23 September 2024
If you are covering Rachel Reeves' speech at the Labour party conference, please see the following comments from Rachael Griffin, tax and financial planning expert at Quilter. Rachael Griffin outlines Quilter's asks for the upcoming budget on 30th October:
"As the Labour government grapples with the challenge of filling the infamous £22 billion fiscal black hole, it faces not only significant political constraints but those of its own manifesto. The OBR has warned that UK debt is on an unsustainable path and Rachel Reeves has pledged no return to austerity. This suggests that without significant tax rises, the country faces a “spiral” of public debt. This daunting task is likely to result in a complex package of measures and will require careful navigation.
"There is little choice but to invest in growing our economy at a faster rate. Without this, we simply won’t ‘make ends meet’ as tax revenues won’t keep up with spending requirements. This means boosting government investment and supporting private sector investment and a favourable business environment. While it’s true that economic growth is essential to prevent debt from spiralling, it’s equally important to acknowledge that maintaining and improving public services—especially as demand for them increases—requires a candid conversation about tax. Where looking to raise tax revenues, it is crucial to maintain a sense of fairness, even as the primary objective remains revenue generation.
"One of the key strategies involves keeping tax thresholds frozen for the next three years, a move that, while not new, will continue to raise revenue as earnings increase. Additionally, the government may reassess inheritance tax (IHT) reliefs, particularly Agricultural Property Relief and Business Relief, with a view to potentially removing, capping, or redefining these benefits.
"We are not supportive of annual wealth taxes which are rarely, if ever, effective, and while equalising Capital Gains Tax (CGT) marginal rates is unlikely to generate the required revenue, removing the CGT uplift on death could encourage earlier wealth transfer and growth. Furthermore, there is speculation about aligning dividend tax rates with income tax rates, which could also be on the table.
"Below we detail some of the changes Labour could make that would improve the fairness of the current tax system. Similarly, there are requests that would help to avoid unintended consequences of Labour’s negative rhetoric and continue to meet the party’s stated aim of boosting investment in UK plc."
Balance inheritance tax (IHT) simplification with increased annual gifting exemption
"If Labour maintains the status quo for Inheritance Tax (IHT) and its associated thresholds or even opts to make it more punitive, then it must balance this with modernising gifting laws. There are hundreds of IHT reliefs, and the system is ripe for simplification but that should not necessarily mean that more people have to pay IHT. A fairer more equitable system could be something that Labour feel they can get behind.
"At present there are rumours of reform, specifically targeting Agricultural Property Relief (APR) and Business Relief (BR), cutting these reliefs could have unintended consequences for key sectors. Farmers and small business owners, who currently benefit from these reliefs, could face higher tax burdens, reducing their ability to maintain or transfer their businesses. Removing APR and BR may also stifle UK agricultural and family-run businesses, which are already under pressure.
"Nevertheless, simplifying the IHT regime and increasing the annual gifting exemption could ease the complexity of transferring assets and help families pass wealth on during their lifetime. Raising the gifting threshold would encourage earlier wealth transfer, reducing future IHT liabilities, and potentially boost consumer spending. Additionally, simplifying the system would decrease confusion and provide greater flexibility for estate planning. Striking a balance between supporting family businesses and simplifying IHT aligns with Labour's goal of fostering a more productive UK economy and presents a balanced option for the party this autumn."
Provide clarity on pension reforms to avoid missteps
"With widespread speculation around the upcoming budget and the prevailing rhetoric that it is going to be painful, there is increasing anxiety surrounding potential pension reforms. Rumours of restrictions on the 25% tax-free cash (TFC) lump sum have led to significant concern, particularly for those in or on the cusp of retirement. Plans such as these, if implemented without consultation and clear communication, could lead to a rush of ill-considered withdrawals.
"Retirees have long planned under the assumption that they could access this portion of their pension tax-free, and any sudden restrictions could force hasty financial decisions. Without transparent guidance on pensions, individuals may make detrimental choices based on hearsay with what is likely the most important and largest pot of money they have.
"The government therefore must provide clarity on what pension-related changes are not in scope to prevent poor decisions, particularly as any significant reforms could have long-lasting effects on retirement planning. Denying access to previously promised benefits would cause distress among savers, many of whom have structured their entire retirement strategies around the existing rules.
"By offering clear assurances and communication ahead of the budget, the government can help retirees avoid making rash, ill-advised financial moves as we are seeing from some at the moment, that could have ramifications for someone’s entire retirement."
Address the £100k-£125k "earning cliff edge" tax issue
"Families facing the "cliff edge" tax problem where one earner earns between £100,000 and £125,000 are dealing with one of the UK's most significant marginal tax traps. It’s understandable to think that this is a very nice problem to have but such a high-rate stifles motivation and subsequently curtails the tax take. The London School of Economics (LSE) estimates that the top 1% of earners pay 30% of all income tax revenues. As the personal allowances taper off in this income range, the effective tax rate spikes, particularly when combined with the loss of other benefits such as child benefit.
"Many families in this income bracket find themselves penalised, facing an effective marginal tax rate of up to 60% or higher, which discourages workforce participation and limits career progression.
"This is especially challenging for parents with young children, as crossing the £100,000 threshold also results in losing access to 30 hours of free childcare, further compounding the issue.
"Ensuring a smoother tapering of benefits or adjusting the thresholds could alleviate the disproportionate burden placed on those earning just over £100,000, making the tax system fairer and encouraging workforce engagement which contributes to a thriving economy. Such reforms would not only benefit individual families but also improve the economy by removing disincentives for high earners to continue progressing in their careers or face punitive taxes."
Child benefit: Peg eligibility to household income
"The outgoing Conservative government as one of their manifesto pledges said it would get the ball rolling on fixing the absurd issue with child benefit where many dual-income households earning just under the cap can still receive full child benefit, while single-earner households slightly above the threshold face a reduction or loss of this support.
"Labour has so far been tight-lipped on whether it would continue with this work. Labour should address this disparity, as it would be more equitable to peg child benefit eligibility to household income under £120,000, rather than individual earners. This would more accurately reflect the financial realities of modern families, ensuring that those most in need are not unfairly penalised. Such a reform would reduce the "cliff edge" effect currently in place for single parents and align child benefit with today's economic conditions. Reforming this threshold would ease financial pressure on families and ensure that the benefit continues to serve its purpose in supporting households raising children, especially during times of rising costs."
ISA simplification and encourage savers to invest more
"Labour has made good progress in this area with the decision to abandon the creation of a "British ISA." However, further simplification of the ISA system is still needed, particularly in promoting investment in Stocks & Shares ISAs. Over the years, ISAs have become increasingly complex, with multiple options causing confusion for savers. Limiting the number of new ISAs and focusing on encouraging investment in higher-return options such as Stocks & Shares ISAs should be high on its list of priorities. This serves multiple purposes; firstly, it helps encourage greater long-term saving amongst the nation and secondly it helps reach Labour’s aim of getting more money invested in UK plc.
"As part of this simplification process LISAs need to be looked at as a priority. They are a muddled product with their dual purpose of both saving for a first home and a retirement nest egg. Renaming the LISA to something like a "First Home Account" and removing the retirement element could make the product more attractive and easier to understand. Additionally, reducing the early access penalty from 25% to 20% would give savers more flexibility without punishing them during times of financial hardship. Reforming the LISA, alongside simplifications in the broader ISA landscape, could encourage more people to invest for the long term and navigate the housing market more effectively."
