Spring Budget 2024 Predictions

Following Jeremy Hunt’s delivery of the Autumn statement, there was optimism surrounding the possibility of tax cuts in the upcoming Spring budget, slated for March 6, 2024. Initially, it was speculated that the Government might have up to £24 billion in fiscal headroom to allocate towards tax reductions.

However, recent news of the UK slipping into a recession, signifying two consecutive quarters of GDP decline, has tempered expectations. The economic downturn has naturally impacted tax revenues received by the treasury, potentially limiting the available fiscal headroom to around £12 billion for tax cuts. Consequently, this reduced fiscal space is likely to curtail the scale of tax reductions envisioned by Jeremy Hunt.

Nevertheless, with the looming general election favouring a Labour majority government, the Conservative government remains motivated to deliver tax cuts. This final budget before the election holds significant weight, potentially influencing voter sentiment. The recession’s effect on public opinion may further tilt the electoral landscape in favour of Labour.

Given these political dynamics, the Conservatives are expected to alleviate the tax burden on taxpayers, possibly offsetting the costs through future spending cuts. The impending general election, likely around November, adds urgency to retaining as many seats as possible.

However, should Labour assume power, typical post-election trends suggest a potential rise in taxes within their first year. This could involve rolling back some of the tax cuts implemented by the Conservatives or introducing tax increases to fund their policy.

Navigating the tax landscape in the coming year promises to be challenging, characterised by potential tax cuts followed by subsequent increases, making long-term planning uncertain.

Income Tax

Income tax rates and thresholds are currently as follows:

ThresholdRate
£0 – £12,5700%
£12,571 – £50,27020%
£50,271 – £125,14040%
£125,141 and above45%

Rumours surrounding Rishi Sunak’s leadership campaign pledge to reduce income tax indicate a possible 2% cut to the basic rate, potentially reducing it from 20% to 18%. Such a move would positively impact take-home pay, with individuals earning £35,000 potentially seeing an increase of around £449, and those above £50,270 benefiting by £754.

However, the freezing of tax thresholds since April 2021 has resulted in fiscal drag, pushing many individuals into higher tax brackets despite stagnant real incomes. A fairer approach to tax reduction could involve adjusting these thresholds in line with inflation, potentially raising the personal allowance to around £15,000 and expanding the basic rate tax band beyond £60,000.

National Insurance

The main rate of National Insurance was cut from 12% to 10% in the Autumn Statement and was well received.

The main difference between National Insurance and Income Tax is that Income Tax applies to all income (interest, dividends, salary, pension etc) whereas National Insurance only applies to earned income, largely salary, pension and self-employed profits.

We consider it unlikely that we will see a further cut to National Insurance instead of Income Tax, given that the Conservatives will seek to benefit as many people as possible and by further cutting National Insurance, those who receive most of their income by way of investments will not see a benefit.

Inheritance Tax

Inheritance Tax remains a divisive tax and there are always rumours of cuts or possible abolishment before every Budget.

Whilst abolishing Inheritance Tax would make headlines, we consider it unlikely to be abolished in this budget given that it would create a £6bn tax gap and it would only benefit a small amount of taxpayers.

One of the main criticisms of Inheritance Tax is that due to the way it works, is that it affects estates in the middle disproportionately to higher value estates.

For example, a married couple with an estate valued at £1.5m (made up of mostly the family home, with cash and other investments, with little room for gifting) would pay Inheritance Tax of £200,000.

If another married couple had the exact same estate, plus a family business worth £30m, they would pay the exact same amount of Inheritance Tax despite being considerably wealthier due to the availability of Business Property Relief.

Therefore, we think a more likely proposition is that Inheritance Tax could be cut, possibly by raising the thresholds, which could be financed by changes to Business Property Relief.

We wouldn’t expect Business Property Relief to be abolished however, as by doing so, it would result in businesses needing to be broken up or heavily financed to pay the 40% Inheritance Tax charge, which would be bad for the economy, but we consider a cap on the amount of Business Property  Relief available may be an option, capping it at £10m for example could be an option as with Business Asset Disposal Relief under Capital Gains Tax which is capped to £1m (previously £10m).

We don’t think any changes to Business Property Relief will apply in this budget however given that the election is round the corner, but it remains a possibility for the future.

High Income Child Benefit Charge

Child benefit begins to be repaid by families where the higher earner earns more than £50,000, with all of the child benefit being repayable when income increases above £60,000. This was set in 2013 and has not increased with inflation.

This is problematic for a number of reasons. Firstly, it disproportionately penalises those households where one parent is working and one parent is looking after the children. If both parents worked and earned £50,000 each, they would be entitled to keep the full benefit compared to a single earner on £60,000 who would have to repay it in full. Households with children are clearly more likely to have a single-earner.

The other issue is that £50,000 was worth significantly more in 2013 than it is now, so it is impacting significantly more families who previously would not have earned enough to repay the child benefit.

This is being lobbied by various groups, one being Martin Lewis who has written to Jeremy Hunt in respect of the above and it is expected that we will see changes to the way the High Income Child Benefit Charge operates.

The simplest measure is to raise the thresholds with inflation, and if inflation adjusted since 2013, the £50,000 threshold would be increased to £67,000 which would be a welcome change for those who are now caught by the charge as a result of their salary increasing with inflation.

Capital Gains Tax

The annual exemption, being the amount of capital gain which an individual can make in a tax year before paying tax, was £12,300 in the 2022/23 tax year, which has decreased to £6,000 in the 2023/24 tax year, and is going to decrease to £3,000 in the 2024/25 tax year.

This will bring more investors within the scope of Capital Gains Tax. We wouldn’t expect many material changes to Capital Gains Tax in this budget.

However, if Labour were to form a government, it is possible that Capital Gains Tax may be one area in which they seek to raise further tax. There have been rumours for a while that Capital Gains Tax rates will be increased to match Income Tax rates and this is something that we may well see under a Labour Government.

VAT  

We don’t expect to see many changes that impact businesses in this budget, but some changes may occur.

One rumour is that the VAT registration threshold could rise from it’s current limit set in 2017 of £85,000. The Government has previously confirmed this will not increase until 31 March 2024, so we may well see an increase announced in this budget.

There is evidence to suggest that small businesses, deliberately keep their revenue below £85,000 in order to prevent the need to register for VAT, therefore making them less competitive and an increase to the threshold would be a welcome boost to those small businesses.

Employment Taxes and Incentives

The Government are trying ensure people work for longer, and also trying to incentivise those who have retired to return to work.

The changes to pensions announced in the Autumn Statement will help with that, particularly for high earners and we may well see further incentives to encourage more people back to the workforce.

One option is by reducing the rate of employers National Insurance, currently 13.8%. Given the large increase to National Living Wage, this will increase the cost of employment for many businesses. The news that we have entered into a recession may also have an impact, as typically unemployment increases during a recession. However, the recession is only marginal and likely we are now already out of it.

Reducing the rate of employers National Insurance would therefore help protect workers and reduce the cost to businesses. One of the key targets of the Government was to grow the economy, businesses will need to see changes to help them achieve this target.

There may also be further incentives announced to ensure unemployment doesn’t rise, such as grants or subsidies when employing younger workers similar to what we saw during COVID, or possibly further incentives to get people back into work who have previously left the workforce.

Conclusion

It is important to note that these remain predictions at this stage and as of writing nothing has been confirmed with respect to the budget.

It is expected that this will predominantly be a tax-cutting budget given the general election, and we have analysed the key areas we think may be targeted. There will, of course, be many further announcements which we will analyse in due course.

Tax cuts should be treated with caution, particularly with a possible Labour government towards the end of the year and the fact we are officially in recession as both factors could lend itself to an increase in tax in due course.

If Labour are elected, we would also expect an emergency Budget shortly after.