Over recent weeks there has been continued speculation over announcements that the Chancellor may make in her second Budget on 26 November.
Following the first year in office for Labour, there remains a significant amount of pressure to balance the public finances amongst continued economic uncertainty. With inflation remaining at 3.8% and businesses and taxpayers already having seen a number of tax rises since the Covid-19 pandemic, Catherine Heyes, Head of Tax at PKF, outlines what we know so far.
Possible changes
Income Tax
Despite the 2024 manifesto pledge which stated that Labour would not increase National Insurance, Income Tax (basic, higher or additional rates) or VAT, the narrative from the Chancellor has now changed. While in September she stated that “manifesto comments stand”, when questioned on such rises she has since refused to rule out an increase to Income Tax. Despite this, the Chancellor has said that she will “ensure that we continue to support working people by keeping their taxes as low as possible”.
There are two ways in which we could see this happen i. Firstly, we may see an actual increase to the rate of tax, with rumours circulating of one pence and two pence increases. Could there be a return to the 50% rate of Income Tax for additional rate taxpayers? The 50% rate was last brought in in 2010 by Labour and subsequently reduced to the 45% rate by the coalition. The 45% rate currently applies for income above £125,140 in England, Wales and Northern Ireland.
Secondly, we could see a stealth move of extending the Income Tax threshold freeze beyond 2028, through fiscal drag.
National Insurance LLPs
The Chancellor raised National Insurance in last year’s Budget, resulting in the rate of employer National Insurance increasing from 13.8% to 15% from April 2025. This was seen by many as going against the manifesto pledge.
It is now widely speculated that there will be a change to the taxation of Limited Liability Partnerships, targeting people who trade through these vehicles and do not pay employers National Insurance. This would target professionals such as lawyers and accountants who often trade through LLPs.
The tax rules that exist currently ensure partners are treated as employees if they meet the following three conditions:
- Condition A: It’s reasonable to expect that at least 80% of the total amount payable by the LLP, in respect of the individual’s performance, will be ‘disguised salary’ i.e. the payment is fixed, or not varied or affected by the overall profits or losses of the LLP
- Condition B: The mutual rights and duties of the members of the LLP, both between themselves and between them and the LLP, do not give the individual ‘significant influence’ over the affairs of the LLP
- Condition C: The individual’s capital contribution to the LLP is less than 25% of their ‘disguised salary’.
The partner can be treated as self-employed, however, if they don’t meet at least one of these conditions. The purpose of these rules is to ensure that partners who are, in reality, employees are taxed as employees, and vice versa. We will have to see how far these changes could go and the impact that this may have on those that are truly self-employed.
Mansion tax
Following previous speculation around a wealth tax which had been rumoured could have been a 2% levy on individuals with assets over £10 million, it is now anticipated that there will be a ‘mansion tax’.
A mansion tax would be another attack on wealthier individuals, with a proposed one per cent levy on the portion of property values exceeding £2 million.
Salary sacrifice
Rumours surrounding salary sacrifice have been in play for months, especially since the increase in employers National Insurance.
Not all benefits can be salary sacrificed, but pensions, workplace nurseries and EV cars are examples of ones that can.
If implemented correctly, the scheme will generate a cost saving; it reduces taxable income, meaning lower Income Tax and National Insurance contributions.
Pensions
Fear has grown that tax-free lump sums from pensions will also be targeted in November, however the Government has refused to be drawn into commentary. This has been causing panic, with a large number of people making withdrawals from pension funds in anticipation of this change. At the moment it is possible to withdraw a tax-free lump sum of up to £268,275.
ISAs
Could ISA tax-free allowances be cut next month, potentially by up to half from £20,000 to £10,000? This is despite pressure from a group of senior MPs.
Property taxes
Speculation regarding changes to property taxation have been in circulation for some weeks. This could include:
- National Insurance for landlords
- Restrictions to the Principle Private Residence Relief which exempts the main residence from Capital Gains Tax
- Exemption from Capital Gains Tax for more expensive properties
- Abolishing Stamp Duty Land Tax and replacing it with a property sales tax
- Introducing a national property tax
The property tax system is already complicated in the UK with a myriad of rules; we wait and see what any changes might bring in terms of taxes and simplification.
Low value imports
In good news for UK retailers, the loophole which allows overseas online retailers to import low-value goods to the UK without paying customs duties could be scrapped. This currently enables goods up to £135 in value to enter the UK duty free, where the UK sees a large influx from countries such as China. This change would follow similar reforms in the EU and United States. Whilst good news for some, this will hit the pocket of consumers who will no doubt have this cost passed on to them.
A more aggressive HMRC
We expect HMRC to continue to focus on “cracking down on avoidance”. We expect the Chancellor will want to show that the tax gap continues to be closed and people are paying the correct amount.
Given the recent press around the abuse of the R&D regime, there could be more targeted anti-avoidance rules. The Government may also focus on offshore arrangements, trusts and property-related avoidance. We might see stronger use of penalties/prosecution for serial tax avoiders and advisors who enable them. There is also likely to also be a focus on more aggressive tax enquiries.
Changes already confirmed
Changes which were announced in last year’s Budget and which we will continue to see the impact of include:
- Business Property Relief and Agricultural Property Relief, restrictions to the available relief to £1million
- Reform of the UK carried interest regime from 6 April 2026
- Bringing undrawn pension within the scope of Inheritance Tax from April 2027
- The Business Asset Disposal CGT rate increasing further from 14% to 18% from April 2026.
If you would like to discuss the impact of any of these changes, please contact Catherine Heyes.
