How will Labour’s budget in October affect me?
Paula Veysey-Smith • 30 September 2024
On the 30th October 2024 the Government will deliver the first Labour budget for over a decade. More than that, it will be the first budget ever to be delivered by a woman, Chancellor Rachel Reeves.
So, what can we, the tax payer, expect? Especially after she has already told the BBC that it would involve some “difficult decisions” on tax, spending and benefits aimed at addressing the significant public finance shortfall of £22 billion.
No financial crystal balls currently exist but if they did, we can be fairly certain they would foretell the following!
- Pension Tax Relief Changes: One of the more contentious proposals is to introduce a flat 30% pension tax relief rate. This change would primarily affect higher earners, increasing their effective tax burden while providing a boost for basic-rate taxpayers. It's estimated that this could raise around £3 billion annually.
- Inheritance Tax Reforms: Labour has already indicated its intentions to close loopholes in the inheritance tax system, potentially making reliefs less generous. Ending certain exemptions, like those for offshore trusts and agricultural properties, would also generate significant much needed additional revenue.
- Council Tax Revisions: There is a call for council tax reform, addressing its outdated valuation system from 1991. This could lead to more equitable taxation based on current property values but would almost certainly see larger properties attracting higher council tax bills.
- Changes to Capital Gains Tax: Although Labour has committed to not increasing income tax or national insurance rates, it has left the door open regarding capital gains tax. There's speculation about raising rates or changing how gains are taxed upon death and this is almost certainly an area of tax that will feature in the budget.
- VAT on Private Schools: Labour plans to end the VAT exemption for private schools, which could begin to be implemented in the 2025-26 school year. This policy has already been announced causing much criticism and it is still unclear how much impact this will have on the budget black hole.
- Increased Business Taxes: With the recent increase in Corporation Tax to 25% it is unlikely that any major changes will be made this time around. However, there will likely be a roadmap for business taxes, with an emphasis on reducing tax avoidance and increasing compliance efforts.
- Windfall Tax on Energy Companies: A long anticipated measure, Labour is expected to extend the current windfall tax on oil and gas profits, increasing the levy by three percentage points.
Conclusions
With the already announced focus on Wealth Taxes the above measures would certainly be in line with this policy. It also falls in line with Keir Starmer’s stance that those with the broadest shoulders should bear the heavier burden.
Labour's approach is framed around repairing what they characterise as financial mismanagement by the previous administration. As they prepare for this budget, both Rachel Reeves and Keir Starmer have indicated that the measures could be “painful” but necessary for long-term fiscal health.
There will be many more developments and updated analysis before the budget day which, at M:Power, we will be keeping a close eye on. We will also publish the major headlines from the budget, with a focus on what it means for small businesses in the UK, so please look out for that.
Key changes in Employer National Insurance (NI) rates and thresholds for the 2025-26 year have meant advice on the tax efficient salary for Directors has significant altered.
HMRC are starting to send out letters to sole traders and landlords in the initial steps towards Making Tax Digital for Income Tax. If you receive one of these letters do not panic, help is at hand. So let’s answer your most asked questions about Making Tax Digital. What is Making Tax Digital for Income Tax? Making Tax Digital for Income Tax (MTD for ITSA) is a UK government initiative aimed at modernising the tax system. It will require individuals and businesses to keep digital records and submit tax information to HMRC using compatible software. It is part of a broader initiative to digitalise tax returns and follows on from the changes already implemented for VAT reporting. Will Making Tax Digital affect me? MTD for ITSA will affect individuals who: Are self-employed (e.g. sole traders) and/or landlords (earning income from property). Have a total income over £50,000 per year (combined from self-employment and property). Are currently required to complete a Self-Assessment tax return. From April 2026 , MTD for ITSA will be mandatory for those earning over £50,000. From April 2027 , this threshold will reduce to £30,000. What will I have to do if my earnings are over the threshold? You will need to keep digital records for income and expenses which will mean using MTD compatible software. This will be a major change for those of you still keeping paper records. Instead of submitting an annual self-assessment return you will need to submit quarterly updates 4 times a year to HMRC. At the end of the tax year an End of Period Statement (EPOS) and a Final Declaration will need to be submitted which essentially replaces the current Self-assessment return. All of these will be required digitally, paper records and manual calculations will no longer be accepted. This means that instead of 1 annual return you will need to make 6 submissions! So what software do I need to use to keep digital records? Acceptable software include: QuickBooks Xero FreeAgent Sage or, HMRC-recognised spreadsheet tools with bridging software ( not highly recommended ) No more shoeboxes of receipts or manual books — everything must be digitally recorded. When will I need to register for MTD? You’ll need to sign up for MTD for ITSA before April 2026 . This is a deadline and not a target, signing up early is always advisable. HMRC will provide a service for you to do this but having the guiding hand of an accountant will make this a much easier task.
What are these jumbles of letters and numbers? When you start a new job, receive a pension, or change employment, you’ll likely notice a tax code on your payslip. Although, to many, this code looks like a random combination of letters and numbers it is actually the crucial piece of information that determines how much tax is deducted from your income. Understanding your tax code will empower you to check that you’re paying the correct amount of tax and, if necessary, correct the code with HMRC. What is a Tax Code? A tax code is used by your employer or pension provider to calculate how much income tax to deduct from your pay or pension. It’s based on your Personal Allowance (the amount you can earn tax-free each year) and any other factors that affect your tax situation, such as additional income or benefits. For the 2024/25 tax year, the standard Personal Allowance is £12,570 and will remain at this level for the 2025/6 tax year. This means most people can earn up to this amount without paying income tax. Common UK Tax Codes and Their Meanings Common codes can be broken down into three main categories: Standard Tax Codes 1257L: This is the most common tax code for people with one job or pension. It reflects the standard Personal Allowance of £12,570. BR: Stands for Basic Rate (20%). This code is used when all your income from this employment or pension is taxed at the basic rate, usually because you have more than one job or pension and the Personal Allowance has already been used up. D0: This means all your income is taxed at the higher rate (40%). D1: This code applies when all your income is taxed at the additional rate (45%). 0T: Used when your Personal Allowance has been used up, and all your income is taxable. Although similar to BR this code applies to all tax rates (20%, 40% & 45%). Emergency Tax Codes The term ‘Emergency Tax Code’ is often misunderstood. This code is most often used when HMRC does not have the information to calculate the correct tax code for an individual and should be corrected when the information does become available. Usually the code 1257L W1/ M1 is used which means that the Personal Allowance is being applied. The main difference is that tax is calculated on a weekly (W1) or monthly (M1) basis rather than cumulatively. You would most usually see this if you’ve started a new job and your previous tax details are not yet available 0T W1/M1 is another emergency tax code but this means that no Personal Allowance is being applied, leading to higher tax deductions. Worldwide and Non-Resident Tax Codes NT: No tax is deducted from your income. This is usually for non-UK residents or people with special tax arrangements. K: This code is used when untaxed income (e.g., state benefits or company benefits) exceeds your Personal Allowance, meaning additional tax is due. If your tax code begins with an S then it is a Scottish code and similarly if it is a Welsh code it will begin with a C . Other Special Tax Codes There are a number of letters that may also be applied to a tax code: T: Used when HMRC needs to review your tax code (e.g., for complex tax situations or multiple income sources). Y: For people born before 6 April 1938 who qualify for a higher Personal Allowance. L: Indicates entitlement to the basic Personal Allowance. M: Given to someone receiving the Marriage Allowance from their spouse. N: Given to someone transferring part of their Personal Allowance to their spouse. How to Check and Change Your Tax Code Your tax code will appear on your payslip, P60, or P45. If you think your tax code is incorrect, you can: Check Online: Log into your personal tax account on the HMRC website . Contact HMRC: Call HMRC to request a review or correction. Seek Professional Advice: If you’re unsure, a tax advisor can help you navigate your tax situation. Why Understanding Your Tax Code Matters Getting your tax code right is essential to ensure you’re not overpaying or underpaying tax. An incorrect tax code could lead to an unexpected tax bill or a delay in receiving a refund. By understanding your tax code, you can take control of your finances and avoid unnecessary stress. Need Help with Your Tax Code or Finances? Tax codes can be confusing, especially if you have multiple income sources or complex financial arrangements. At MPower Accounting, we’re here to help! Our team of experts can guide you through your tax obligations, ensure your tax code is correct, and help you maximise your income. Contact MPower Accounting today for personalised advice and support. Let us take the stress out of tax so you can focus on what matters most. Sources: HMRC (HM Revenue & Customs): Tax Codes Overview: HMRC Tax Codes Guide Personal Allowance and Tax Codes: HMRC Personal Allowance Emergency Tax Codes: HMRC Emergency Tax Marriage Allowance: HMRC Marriage Allowance K Tax Code: HMRC K Code Non-Resident and NT Code: HMRC Non-Resident Tax Scottish Government: Scottish Tax Codes and Rates: Scottish Income Tax S Prefix Tax Codes: Scottish Tax Codes Welsh Government: Welsh Tax Codes and Rates: Welsh Income Tax C Prefix Tax Codes: Welsh Tax Codes General Tax Information: Understanding Tax Codes: Money Advice Service - Tax Codes Tax Codes for Multiple Jobs: HMRC Multiple Jobs
The Bank of England has halved its growth forecast for 2025 as it reduced interest rates to their lowest level in over 18 months. The UK economy is now expected to grow by 0.75% in 2025, down from the previous estimate of 1.5%. Despite this downgrade, Bank of England Governor Andrew Bailey expects a "pick-up" in growth, though he emphasised the need for gradual and careful rate cuts due to economic uncertainties. The latest interest rate cut—from 4.75% to 4.5%—signals the Bank’s continued efforts to stimulate economic activity while managing inflation risks. What This Means for Small Businesses in the UK For small businesses, the interest rate cut and lower growth forecast have both benefits and challenges: Positive Impacts Lower Borrowing Costs: Businesses relying on loans, credit, or overdrafts may see slightly reduced repayment costs. This could help with cash flow and investment decisions. Potential Increase in Consumer Spending: Lower interest rates might encourage consumer borrowing and spending, benefiting sectors like retail, hospitality, and services. Reduced Mortgage Payments for Business Owners: Many small business owners with tracker or variable-rate mortgages could see a slight drop in their monthly payments, potentially freeing up more funds. Negative Impacts Slow Economic Growth (0.75% instead of 1.5%): Businesses might experience reduced demand and slower revenue growth due to weaker economic conditions. Rising Employment Costs from April 2025: The increase in employers' National Insurance contributions could make hiring more expensive, discouraging expansion and investment. Inflation Expected to Rise (3.7%): Higher energy and water bills will increase business operating costs, especially for energy-intensive industries. Lower Confidence & Uncertainty: Businesses may hesitate to invest or expand due to economic instability. The Mortgage Impact: Who Benefits? Tracker Mortgage Holders: Around 629,000 homeowners with tracker mortgages will see an estimated £29 reduction in monthly payments. Standard Variable Rate (SVR) Holders: Nearly 700,000 people on SVRs must wait to see if their lenders adjust rates accordingly. Fixed-Rate Mortgage Holders: No immediate change, but they may find better deals when renewing. Savers: Those relying on savings for income, such as retirees, may see lower returns on savings accounts. What Next? The Government’s Response Prime Minister Sir Keir Starmer emphasised the need to "turn the economy around" with a focus on infrastructure, planning, and nuclear energy. However, businesses remain concerned about higher employment costs and stagnant growth. Chancellor Rachel Reeves has introduced measures to stimulate the economy, but critics argue that the employer National Insurance hike will increase costs for businesses, making it harder to invest or hire staff. Shadow Chancellor Mel Stride warned that while rate cuts are good news for families and businesses, the government’s "disastrous Budget" could limit further rate cuts this year. Take Control of Your Finances with MPower Accounting With rising business costs, inflation concerns, and economic uncertainty, small businesses need strategic financial planning now more than ever. Mpower Accounting specialises in helping small businesses across London, Kent, and Sussex navigate financial challenges. Whether you need help managing rising payroll costs, improving cash flow, or planning for tax efficiency, Mpower Accounting has you covered. How MPower Accounting Can Help Your Business Optimise payroll & plan for the National Insurance hike Improve cash flow management to navigate economic shifts Access expert financial advice to make smarter business decisions Prepare for tax changes & ensure compliance Book a consultation today and get expert support tailored to your business! Stay ahead of economic changes with the right accounting partner. Photo by Tim Mossholder on Unsplash
