UK autumn budget 2024: What to expect, from non-dom rules to tax-free shopping

Rachel Reeves is to unveil one of the most talked-about British budgets in recent times, but who are the probable winners and losers?

UK Chancellor Rachel Reeves will announce the Labour government's first budget this week. EPA

British taxpayers already know a good deal about what will be in Chancellor Rachel Reeves's budget, given the amount of information that has slipped out before her speech on Wednesday.

She has even been admonished by the Speaker of Parliament for telling journalists at the International Monetary Fund meetings in Washington last week that the government will rewrite the rules on how it calculates debt. Meanwhile, Prime Minister Keir Starmer was forced to retract a statement that said funding for five new freeports would be announced in the budget, after officials said that would not be the case.

Basically, the Labour Party government is constrained by its election manifesto pledges that rule out income tax rate increases, rises in corporation tax, VAT or employee national insurance contributions. That means Ms Reeves will have to explore several other tax-raising avenues to plug the £40 billion ($48.1 billion) funding gap she has identified. A day before Halloween, the trick will be how she raises tax revenue and spending on economy-boosting projects in areas including infrastructure, as well as increasing borrowing, all at the same time. The treat, if she is successful, will be an economy that is on a solid footing, allowing growth to accelerate.

Non-doms

The current tax treatment of UK-resident non-domiciled individuals, or non-doms, is expected to come to an end in April next year, with a new residence-based regime established to replace it. Essentially, this means, after certain exemptions, non-doms will be taxed on their income and assets outside the UK. The big issue for non-doms in the UK is inheritance tax, which will also be applied to their worldwide assets, including those held in trusts.

There has been much speculation about exactly how Ms Reeves will approach the non-dom issue in her speech. Media reports about high-net worth individuals fleeing the country and taking their investments with them are thought by some to have forced Ms Reeves to rethink and water down her original proposals. "It’s impossible to know how much truth there is to the rumours of ‘watering down’ and ‘delay’, but if we were forced to place a bet it would be on a delay to the IHT [inheritance tax] changes," said Gavin Shaw, of British accounting organisation KPMG.

One non-dom told The National that "the exposure of worldwide assets to UK IHT for a non-domiciled individual seems unfair, as we are being taxed in the UK on assets created overseas".

Inheritance tax

Inheritance tax will be a key issue in Ms Reeves's first budget, but it will concern more than non-doms in the UK. While is it unlikely she will change the thresholds, she is expected to make certain other changes, including extending the number of years someone has to stay alive after passing on wealth as a gift from seven to 10 years. Currently, no inheritance tax is payable on an estate worth less than £325,000, which has been fixed since 2009 and is expected to remain at that level until 2028. But that means that, as house prices rise, more estates are drawn into the inheritance tax net, because the house is usually the most valuable asset in a deceased person's estate.

Capital gains tax

It is widely expected that capital gains tax will rise. Only about 350,000 people a year pay CGT, but they plough about £15 billion into the Treasury through it, according to figures from the Institute of Fiscal Studies. Media reports suggest CGT, which is levied on the proceeds from selling an asset, could increase.

However, The Times reported Ms Reeves will not change the rate of CGT on the sale of second homes and buy-to-let properties in the budget, because of concerns the property market could be severely affected. But CGT is also levied when shares change hands and the government has hinted recently that the rate could rise significantly from its current level of 20 per cent.

Employers' National Insurance contributions

Possibly one of the more controversial budget measures, Ms Reeves is expected to increase employer National Insurance contributions, which are essentially a payroll tax. It is thought the Chancellor could raise the employer NI rate by 2 per cent to 15.8 per cent but, at the same time, change the threshold at which companies have to start paying it. Currently, companies start to pay the tax on employees' pay above £175 a week.

Many experts feel that increasing employer contributions is an extra burden for businesses that have just survived the twin tempests of rising inflation and the Covid-19 pandemic. In addition, a rise in employer NI is also expected to have a knock-on effect on employees, simply because, as a company's payroll costs rise, there is less money for salary increases.

"Businesses will be launching into staff reviews from January, setting remuneration for the new financial year beginning in April, and it won’t be surprising if the costs of a rising NIC bill are taken into account at many firms for that year and years beyond," said Toby Tallon, tax partner at Evelyn Partners.

Tax-free shopping for foreign visitors

Although Ms Reeves is not expected to make an announcement on the reinstatement of VAT-free shopping for foreign tourists, there has been much lobbying from UK retailers, hospitality groups and airports in the run-up to Wednesday's budget. Last week, more than 300 chief executives wrote to the Chancellor, urging her to take “decisive action” on what has been called a "tourist tax". VAT-free shopping for overseas visitors was stopped by former prime minister Rishi Sunak when he was chancellor and the Treasury calculates that bringing it back will cost £2 billion a year in lost taxes.

But those who want it reinstated argue that the Treasury's figures are wrong and warn tourists are increasingly taking their cash to spend in Paris and Milan, because of the UK's lack of VAT-free shopping. British MP Geoffrey Clifton-Brown told The National the government is missing a trick by not having VAT-free shopping for tourists and that, far from a tax burden, it could be a significant tax revenue stream.

"The government says that growth is their priority. This potential £10 billion new market is worth a review, especially since we estimate it would generate around £3.7 billion in new tax-free revenues for the Exchequer," he said.

VAT on private school fees

Although this has been announced already, Ms Reeves is expected to give more details on Wednesday regarding her plan to remove the VAT exemption and business rates relief for private schools. The move aims to fund 6,500 new teaching posts in state schools. The French and German ambassadors to the UK have called for international schools to be excluded from the plans.

Stamp duty

Many hope Ms Reeves will extend the current benefits associated with stamp duty land tax (SDLT) that are due to end in March next year. SDLT only applies to properties over £250,000 and the property website Rightmove has warned that, if the current stamp duty thresholds are not extended or made permanent, the average first-time buyer will pay £3,538 in stamp duty, compared with nothing now. At the moment, stamp duty thresholds benefit 28 per cent of all house buyers – if Ms Reeves lowers the threshold from £250,000 to £125,000, only 5 per cent of buyers will benefit.

Calculating debt

The Chancellor confirmed at the IMF meetings that she will change the way debt is measured. She is expected to focus on public sector net financial liabilities (PSNFL) as her new measure of debt, rather than the current yardstick of underlying public sector net debt. Doing so should enable her to use more than £50 billion more for infrastructure development. But critics have said the move is an accounting gimmick and could in itself be inflationary.

Income tax

While the Labour Party pledged to avoid putting up income tax rates in the budget, it is thought that Ms Reeves will extend the freeze on the thresholds, which pulls increasing numbers of people into paying higher rates through a process known as "fiscal drag". Essentially, by leaving thresholds where they are, Ms Reeves can fulfil her promise not to affect a worker's payslip the day after her budget. However, unless thresholds increase at the same pace as salaries, increasing numbers of people will be drawn slowly into the higher rate tax bracket.

And the rest

It is expected that the Chancellor will inject billions of pounds into the NHS, including £1.5 billion for new surgical hubs and scanners and £70 million for radiotherapy machines. That comes on top of the £1.8 billion allocated in July in an effort to cut waiting lists.

About £1.4 billion has been announced already to rebuild dilapidated schools and to triple investment in free breakfast clubs. Meanwhile, £1.8 billion has been set aside to expand childcare provision and £44 million is to be used to support kinship and foster carers. In addition, the cap on bus fares will rise from £2 fare to £3 until the end of 2025, while £240 million will be given to local services to get people back to work, as the government looks to rein in spending on welfare.

Fuel duty, which motorists pay at the pump as it is included in the price of petrol and diesel, could be raised for the first time in more than 10 years. The tax on motor fuels was frozen by the previous Conservative government between 2010 and 2022. It was then cut by 5p to 52.95p per litre, where it remains.

Ms Reeves is reportedly considering increasing the tax on e-cigarettes, as part of a move to discourage vaping. Vaping products are subject to VAT at 20 per cent but, unlike tobacco, they are not also subject to excise duty.