension Tax Relief
Labour is reportedly considering reforming pension tax relief by introducing a flat 30% rate.
Currently, pension contributions up to the largest of £3,600 or 100% of a worker's annual earnings are eligible for tax relief, and the relief applies at the worker's marginal rate. This has historically been particularly useful for high-rate taxpayers that want to reduce their earned income down by increasing pension contributions, often by salary sacrifice.
A flat 30% relief would mean higher earners receive less tax relief, while basic-rate taxpayers could see a boost to their pensions. This measure could raise around £3 billion annually by shifting the tax burden towards wealthier individuals.
2. Reform of Inheritance Tax (IHT) Loopholes
Inheritance tax currently applies to estates valued above £325,000, but many exemptions allow wealth to be passed on tax-free, particularly through business and agricultural reliefs.
Labour is looking to close some of these exemptions, which could increase tax revenue by up to £4.8 billion per year.
This move would affect wealthier estates, and family-owned farming and agricultural businesses significantly.
3. Review of Capital Gains Tax (CGT)
Another area under scrutiny is capital gains tax, which is levied on profits from the sale of assets such as property, shares, or collective investments schemes held within general investment accounts such as OEICs and Unit Trusts.
While Labour has not committed to raising the CGT rate yet, the Chancellor’s emphasis on “difficult choices” has led to speculation that this could be a target for reform.
Adjustments could involve aligning CGT rates more closely with income tax rates, a move that would primarily impact many British workers with investments.
This would mean that after allowing for the tax-free CGT allowance of £3,000, a higher rate taxpayer would have to pay 40% of their capital gain to the government after selling their asset or investment.
4. Council Tax Overhaul
Council tax is widely considered outdated as it is still based on 1991 property values.
Reeves might look to reform the system, potentially introducing a model based on current property prices.
While details remain unclear, such a change could address inequalities in the current system, particularly in areas with rapidly increasing property values. However, this system is also likely to significantly increase many families' monthly expenditure depending on the age of their property.
A lot of details around council tax remain speculative at the time of writing.
5. Inheritance Tax on Pensions
Currently, pension funds are exempt from inheritance tax. This is due to a variety of rules including trust law (as pensions don't technically form part of your estate) and the rules around pension freedoms.
The rules around the taxation of pensions and any death benefits are complex, and we'd recommend speaking to a financial adviser about this topic so that they can relate the rules to your personal circumstances.
These rules are expected by many to change after the October budget, as Labour may consider including pension pots within the IHT framework.
There has been speculation that they could introduce a pension nil-rate band or allow spousal transfers without tax, but anything beyond that could be taxed. This change could bring in significant revenue, given the increasing size of pension funds.
This does represent a significant challenge for many, especially those who have most of their wealth wrapped up within their pension pots.
How to plan for Labour's tax changes
These potential tax changes that are a part of the UK October Budget 2024 reflect Labour's focus on addressing the UK’s budget deficit, particularly in light of a £22 billion overspend revealed by a recent Treasury audit.
While the government has ruled out increases to income tax, national insurance, or VAT for most individuals, Labour are expected to use a variety of tax changes to play a critical role in balancing the books.
These changes are likely to affect you in a variety of ways, and if you're unsure on what to do, hold tight for now. Most of the information we are seeing is merely informed speculation and government signalling. Until we have a firm set of rules put forward in the October budget - it simply isn't worth panicking.
If you want to get ahead of the curve, or you're reading this after the budget has been announced and you need advice: we can help.
Getting in touch with one of our advisers is a great first step.
Get in touch using the link below.
Sources: [Independent], [Evelyn Partners], [De Pointe Opportunities].
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