The Upcoming Labour October Budget: What to Expect and How to Prepare

As the UK awaits the Labour Party’s October budget, there is considerable interest in understanding what policies might be introduced and how they could impact individuals, businesses, and the economy at large. In this post, I’ll explore the potential contents of the budget, with particular attention to how it might affect key investment tools such as General Investment Accounts (GIAs), ISAs, offshore investment bonds, Family Investment Companies (FICs), pensions, savings income from bank accounts, and residential property. Additionally, I’ll discuss practical steps to take in anticipation of these changes.

The Political and Economic Context

Understanding the broader political and economic context is crucial when preparing for the upcoming budget. The Labour Party, under the leadership of Keir Starmer, has focused its agenda on addressing societal inequalities, with a strong emphasis on increasing public spending and implementing tax reforms. With inflationary pressures and public services under strain, the budget is likely to reflect these priorities. The anticipated measures aim to balance economic growth with social responsibility, though they may bring changes that will require careful planning from both individuals and businesses.

Expected Key Measures

While the full details of the budget will only be revealed on the day, several key areas are likely to see significant changes:

Taxation

Taxation is expected to be a central theme of the upcoming budget. Labour has indicated its intention to overhaul the tax system, which could have implications for various investment tools and individual taxpayers:

Income Tax Adjustments: There is speculation that higher earners may see increased income tax rates or the introduction of a new top tax band. Such measures are intended to ensure a more progressive tax system, though they may require adjustments in financial planning for those affected.
Capital Gains Tax (CGT): Labour may consider aligning CGT rates more closely with income tax rates, which could impact investors with assets in General Investment Accounts (GIAs) and residential property. While this could lead to higher tax bills for some, it reflects an effort to equalise the tax treatment of income and capital gains. For high-net-worth individuals, switching from a GIA to an offshore investment bond could be a strategic decision to mitigate potential tax increases, as offshore bonds offer tax deferral benefits and potentially greater flexibility in managing tax liabilities.
Corporation Tax: An increase in corporation tax rates, particularly for larger businesses, is expected. This aligns with Labour’s focus on ensuring that businesses contribute fairly to public finances, though it may require companies to review their tax strategies.
Wealth Taxes: The possibility of new or expanded wealth taxes, such as inheritance tax, remains under consideration. These measures are part of Labour’s approach to addressing wealth inequality, though they could have implications for long-term wealth planning.

Public Spending and Investment

Labour is expected to announce significant increases in public spending, particularly in areas such as health, education, and social care. These measures aim to address longstanding issues in these sectors, though they will require funding that could come from tax increases or borrowing:

NHS Funding: Additional funding for the NHS is anticipated to address current pressures. The effectiveness of this funding will depend on how it is allocated and managed.
Education: Increased funding for education is likely, with the aim of improving outcomes for students across the UK. The focus will be on ensuring that this investment delivers long-term benefits.
Social Care: Labour may propose increased funding for social care to support the aging population. This is an area that has seen growing demand, and the budget may seek to provide sustainable solutions.
Green Investment: Substantial investments in green infrastructure and renewable energy are expected, reflecting Labour’s commitment to environmental sustainability. These initiatives could offer long-term economic and environmental benefits, though they will need to be carefully managed to balance costs and returns.

Welfare and Benefits

The cost-of-living crisis has highlighted the importance of welfare benefits. Labour may introduce measures aimed at increasing support for low-income households, though these will need to be balanced with fiscal responsibility:

Universal Credit: Potential increases in Universal Credit could provide additional support for those in need, while efforts will likely be made to ensure that incentives for work are maintained.
Pensions: Labour may seek to protect pensioners from inflation by maintaining or increasing the triple lock on state pensions. This is intended to safeguard pensioner incomes, though it will add to public expenditure. Additionally, there may be discussions around pension tax relief, which could affect how individuals save for retirement.
Support for Low-Income Families: Additional support for low-income families, such as increased child benefit or targeted payments for energy costs, could be proposed. The challenge will be to implement these measures in a way that is both effective and sustainable.

How the Budget Could Impact Key Investment Tools

The upcoming budget may have significant implications for various investment tools used by UK residents, particularly those related to taxation. Here’s what you should consider regarding some of the most popular investment vehicles:

General Investment Accounts (GIAs)

General Investment Accounts (GIAs) are widely used by investors for holding a range of assets. If Labour decides to increase CGT rates, investors with gains in GIAs could face higher tax bills. This could lead some investors to consider alternative strategies to mitigate these potential tax increases, such as fully utilising tax-free allowances or exploring tax-efficient investment vehicles. For high-net-worth individuals, transitioning from a GIA to an offshore investment bond could be a worthwhile financial planning decision, as offshore bonds offer the advantages of tax deferral and greater flexibility in managing tax liabilities.

Individual Savings Accounts (ISAs)

ISAs have long been a staple of tax-efficient investing for UK residents. However, there is growing speculation that the ISA regime may come under review. Potential changes could include limits on contributions or adjustments to the tax-free status of gains. While these changes remain speculative, it is important for ISA holders to stay informed and be prepared to respond if the tax advantages of ISAs are reduced.

Offshore Investment Bonds

Offshore investment bonds, which offer tax deferral benefits, might remain less affected by the budget’s proposed changes. Their tax-efficient structure could continue to provide advantages, particularly if UK tax rates rise. However, it is important for investors to stay informed and possibly seek advice to ensure these tools remain aligned with their overall financial strategies.

Family Investment Companies (FICs)

Family Investment Companies (FICs) are increasingly popular for wealth planning and succession. Given their structure, FICs may remain relatively unaffected by the budget’s proposed tax changes, continuing to offer a viable option for managing and protecting family wealth. However, investors should remain vigilant and review their FICs regularly to ensure they remain optimally structured in light of any new tax regulations.

Residential Property

Residential property remains a key investment for many UK residents, but it could be particularly vulnerable to changes in the budget. If Labour decides to increase CGT on property sales or introduce new property taxes, this could significantly impact both buy-to-let investors and those selling second homes. Potential increases in taxes on rental income could also make property investment less attractive, potentially leading to a cooling of the housing market.

Savings Income from Bank Accounts

Savings income from bank accounts, which is typically subject to income tax, may also come under scrutiny in the budget. With interest rates on savings accounts rising, there could be changes to the personal savings allowance or other tax thresholds. It’s important for individuals to monitor any changes that could impact the tax efficiency of their savings and consider alternative savings or investment options that might offer better tax treatment.

Potential Impact on Pensions

Changes to Pension Tax Relief

One of the most significant areas where the budget could impact pensions is through changes to pension tax relief:

Reduction in Tax Relief for Higher Earners: Currently, pension contributions are tax-relieved at the marginal rate of income tax, meaning higher and additional rate taxpayers receive more tax relief on their contributions. The Labour government may consider capping the tax relief at a lower rate, such as the basic rate of 20%. This would reduce the incentive for higher earners to contribute large amounts to their pensions.
Lifetime Allowance and Annual Allowance Adjustments: The government might look at further changes to the Lifetime Allowance (LTA), which is the maximum amount you can save in your pension pot without facing extra tax charges. Similarly, the Annual Allowance, which limits the amount you can contribute to your pension each year with tax relief, could be reduced. This could particularly impact those with significant pension savings or those making substantial annual contributions.

Impact on State Pensions

The budget could also address changes to the state pension:

Triple Lock: The “triple lock” guarantees that the state pension increases each year by the highest of inflation, average earnings growth, or 2.5%. There has been ongoing debate about the affordability of this policy, and the Labour budget might consider adjustments to the triple lock mechanism to manage public spending more effectively, potentially leading to slower growth in state pensions.

Company Pensions and Employer Contributions

Changes in taxation or regulation could also affect company pension schemes:

Employer Contribution Requirements: The government may seek to increase the minimum employer contribution to workplace pensions as part of an effort to boost savings and reduce future reliance on the state pension. This could increase costs for businesses, particularly smaller companies, potentially affecting their financial planning and staffing decisions.
Defined Benefit (DB) Schemes: For companies with defined benefit (final salary) pension schemes, any changes in pension regulations or tax treatment could impact their financial obligations. The Labour government might introduce measures to ensure that companies adequately fund these schemes, particularly in cases where pension deficits exist, which could require businesses to allocate more resources to their pension funds.

Pension Age and Access to Pensions

The Labour budget might also consider changes to when individuals can access their pension savings:

Increase in State Pension Age: To reflect rising life expectancy and to manage the costs of state pensions, there could be a proposal to increase the state pension age further. This would delay when people can start receiving their state pension, impacting retirement planning.
Changes to Private Pension Access Age: The minimum age at which people can access their private pensions (currently set to rise to 57 in 2028) could be reviewed, potentially increasing the age further in line with any changes to the state pension age.

Impact on Pension Investment Strategies

Finally, changes in fiscal policy or taxation could affect how pension funds are invested:

Green Investments and ESG Focus: Labour’s focus on green policies might lead to changes in regulations that encourage or require pension funds to invest more heavily in environmentally sustainable and socially responsible investments. While this aligns with broader ESG trends, it may require pension funds to adjust their investment strategies, potentially affecting returns.
Taxation of Pension Funds: There could be changes in the taxation of pension funds themselves, particularly in how dividends and capital gains within the fund are taxed. If taxes on pension fund investments are increased, this could reduce the overall returns on pension savings.

How to Plan for the Budget

Given the potential changes, it’s important to start thinking about how you can prepare for the upcoming budget. Here are some practical steps:

Review Your Investment Strategies

Tax Planning: If you’re concerned about potential tax increases, particularly on CGT, now is the time to review your investment strategies. This could involve realising gains before any rate hikes, fully utilising tax-free allowances, or exploring alternative investment vehicles that offer more favourable tax treatment.
Diversification: Consider diversifying your investments across different asset classes and vehicles to spread risk and potentially mitigate tax impacts.
Estate Planning: With potential changes to inheritance tax and wealth taxes, it’s prudent to revisit your estate planning strategies. Tools like FICs can play a role in protecting family wealth under a new tax regime.

Business Planning

Corporation Tax Strategy: Businesses should prepare for a potential increase in corporation tax by reviewing their tax planning strategies, including the timing of income and expenses, and exploring investment opportunities that might attract tax relief.
Employee Benefits: With potential changes in personal taxation, businesses might want to review their employee benefits packages to ensure they remain attractive and tax-efficient for employees.
Green Investments: Companies should also consider how they can benefit from any green investment incentives that may be introduced, such as grants, subsidies, or tax breaks for sustainable initiatives.

Prepare for Changes in Public Services

Healthcare and Social Care: If you’re concerned about the availability or quality of healthcare and social care services, it may be worth exploring private insurance options or alternative care arrangements.
Education: Parents should stay informed about any changes in education funding, particularly if you have children approaching school age or considering further education options. There could be opportunities for grants or bursaries that weren’t previously available.

Stay Informed and Seek Advice

Regular Updates: The specifics of the budget won’t be clear until it is delivered, so staying informed through reliable news sources and updates from financial advisers will be crucial.
Professional Advice: Given the complexity and potential impact of the budget, seeking professional financial advice is recommended, particularly if you have substantial assets or complex financial arrangements.

How to React to the Budget

Once the budget is announced, it’s essential to react swiftly to ensure your financial plans are aligned with the new realities:

Immediate Actions

Review Your Budget and Financial Plans: Reassess your financial situation in light of any changes in taxation, public spending, or benefits that affect you directly.
Update Your Investments: Adjust your investment strategy to reflect any changes in market conditions or tax implications resulting from the budget.
Consider Philanthropy: If wealth taxes are introduced or increased, charitable donations may become a more attractive option for reducing taxable income or gains.

Long-Term Adjustments

Estate Planning: Revisit your estate planning strategies, particularly if there are changes to inheritance tax or the introduction of new wealth taxes.
Retirement Planning: Adjust your retirement plans if there are changes to pension tax relief or other related policies.
Business Strategy: Reevaluate your business plans, including growth strategies, investment plans, and tax planning, in light of any changes in the corporate tax landscape.

The Value of Immutable Investment Tools

In the face of potential changes, it’s worth noting that certain investment products, due to their immutable features, are likely to continue offering tax-efficient ways to invest for UK residents. Offshore investment bonds, for instance, provide a unique advantage through tax deferral, allowing investments to grow without immediate tax liabilities—a feature known as “gross roll-up.” Additionally, the ability to assign segments of offshore investment bonds to others, such as family members, can provide flexibility in managing tax liabilities. These inherent features of offshore investment bonds, which are built into the product’s structure, ensure that they remain a robust option for tax-efficient investing even as the tax landscape evolves.

The Labour Party’s October budget is likely to introduce significant changes across a range of areas, particularly in taxation and public spending. By anticipating these changes and preparing accordingly, individuals and businesses can mitigate potential risks and take advantage of new opportunities. Staying informed, seeking professional advice, and being ready to adjust your financial plans are key to navigating the post-budget landscape effectively. Additionally, considering investment tools with immutable features like offshore investment bonds may offer a way to maintain tax efficiency despite a shifting fiscal environment.

Russell Hammond – FPFS, FCSI

Chartered Financial Planner & Chartered Investment Adviser

Contact Us

Special Feature