October budget predictions: what could Rachel Reeves announce?

Rachel Reeves has said her first budget on October 30 is a chance to “reset” the UK economy and boost investment.
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 on 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.
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.
Here we look at some of the chancellor’s options for the budget.
• What could the autumn budget mean for you?
The chancellor has confirmed she will introduce a new “investment” debt rule at her maiden budget on October 30, a decision that will free up more than £50 billion in borrowing space to fund long-term capital spending projects. Treasury sources said Rachel Reeves would target a measure of public sector net financial liabilities as a percentage of GDP as her new fiscal rule — a shift that would free up £53 billion for Reeves, according to estimates from the Institute for Fiscal Studies. The current debt rule requires the government to reduce public sector debt in the fifth year of forecasts produced by the Office for Budget Responsibility.
The new rule would be governed by strict “guardrails”, the chancellor said, and the additional borrowing would not be used to fund public sector pay deals or the day-to-day functioning of government. Reeves said she would “not be using all the headroom available” and the government would maintain a “substantial” fiscal buffer to keep debt falling within the next five years and reassure investors. Analysts have speculated that the government will borrow up to £25 billion to maintain more than £30 billion in headroom.
Reeves had seriously examined imposing national insurance on the money that companies put into their employee pensions, which would have raised about £15 billion. The plan was scrapped amid warnings, including from Lord Blunkett, the Labour peer, that firms would respond by reducing future pension contributions, further reducing people’s retirement income. Instead, Reeves has opted for a wider increase in firms national insurance contributions. 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.
Rachel Reeves will use her budget to increase capital gains tax (CGT) on the sale of shares and other assets but will not change the rate for second homes. The Times has been told that capital gains on profits from the sale of shares, which is currently levied at a higher rate of 20 per cent, is likely to rise by “several percentage points”.As well as raising capital gains on share profits, Reeves is also expected to end some reliefs in the current regime to increase potential revenues as she seeks to repair the public finances and avoid a return to austerity. Ministers have discussed going further but there are concerns that people would deliberately defer selling assets in a bid to avoid being hit by higher rates.
The chancellor will leave the rate of capital gains tax on the sale of second homes and buy-to-let properties untouched amid concerns that increasing it would cost money.
As a result of the expected changes to CGT 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.
The housing market is the busiest it has been for four years, in part because landlords have been trying to sell up before this week’s budget, especially in London.
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.