What can we expect from a Healey Budget?

Healey has in effect already made several commitments at a time when the Iran War is further restricting choices in direct economic terms and borrowing costs.

As he has acknowledged, individuals are under cost-of-living pressure and “we’re concerned about the cost of business.” The fiscal challenge is not finding one clean revenue-raising lever but managing a difficult balance: tax levels are already high, fiscal drag is pulling more middle and higher earners into heavier tax burdens, and further increases risk landing on households already feeling squeezed.

At the same time, he allegedly wants a drama-free or even low-key Budget and has insisted on absolute secrecy over its market-sensitive contents following what the media itself called “the communications disasters of last year’s fiscal set-piece.”

What makes this a difficult Budget for the Chancellor? 

Welfare. There might be some trimming of the benefits bill but it is unlikely to be substantive. Similarly, the commitment to the pensions Triple Lock looks tight.

Defence. Given his resignation on the issue, it is unlikely from a political credibility standpoint that Healey will not endorse increased military spending, although a decision to increase it to 3% of GDP has been pushed back to the middle of next year, when a government spending review is scheduled to take place.

Fiscal Rules. Healey and Burnham have said they will stand by Reeves’s fiscal rules and maintain the commitment not to raise Corporation Tax. However, reclassifying infrastructure spending could allow the Government to borrow more and spend an additional £9bn a year on infrastructure, housing and business support. If that headroom is created, the case is to direct it towards private investment, regional transport, skills and targeted growth incentives.

So his options are:

1. Do nothing or very little – this is probably the preferred option, but all that would do is kick the proverbial can down the road and leave the new Government with no political “good news”.
2. Raise taxes – the hard place – and suggestions already out there include:

Equalise capital gains tax rates with income tax rates – a big one. Levelling rates across income and capital gains might, depending on who you believe, amount to a “wealth tax that works”.  However, a straight increase in CGT is unlikely to raise tax revenues – HMRC have said that an increase of 10% would likely cost the Treasury £3.5bn per annum by 2028/29.

That said, in a 2024 report by the Centre for the Analysis of Taxation (CenTax), they estimated that £14bn could be raised by aligning CGT rates with income tax rates as part of a much broader reform package, including:

1. Aligning CGT rates with income tax rates.
2. Introducing an investment allowance.
3. Removing the CGT uplift on death.
4. Introducing departure and arrival rules to capture gains accrued while UK resident.
5. Reforming loss relief.
6. Reducing opportunities to convert income into capital gains

The fear is that any of the above would discourage investment in the UK at a time when such investment is so desperately needed to fuel growth.  A pro-growth alternative would be to protect competitive rates while strengthening reinvestment reliefs for proceeds recycled into UK businesses, intellectual property and innovation.

Pension reforms. Pensions remain one of the last major tax-efficient savings vehicles for higher-rate taxpayers, which makes them an obvious but sensitive target. Restricting the tax-free lump sum could raise revenue, while proposed 2027 changes, including pension assets falling within estates for inheritance tax, may encourage earlier drawdown and faster intergenerational wealth transfers. Further reform to higher-rate relief would be tempting, but risks alienating taxpayers already pulled into higher bands through fiscal drag.

A windfall tax on banks would have support across the political spectrum and lifting the surcharge on bank profits over £100m could raise up to £4bn a year. Unsurprisingly, the Treasury has called this “low-hanging fruit”. Whether the backlash from US-headquartered banks would be a price worth paying is debatable.

Oil and Gas. Another sector in the firing line is oil and gas. There has been speculation that Treasury officials have noted the record profit figures from the likes of BP and might propose an extension of the so-called windfall tax for fossil fuel companies beyond 2030.

Employment and National Insurance. Cracking down on employment disguised as self-employment is another option. Applying employer’s National Insurance to professional partnerships could raise £2bn, although UK professional services firms are likely to adapt. Alongside any crackdown, targeted National Insurance support could encourage employers to recruit and train younger workers.

Property held through corporate structures. Increasing the annual tax on UK residential properties valued at more than £500,000 and owned by companies, partnerships and investment schemes is another option. Ditto ending a stamp duty “loophole” for so-called enveloped commercial property, which could raise about £1bn.

VAT reform. After the increase in VAT on private school fees, a similar major change looks less likely. But minor reforms to address VAT anomalies, smooth the registration threshold’s barrier to growth and make large online platforms responsible for VAT collection could still feature.

One area of VAT reform which the Chancellor can’t ignore is whether to extend the zero-rate for energy saving materials which will automatically expire on 31 March 2027 without further action. This might revert to 5% or even 20% – but any change will test the government’s green credentials. There might also be a temptation to settle the current debate on the VAT rate for on-road EV charging. HMRC are pursuing litigation to restrict the reduced rate to home charging – as this will be temporarily be zero-rated over the next few months, the additional costs for EV drivers without home charge points threatens to become more severe.

Other indirect taxes. One of the few locked-down promises on indirect taxes is to hike levies on vape shops and online sellers. This would help pay for the 20% cut in business rates for pub landlords. Taxes on retailers’ warehouses have also been mooted.

Wealth taxes. A broader wealth tax, or additional taxation of property wealth, will inevitably remain part of the debate. The attraction is obvious when so much national wealth sits in assets rather than income, but the design challenge is equally clear.

This has been considered before.  In 1989, the former Chancellor Denis Healey, reflected on the position in 1974: ‘We had committed ourselves to a Wealth Tax; but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and the political hassle’. There must be a good chance that this would still be the case today.

Further, most countries that tried wealth taxes have since repealed them. Where they remain, they often come with trade-offs, such as there being no inheritance tax or capital gains tax. In Switzerland, for example, there is no CGT or IHT. The UK already has these taxes and according to the Institute for Economic Affairs the UK raises more revenue from wealth and wealth related taxes as a share of GDP than any other OECD economy!

A simpler route?  

If the aim is a low-key Budget, there are less dramatic reforms available. However, the more likely outcome is a series of targeted measures affecting the “middle wealthy”: higher earners, pension savers, homeowners and those with significant investment assets. But this cannot be a long-term solution. That has to be investment, growth and job creation.

Keen to find out more?

Join MHA at their upcoming Finance Leaders Forum in Manchester, on the morning of 29^th October.

With Chancellor John Healey delivering his first budget the day prior, there will be plenty for finance leaders to digest. MHA are bringing together an expert panel to cut through the headlines and look at what the announcements could mean in practice for businesses across the North West.

It is an opportunity to hear the key developments first-hand, understand the potential implications for your business and discuss the issues with fellow finance professionals.

The session will cover:

• Expert Budget insights
• Regional perspectives
• Interactive discussion and Q&A
• Peer networking
• 1-hour CPD accreditation

The event is free to attend however places are limited and demand is expected to be high, so booking early is recommended to avoid disappointment.

Date: Thursday 29^th October
Time: 8:00am – 10:00am
Location: Ringway Golf Club, Hale Road, Hale Barns, WA15 8SW

Register here