October budget predictions: what could Rachel Reeves announce?

There have been weeks of gloomy scene setting from the Labour government about what to expect in Rachel Reeves’ first budget on October 30 and new borrowing figures underline the tight fiscal bind the new chancellor is in.Government borrowing has exceeded official forecasts by £6.6 billion so far this year, demonstrating how Reeves is grappling with overspending now and the need to fund extra public service spending in future. This has prompted fresh warnings from the Treasury of “difficult decisions” in the budget next Wednesday.The budget is expected to see employers’ national insurance contributions rise, while capital gains tax and gambling taxes have also come under the spotlight.
At the government’s investment summit last week, Reeves warned businesses that taxes will have to rise, arguing that political and economic stability is more important to business investment than tax levels. Rumours that tax breaks for entrepreneurs will be scrapped along with a broader rise in capital gains taxes on the sale of shares has prompted warnings from some in the business community that they will leave the country.
Reeves and Sir Keir Starmer, the prime minister, have insisted that Labour had never promised not to raise employer national insurance contributions. The party had ruled out raising the main rates of income tax, VAT and national insurance contributions for “working people”, but the government says the pledge never included businesses’ national insurance contributions, with Reeves arguing that it had promised not to increase key taxes paid by working people. This week, a government minister refused to say that someone earning a six-figure salary is covered by the working people promise.
The chancellor has said that “businesses get” the need for tax rises to balance the books.
“I don’t regard it as a dilemma between returning the economy to a path of stability on the one hand and ­attracting investment on the other,” she told reporters at the investment summit last week. “The precondition for bringing investment into a country is economic and fiscal stability.”
Starmer, meanwhile, shas aid suggestions that capital gains tax would rise to 39 per cent were “wide of the mark” but argued that other tax rises would not deter investment in the UK.
Reports have suggested that UK-based bookmakers could be hit with tax rises of up to £3 billion in the budget saw shares in gambling companies fall on Monday.
Reeves has promised that public spending will grow in real terms and that there will be no return to austerity. This pledge will almost certainly be funded by tax rises and some additional borrowing.
However, claims by Labour that the Conservatives’ fiscal mismanagement bequeathed them a £22 billion deficit that must be closed via “difficult decisions” have hit business and consumer confidence, despite the biggest annual growth upgrade in the G7 this year from the Organisation for Economic Cooperation and Development (OECD).
Here we look at some of the chancellor’s options for the budget.
• What could the autumn budget mean for you?
Jonathan Reynolds, the business secretary, hinted at the weekend that the chancellor could raise national insurance contributions for employers in the budget. Though Labour’s manifesto ruled out raising income tax, VAT or national insurance, Reynolds refused to say that this applied to the rate paid by employers as well as that paid by employees. Starmer refused to rule out the same rise when pressed repeatedly by Rishi Sunak, the opposition leader, at prime minister’s questions last week.
A one percentage point increase in employers’ national insurance contributions could raise about £8.9 billion a year.
John Caudwell, the billionaire founder of Phones4U and former Tory donor who switched to Labour at the election, cautioned against proposed changes to non-domiciled tax status, a system that excludes foreign-earned income from UK taxes.
“Anything that we do that might be negative to attract inward businesses and inward wealthy people, is a negative,” he told the BBC. “I’m not too worried about losing the odd few people to Monaco or wherever who want to avoid paying any tax. They’ve already gone, most of them. But there are issues all around the policies, that we have to be very careful of.”
Income tax
This year the Treasury will raise more than £1 trillion in taxes, according to the Office for Budget Responsibility. Some 30 per cent, or £303 billion, of that will come from income tax alone — it is by far the biggest revenue-raiser for the government.
The chancellor could increase this return further without lifting the main rates of income tax by lowering the thresholds at which those rates — 20, 40 and 45 per cent — kick in.
According to the Institute for Fiscal Studies (IFS), a think tank: “Reducing the personal allowance or the basic-rate limit … by 10 per cent, for example, would yield £10 billion and £6 billion a year in additional revenue, respectively.”
Income tax thresholds have been frozen for several years already, a policy first launched by Rishi Sunak in March 2021, dragging people up the tax system when they receive a pay rise.
Labour is expected to abandon plans to mount a tax raid on pension savings amid warnings that it would unfairly penalise up to a million teachers, nurses and other public sector workers. Senior Treasury officials are understood to have told Rachel Reeves that reducing the current 40 per cent level of tax relief on higher earners would disproportionately hit those of relatively modest incomes who work for the state.
At present, pension contributions up to a certain limit (typically 100 per cent of annual earnings) receive income tax relief. Pensioners then pay tax when they withdraw from their retirement pot. The system is intended to ensure that pensions are taxed once — when they are actually used.
However, critics say that some pensioners receive an income tax relief of 40 per cent or 45 per cent and only pay the basic 20 per cent rate of income tax.
The IFS estimates that if the chancellor limited the up-front relief on pension contributions to the basic rate of income tax, it would raise about £15 billion a year. Alternatively, making employers liable to pay national insurance on employees’ pension contributions could yield £12 billion in five years, according to the Resolution Foundation.
The chancellor could either increase the main rate of capital gains tax, which is typically either 10 per cent or 20 per cent, or expand the base of assets liable for the levy. Doing so would more closely align CGT with income taxes but could blunt investment.
Any such increase in the main rates of CGT or the type of assets exposed to it could be offset with inflation indexation. Right now, purely inflationary increases are subject to tax without any real increase in the value of the asset.
Reeves is expected to scrap or further reform business asset disposal relief, previously known as entrepreneurs’ relief, which allows people selling companies to pay a tax rate of only 10 per cent on qualifying gains, up to a maximum of £1 million of gains in their lifetime. The Treasury is thought to view the relief as poor value for money.
The government’s warnings about tax increases have prompted an increasing number of directors to weigh up plans to sell their businesses, according to new analysis.
A survey of business owners by Evelyn Partners, a wealth management and professional services group, has found that close to 29 per cent have accelerated plans for selling their companies over the past year and 23 per cent had acted because of concerns about higher capital gains tax.
At £8 billion a year, inheritance tax is one of the UK’s smaller taxes. Only about 4 per cent of deaths trigger the tax. However, it draws much scorn as it is regarded as double taxation.
There are several options available to Reeves to make the IHT system more effective.
The IFS said: “A good start would be ending, or at least capping, the unjustified exemptions for pension wealth, business assets and agricultural land — a change that would raise around £2 billion a year, assuming no behavioural response.”
Reeves could also abolish or cap the business and agricultural IHT relief. Shares in companies listed on the Alternative Investment Market can also be passed on IHT-free if held for more than two years before an individual’s death. Abolishing that relief could yield £1.1 billion.
Thinktank Demos urged the chancellor to introduce a banded system for inheritance tax based on the value of assets and to close a loophole that allows households to pass on estates to their children without paying capital gains tax.
Reeves has been warned that tax record deposits in Isa accounts by curbing tax reliefs risks suppressing much-needed investment. The chancellor could see the swelling of Isa deposits to record levels as an opportunity to raise tax revenue by lowering the annual £20,000 tax-free allowance.
Analysis of data published by the Bank of England showed that savers hold £375 billion in individual savings accounts, the highest level since the accounts were launched in 1999. In the past year alone Isa deposits have climbed 17 per cent, or £54 billion, from £321 billion, with monthly inflows reaching a record of £11.7 billion in April partly due to the tax year deadline falling in the month.
Ashley Webb, UK economist at Capital Economics, a consultancy, said: “While reducing the tax-free allowance on Isas would raise revenue for the Treasury, it won’t help lift the UK’s low level of investment.”
Tomasz Wieladek, chief European economist at T Rowe Price, the investment firm, said: “The UK doesn’t save enough as a country. That is one of the reasons behind weak investment. Given their historical low propensity to save, British savers need all the incentives to save they can get.”
It became a ritual of Conservative chancellors to postpone planned increases to fuel duty. In fact, since 2011, had fuel duty increased every year in line with the retail price index — an old measure of inflation — fuel duty would now raise an additional £19 billion a year for the Treasury.
There is a strong chance that Reeves does not follow this tradition, generating around £6 billion for the government. However, this cash injection is already baked into the OBR’s latest forecasts.
Doing so could steer motorists away from petrol cars and towards more environmentally friendly vehicles if dovetailed with boosting incentives to drive electric cars.
Consensus is hard to come by in economics, but one has emerged around the inefficiency of stamp duty. The OECD and the IFS have each called for it to be abolished at a cost of about £13 billion.
Any property sold for £250,000 or less is exempt. The next £675,000 is subjected to a 5 per cent levy, which reaches a peak of 12 per cent for the most expensive homes.
The IFS said that stamp duty “has a claim to be the most economically damaging tax in the UK. It makes both housing and labour markets less efficient, acting as a drag on growth.”
In July, the Treasury asked private equity firms and affiliated sectors to submit their thoughts on the tax treatment of profits made by private equity executives.
Executives of a private equity fund invest in the vehicle with investors, receiving what is known as “carry” or “carried interest” on profits, which is taxed at 28 per cent, the rate of capital gains tax, rather than the combined income tax and national insurance rate of 47 per cent. It is a key component of the remuneration of executives in the industry.
Subjecting carried interest to income tax rates could, in theory, make private equity executives liable for an additional £2 billion of tax, although this does not account for changes in individuals’ behaviour, which would potentially cut the tax take.
Shares of UK-based bookmakers fell sharply on Monday amid fears that the government could raise taxes on gambling companies. Reports suggest Reeves is weighing possible tax increases on the sector worth up to £3 billion.
Banks have benefited from not passing on the Bank of England’s interest rate rises in full to savers, receiving what is known as a wider “net interest margin”. Reeves could introduce a one-off tax to claw back some of this windfall.
Despite speculation and pressure from trade unions to introduce one, Reeves has ruled out a wealth tax.
She may, however, be tempted to create an entirely new tax moulded on an existing levy. Boris Johnson and Rishi Sunak did this in September 2021 when they created the health and social care levy, effectively an extra 1.25 percentage points on national insurance contributions. It was scrapped by Liz Truss and Kwasi Kwarteng in 2022.
Labour sources have also hinted that Reeves, after beating back speculation for months, is considering tweaking the fiscal rules to raise money for investment. Minimising the impact of the Bank of England’s bond sales on the public finances could generate around £15 billion.
Reeves has committed to balancing the current budget and reducing the debt-to-GDP ratio between the fourth and fifth years of the OBR forecast.
The chancellor is also considering switching to one of two alternative debt measures — public sector net worth or public sector net financial liabilities — that account for a broader net of the government’s assets.
Sanjay Raja, senior economist at Deutsche Bank, predicted that incorporating one of these definitions would act as a “sense check” on investment spending “whereby Treasury officials would be required to outline the merits of investment/borrowing to boost the supply side of the economy alongside potential growth”.
Incorporating PWNW or PSNFL would increase the fiscal headroom to around £60 billion.