the chancellor, Rachel Reeves, will present the first budget of the new Parliament on 30th of October 2024, and this will lay out the fiscal plans for the labor government. The prime minister has already warned that this budget will be painful, but just how painful will it be? In this video, I'll look at the options open to them and also discuss what I think the most likely changes will be. This video is sponsored by Trading 212, a UK commission-free investment platform. Form let's begin with why this budget matters in the first place. I think the most important point is that it'll affect you if you live in the UK, almost certainly. So, for example, how much tax are you going to pay, and what will you pay that tax on? That's one of the things we're going to learn. Another thing that will almost certainly affect you is growth in the UK. If growth is slow, then that's going to affect everyone. Inflation, as we've recently learned, can also be painful, and it's felt by everyone in the country.

both households and businesses, and of course, if unemployment goes up, then the risk of losing your job could increase. Now, almost all of us work for a company in the UK, or we own a company in the UK, or both. And if that's the case, then taxation is going to affect those businesses. What are their margins going to be? And also, will they be favored by changes in regulations? And then finally, if you're an investor in the UK, then almost all asset prices will in some way be affected by what happens in the budget. So that could be directly via their prices changing for stocks, bonds, and for Sterling, or it could be taxation changes which affect the amount of the returns which you get to keep. So there'll almost certainly be something in this budget which affects you directly. Now, the reason that the government has to raise money in taxes is to be able to spend it, and that can solve economic problems. So what economic problems does the UK face right now? Well, one of the structural or long-term problems that the UK faces is slow

growth, and one manifestation of that is low productivity growth, and that's the amount of goods and services that the UK produces per year or per hour. You can see that that rate of growth has been quite low for some time, and if we compare the UK to other large economies, you can see we're about in the middle of the pack when it comes to GDP productivity per hour. So ideally, as a result of this budget and government policy, we'd move to the left of this graph and become more productive. But one of the difficulties that the government faces right now is that as a result of the spending during covid, the UK's government debt relative to its GDP is at very high levels. It's at about 100%. Now, if we go back to wartime, it was certainly higher. You can see that during World War II, it peaked at over 250%. However, it is high, and that means that the government's restricted in terms of how much debt it can issue in order to spend, and that means that a lot of the

money is going to have to come in by a taxation. At the same time, what we can see is that UK inflation remains quite sticky for services. In contrast, Goods inflation is now in a state of deflation; it's falling year on year. But that sticky Services inflation has got the Bank of England worried. If inflation does prove persistent, then it's going to have to keep rates higher for longer. Furthermore, if there's a huge amount of government spending, then that could be inflationary as well. And there is a problem with the UK labor market in the sense that we have a skills shortage that depends on which sector you look at. So, for example, data in 2019 here shows that in particular sectors like construction and Manufacturing, there's a big skills Gap in terms of the demand for workers with particular skills and the supply of workers in the UK who have the skills to service those roles. So, what do we know about what's going to go into the budget so far? Well, this beautiful infographic from Dan nidle of

tax policy associates shows where revenue came from in the 2023 to 24 tax year. The total revenue is about 829 billion, and of course, current taxation levels in the UK are at the highest they've been ever, at about 30% of GDP. But you can see that three taxes really dominate here in terms of how much revenue they generate, and that's income tax, VAT, and National Insurance. Those are the big three. So, if you want to increase the amount of tax you take in as a government, those are the ones which you'd naturally be able to adjust by quite small increments but still be able to generate quite a lot of cash. However, Labor's already ruled out those big three. So, Rachel Reeves at the Labour Party Conference said, We said we would not increase taxes on working people, which is why we will not increase the basic, higher, or additional rates of income tax, National Insurance, or VAT. Furthermore, she said, We will cap corporation tax at its current level for the duration of this Parliament. Now, as

you can see that leaves a lot of small categories of revenue which the government can now tap or it can maybe think up new ones. So, what I'm going to do now is go through what categories I think are most likely to be the ones where the government could raise more revenue. What you'll see is that I've ordered them by probability, starting with the ones which I think are most likely down to the ones which I think are least likely. Today's video is sponsored by Trading 212, a very innovative platform which allows you to trade commission-free. I've used it for a long time for my fund portfolio, and one feature I use a lot are the pies. What these are are kind of like a portfolio within a portfolio where you can create strategies, a set of funds, and then rebalance that portfolio with a click of a button. There's also a social feature to pies where you can see other people's pies and use that for inspiration for your own. Trading 212 also lets you have multicurrency.

accounts so that once you convert your money into dollars or euros, you can keep it in that currency, and that way you're not continually converting back and forth. That can certainly save you on FX fees. You'll also earn interest on the cash in those other currencies at a very competitive rate. Trading 212 now also has a very innovative feature called 245 trading. You probably noticed that US markets are only open for about 6 and 1/2 hours a day, but with 245 trading, you can trade outside those hours. So you can do 245 trading on all 5,600 or more stocks which are available on Trading 212, and you can still use the fractional shares feature, and of course, you never pay commission on those trades. It's a zero-commission platform. As if VI of Pension Craft, you get a special offer from Trading 212 where you can claim free fractional shares worth up to £100. To claim that, simply open a new account, verify it, fund it with at least a pound, and then use the promo code.

which is my name ramin, and you'll also find a link to that in the description below. So let's look at what might change now. Ideologically, the Labor Party is most likely to go for things which affect the more wealthy people in society, and they've already said that they're going to increase tax mostly for those who have the broadest shoulders. So I think capital gains tax is a very likely target of tax increases. Now, according to that infographic, this raised £15 billion in 23/24, and certainly what's happened over time is that more people are now paying capital gains tax. So, for example, the figure has doubled in terms of individuals who paid it over the last decade. So in the last tax year, about 400,000 individuals had to pay CGT. Now, there is a capital gains tax-free allowance, which is £3,000, but that's fallen dramatically over time. In fact, if you go back just as 2019 to 20, that tax year, it was £12,000, and then it was halved in

2324 and then cut to £3,000 for 2425. So, one obvious thing to do would be to cut that to zero, so there's no allowance whatsoever. Now, capital gains tax is a tax that you pay on things which you've bought at a certain price and sell at a higher price, and it's based on the difference between those two prices. So, if you buy something for £10,000, you sell it for £20,000, the difference is £10,000, that's your profit. You subtract any allowances you've got and then pay the capital gains tax on whatever's left. And if you're a higher or additional rate taxpayer, the rate that you'd pay would be 24% if it's a residential property which isn't your primary property that you live in. So, for example, a buy-to-let property. If you're a private equity fund manager, you pay 20-8% on gains from carried interest, as it's called. That's certainly in the crosshairs. We already

know according to Rachel Reeves and any other chargeable assets such as stocks outside an Isa or a sip for those you'd pay 20% capital gains tax. So, an obvious thing to do also would be simply to increase that percentage. So, for example, you might increase it to 45%, which is the income tax paid by additional rate taxpayers. So, that would raise a fair old amount of money, about 15 billion, and I think that could definitely be on the cards. There are also certain reliefs which could be taken away, for example, business asset disposal relief. If you've sold your business, you don't have to pay as high as 20%. They could take that away, or as I said earlier, they could simply take away that £3,000 capital gains tax allowance. Another tax which I think is very likely to be raised by the labor government is inheritance tax. Now, what surprises many people is that this actually raises very little in terms of Revenue, and if we look at this map from The Institute for Fiscal Studies, you can

see that the percentage of households that pay inheritance tax is tiny. Furthermore, it's focused where most of the wealth in the country is, which is in the South. So, inheritance tax only raised about £7 billion in 2023-24. So, one thing that the government could do is increase the rate that people have to pay from its current 40% to something higher, or they could lower the threshold at which inheritance tax kicks in, which is currently £325,000. Now, there are some very generous exemptions from inheritance tax, and by taking those away, it could generate more revenue. If you live as a couple, for example, your spouse will inherit any unused allowance from you. And if you give away your home to your children or your grandchildren, your threshold can increase to £500k. So, it is quite likely that you could end up with a threshold of a million if you're living as a couple. So, you can see why very few deaths in the UK result in a payment of inheritance tax. Another rule which could be changed in the UK to

increase the inheritance tax revenue would be about gifting. If you give someone a gift and you live more than seven years after you gave that gift, then you're not liable for any inheritance tax at all. It kind of tapers off from 40% if you die in the first year, all the way down to zero after seven years. So, that could either be scrapped, the taper could be increased, or the rates could be changed. I think taxes to do with housing in particular, stamp Duty land tax, or stamp Duty as we call it, or council tax, I think both of those are very likely to change. So, stamp Duty generated about 13 billion in 2324, council tax generated about 45 billion for local government. Of course, how could this be altered? Well, there are thresholds for stamp Duty land tax. So, if the value of the house is less than 250k, you're not liable for it at all. You pay 5% between 250k and 925k, 10% between 925 and 1.5 million, and

then 12% above that. So, all of those thresholds could be changed, increased, and that could increase revenue. You could also scrap the allowance for first-time buyers. They don't have to pay stamp duty on properties up to 425k and only pay 5% on the portion between 425 and 625. Or alternatively, something that would be less politically contentious would be to increase stamp duty land tax for foreign buyers of UK properties. Turning now to council tax, this is a very odd system which The Institute for Fiscal Studies, for example, has been very keen on reforming, particularly as it uses such an antiquated system of banding, which is based on prices from 1991. So, for example, if you look at the table beside me, the reason why those house prices are so low is because they're from 30 years ago. And the drawback with using that methodology is that the expensive houses in the top band, which is band H, have increased in value proportionately much more than the ones at the cheaper end. So, while those band H houses are worth eight times more

than the ones in band A. You only pay three times as much council tax on those houses, so this is a regressive tax. It really is the case that, as a proportion, those more inexpensive houses are paying the burden of council tax much more than the houses which are most expensive. So, ideologically, I think this fits with Labour's goal of raising more revenue and raising it from people with the broadest shoulders. Plus, it's an antiquated system which is unfair. Now, we're going to move to the kind of median probability, in my opinion, and this is pension reforms. Now, currently, we have pretty generous tax relief on pensions in the UK. You don't have to pay tax if you put money into your pension, and that's up to 100% of your earnings or £60,000 a year, whichever is lower. So, by changing those thresholds, presumably, that could raise more tax. So, that's an increase in revenue based on money going into a pension. Or, alternatively, you could charge more tax while you withdraw money from a pension. So, currently, we

have a lump sum allowance where you can take 25% of your pension tax-free. That is capped. It's capped at $268,700. Reform is going to be strictly limited due to the huge uproar about removing winter fuel payments from UK pensioners. Plus, I think politically, if you hit pensioners, they're big voters, and that's always going to be at the back of people's minds, particularly politicians. Alternatively, the government could just think up new taxes or take old ones which were scrapped and reinstate them. It was kind of interesting, and I picked this up from Paul Johnson of the Institute for Fiscal Studies, his book called Follow the Money, which is excellent, by the way. But he said that in 2024, more than 30 billion of revenue will be generated by completely new taxes which have been created since 2001. And that ranges from the tax on sugary drinks, which raised just 300 million, to the various environmental levies which are now charged on energy supplies, and that raised about 11.5 billion. And he

said a recent example of this was the Health and Social Care Levy, whose design before it was scrapped under the brief premiership of Liz Truss was almost identical to that of National Insurance contributions, which the 2019 Conservative manifesto had pledged not to increase. So, this was a bit of a stealth tax, which came in by just renaming National Insurance. But the upshot of that new tax was that the earnings of those over state pension age were not exempt. So, Paul Johnson says that resurrecting that levy would raise around £15 billion a year if it was set at a rate of 1%. So, for example, one thing that I think could be introduced as a new tax is one on electric cars. They're not affected by Fuel Duty. As more people switch to electric, we get less Fuel Duty, and that means that tax revenue will fall. So, that could be one that Rachel Reeves introduces. And that brings us to Fuel Duty itself, which now falls into the low probability changes. Now, this was first introduced in 1908. It was

charged at 3 p per gallon. That's about 1.3 P per liter. But it used to be tied to the rate of inflation. So, between 1993 and 1999, there was a fuel Duty escalator that meant that fuel Duty would increase by inflation plus 3%, then 5% every year. Then, in 1999, the labor government suspended the escalator, and they moved to just kind of random increases year to year. From 2011 to 22, fuel Duty was frozen at 57.95 P per liter, and that's for petrol and Diesel. And then, in March 2022, the rate was cut by 5 P per liter to 52 P. That was supposedly temporary, but then that got extended in 2425. But I think people are really exquisitely sensitive to fuel prices at the pump. It's one thing that people always quote when they say, Oh, prices are going up, because it's something that we see regularly, and we're always shocked at how much it costs to fill up our cars.

so I think this one is unlikely to be increased. And then finally, another tax which I think is unlikely to be imposed is on ISAs (Individual Savings Accounts). Now, these currently have a cap on how much you can put into them every year (£20,000 as I make this video), but there isn't a cap on how much you can have inside them. So, you could become an ISA millionaire and still not have to pay tax on those ISA savings ever again. Of course, it's paid in after you've paid tax, so it'd be a little bit unfair to have to pay tax on it twice - once before you pay it in and once after you've taken it out. The Resolution Foundation, however, wrote a white paper called ISA ISA Baby, and they estimate that it could raise about a billion if you impose a £100,000 cap on ISAs, such that you'd pay tax on anything above £100,000. However, I think this is unlikely to happen because, firstly, it would be very unpopular; secondly, it would also disincentivize

people from saving, and in the UK, we don't save enough. And thirdly, I think it would be very hard to implement. It would rely on those platforms, presumably, to report any breaches above the 100K limit. Alternatively, Rachel Reeds could just reduce that 20K annual allowance for money that you can put into an ISA. Now, I've spoken to quite a few people who have already taken action to try and circumvent these future changes, potential changes in how we're taxed, for example. They've sold assets in their general investment account in order to pay a lower capital gains tax, in theory, than they'll have to pay in a few months' time. However, I think that's a bit of a gamble because it might be that the government doesn't change capital gains tax, and what you'll end up doing is crystallizing gains which you needn't have done. So, personally, I'm not changing anything in terms of my behavior before the budget actually happens, but hopefully, this video has given you some ideas about how this budget could affect

your finances and whether you should do something about it before that budget is published. Now, don't forget our offer from Trading 212. If you want to claim free fractional shares worth up to £100, simply open a new Trading 212 account, verify it, fund it with at least a pound, and then use the promo code, which is my first name, Ramin. And you'll also find a link to that in the description below. And as always, thank you for listening.

Autumn Budget 2024: How “Painful” Will It Be?

My name is Ramin Nakisa and I started PensionCraft in 2016 as I felt strongly that I wanted to teach people how to invest well for themselves so they could stop making costly mistakes and losing their money through having to pay unnecessarily high fees.

Before starting PensionCraft, I worked in investment banking as a strategist and I was a frequent contributor on CNBC and Bloomberg TV. I have written two books about finance and investment: one for professional investors and one that explains how to buy and sell volatility using exchange-traded products.

I publish a new video on YouTube every Saturday and you can join me for a live Q&A on the 1st Thursday of every month at 7pm UK time.

If you want to learn how to become a better investor then why not join our friendly membership at pensioncraft.com?


Autumn Budget 2024: How “Painful” Will It Be?

Autumn Budget 2024: How “Painful” Will It Be?

스크립트