Autumn Budget preview and triple lock change explained

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Ahead of Chancellor John Healey delivering his first Autumn Budget on 28 October, Kyle is joined by interactive investor’s personal finance editor Craig Rickman to talk through the changes that may be in store, with capital gains tax rule changes dominating the rumour mill. The duo also discuss proposed changes to the state pension triple lock in 2030. 

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello and welcome to our latest episode of On the Money, the weekly podcast that covers investment and pension topics in a practical manner.

For this episode, the focus is on what may be inside the famous red briefcase when Chancellor John Healey steps up to deliver his first Budget on 28 October. Joining me to discuss what may be in store and the potential ramifications is Craig Rickman, personal finance editor at interactive investor.

Please do bear in mind that we’re recording this episode on 12 October, and as we get closer and closer to the Budget, there’ll be more rumours and speculation. 

Now, Craig, before we get on to the various measures that may crop up in the upcoming Autumn Budget, there has already been a very notable policy change, which is that from 2030, if Labour win the next election, the pension triple lock will be tweaked.

At the moment, the state pension rises by the highest of one of three measures, that’s either earnings growth, inflation, or a minimum of 2.5%. So, Craig, what’s going to change from 2030?

Craig Rickman, personal finance editor at interactive investor: So, this was the big announcement from Labour’s annual party conference, this tweak to the state pension triple lock. I think there’s quite a few questions that people may still have around this change. So, let’s try and unpack some of those.

Probably the best place to start is to look at the triple lock in its current form. So, what is it? As you say, it uprates the state pension every year. The state pension uprates by the highest of three metrics, which are 2.5%, average wage growth, and inflation. Whichever of those is highest, the following April, that’s what drives the state pension increase. There’s been a lot of pressure on Andy Burnham since he started his premiership to adjust that policy.

However, in its election manifesto, Labour promised to keep the triple lock for the rest of this parliament. The reason why there’s pressure on Andy Burnham - and there has been pressure on previous governments as well and previous prime ministers - is because critics have said the triple lock has become incredibly expensive, and it’s not sustainable.

So, it’s pressure on Andy Burnham to act, and he has. He’s made a suggested alteration, a tweak to the policy, which will honour the triple lock for the rest of this parliament, but that change will come in from April 2030. 

So, what’s changing? The state pension uprating system will still have three elements. It’s important to say that, and they are inflation and 2.5%, so those remain, but it’s the earnings element which is being tweaked. The earnings element will be the amount required to return or maintain the value of the state pension relative to earnings. So, again, there’s still three parts of it.

How much does the government expect to save from this policy? Well, forecasts have suggested that by the end of the 2030s, it should save around £15 billion, and by the end of the 2050s, around £50 billion.

And what the government has said, or what Burnham has said, is that he wants to use those savings to fund social care.

So, they’re the amounts that the government expects to save by tweaking the triple lock over time. But as many experts have pointed out, there’s no guarantee that they will be the amounts that they save, and that’s because forecasting savings to the state pension, forecasting the cost of the state pension, is really difficult because you don’t know what inflation is going to be in the future, and we don’t know by how much earnings are going to rise.

So, that’s been one of the key questions around this. [Will] this tweak to the triple lock and the savings from that [that are] going to be used to fund social care actually fully fund social care? Most people think it probably won’t, and the government may need to find other sources.

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Kyle Caldwell: Could you explain a bit more about what exactly is changing with the earnings element? I’ve seen various headlines point to the triple lock changing to a double lock. But as you’ve said, they are still taking into account earnings growth, but just not in the same way as they do at the moment.

Craig Rickman: That’s right. So, what it will essentially do is it will remove this ratcheting effect that you get with the state pension triple lock, which is what critics have said is one of the reasons that has made it so expensive to run since it was launched in 2011.

In terms of how this ratcheting effect works, let’s say you have a period where inflation spikes. So, when inflation spikes, earnings don’t tend to rise at the same time.

The earnings increases sort of arrive later and play catch up, [when] companies start paying their staff more money to cope with the inflation increases. So, what that does is it sort of ratchets up the state pension over time. So, instead of that happening, it will be sort of the value of earnings over a period of time instead of [it being] assessed every year.

Kyle Caldwell: So, following that change to the earnings elements, I suppose the key question people receiving the state pension or those about to will be asking themselves is: will I be worse off under these changes?

Craig Rickman: That’s a good question. If the tweaked triple lock or the adjusted triple lock [had been] in place since 2011, the Institute for Fiscal Studies (IFS) did some calcs and worked out that the state pension would have risen by 75% over that period.

Under the current triple lock, it rose by 89%. So, in answer to that question, if it had been in place since 2011, then people wouldn’t have been as well off as they would have been under the current triple lock system. However, if since 2011 the state pension had increased just with inflation, it would have risen 60%. And if it had risen just in line with average earnings, it would have been 66%.

The IFS calculated that the state pension would have risen - again, under this sort of tweak proposal - 6% above inflation. So, it would have risen 6% in real terms.

Kyle Caldwell: Let’s now move on to the Autumn Budget. Reports over the weekend indicate that Healey faces having to find £35 billion to avoid cuts to public spending while meeting his pledge to raise defence spending to 3% of national income by 2030. 

That £35 billion figure is from the IFS - you’ve already mentioned them - a think tank. According to the IFS, Healey will have to choose between spending cuts, tax rises, or a mixture of both. One area that they are reportedly taking a very close look at is capital gains tax.

Now, Craig, proposed changes to the capital gains tax regime, there’ve been rumours that have cropped up in the last two Budgets, and rates actually went up in 2024. It’s not that long ago. Could you firstly explain why this time around the rumours are gathering pace?

Craig Rickman: Yeah. So, the capital gains tax regime has been a big target for the government in recent years. As you note, in the 2024 Budget, the headline rates went up. So, the basic rate went up from 10% to 18%, and the higher rate went up from 20% to 24%, and that’s on the sales of shares, so it brought them in line with the capital gains tax rates for property.

But even before that, the annual exemption, the amount that you can enjoy in profits every year tax free, was slashed. That used to be £12,300 and that was more than halved to £6,000, and then halved again to £3,000 - the amount that it stands at today. All those changes have happened over the past few years, so that’s been a big target for the government. 

There are now rumours that the government could target capital gains tax again. The rumour this time, as they were last year and the year before that, is this idea to equalize them with income tax rates.

If we look at the income tax system in the UK, that would mean the basic rate would rise to 20%, the higher rate to 40%, and the additional rate to 45%, or even slightly higher in Scotland. So, they are the rumours doing the rounds.

Part of this has been stoked by the Labour donor Dale Vince, who suggested that the capital gains tax rate should be equalized with income tax in order to fund an increase to the personal allowance, or to help fund an increase to the personal allowance is more accurate.

So, yeah, they’re the rumours doing the rounds, and they’re really starting to gather a bit of pace.

Kyle Caldwell: Labour in general, Healey in particular, have been playing their cards very close to their chest. Healey has previously said that he won’t give any answers or signals that will fuel Budget speculation, but he did point out to The Sunday Times in late September that the UK has the lowest capital gains tax of any G7 nation. So, Craig, you’ve done some research looking into this, how do the UK capital gains tax rates compare with our G7 neighbours?

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Craig Rickman: Just on that note, if you’re going to make a comment that the UK has low capital gains tax rates compared to others, it does signal that you might be inclined to increase them. That’s the takeaway that people might have. 

So, let’s have a look. Healey said we have the lowest capital gains tax of any European G7 nation, so let’s compare how we look with our neighbours.

If we look at France, it has a capital gains tax rate of 30%, which could rise to 34% for the top earners. For Germany, capital gains tax is 25%, plus there could be a 5.5% solidarity surcharge on the tax paid, which means the total could go to 26.375%.

Italy has a capital gains tax rate at 26% and then, as we’ve said, the UK top rate is 24%. So, were Healey’s comments around it correct? Are we lower compared to the others? Yes, we’re lower, but we’re not talking huge amounts here. In some cases, we’re talking one or two percentage points, so it’s not huge. And if you looked at capital gains tax on a global scale, we’re probably somewhere in the middle. But just in general, comparing tax between different jurisdictions is always a bit of a tricky thing to do.

If we take Germany, for example, capital gains tax is charged on dividends and interest as well, so people will pay 25%-ish on those. Whereas in the UK, we know that on interest and dividends, the top rates are much higher.

So, yeah, if you looked just at the headline rates, yes, our capital gains tax rates are lower than in the countries he’s mentioned, but you need to dig a bit deeper to find out more about how tax systems work.

But, interestingly, if the government decided to equalize capital gains tax with income tax rates, then it would shunt us right near the top, to the very top, in terms of top capital gains tax rates.

Kyle Caldwell: However, if capital gains tax rates were to increase, there’s no guarantee that that’s going to increase tax revenue because it’s very much based on behaviour. Ultimately, you’re not going to pay capital gains tax unless you sell investments or if it’s not your main residence, you sell a property.

Craig Rickman: Well, that’s right. HMRC did some calculations on this and found that if capital gains tax rates were increased by 10 percentage points, they would actually result in a net reduction in Treasury revenue. So, this is not that simple for the government.

If they did see the capital gains tax regime as somewhere where they could raise some extra revenue, then it’s not that simple. They have to be a bit careful there because, as you know, it could trigger a shift in investor behaviour because, as you noted, you only pay capital gains tax if you sell something, if you transfer it or you gift it to someone else. It’s only on what’s called a disposal of an asset, and if people think the rates are unpalatable, then they’ll just stop selling stuff with a view that either rates will come down in the future or, alternatively, they’ll hold on to the asset until they die because there’s no capital gains tax on death.

Kyle Caldwell: On that point about capital gains tax not being payable on death, what this means is that any gains that you’ve made during your lifetime, they’re wiped out on death. Is there any prospect of that rule changing at all?

Craig Rickman: That’s a rumour that has surfaced before, and it’s an option for the government. But I think we, in the UK, typically don’t like double taxation. I say that knowing that from April next year, unspent pension savings could be subject to a double taxation in the form of inheritance tax and income tax.

So, it can happen, but if, for example, people were leaving pensions to loved ones that were double taxed, and also other types of assets in accounts that aren’t in tax wrappers, then [there] could be really, really punishing tax bills on death. Obviously, that’s something that we hope doesn’t happen.

Kyle Caldwell: For investors, the main way to keep capital gains tax at bay is to make use of tax wrappers. You can put up to £20,000 a year in an ISA, and you can use your pension allowance. Most people can put 100% of their earnings, or up to £60,000 a year, into their pension.

There are other tactics as well, Craig, that people can utilise. Could you give us a quick run through of them?

Craig Rickman: Yeah, there are a few things you can do to mitigate capital gains tax. Again, this is on holdings outside tax wrappers. 

One thing you can do is to use your annual exemption every year if you can. As I mentioned earlier, the first £3,000 of any gains that you make during the tax year are tax free. But that allowance is ‘use it or lose it’. So, if you don’t use it between 6 April one year, then 5 April the following year, then you can’t carry it forward. So, it’s worth using.

One tactic that some investors use is something called Bed & ISA, where you realize gains outside of tax wrappers up to your £3,000 annual exemption, and then funnel that straight into your ISA to make sure that any future capital gains and any future dividends escape tax. That’s one thing to look at.

Another is gifting money to spouses and civil partners. They are capital gains tax exempt.

Another thing you can do as well is offset losses against gains, so you can offset losses made - I think it’s the previous four years. So, there are a few things that investors can do to avoid capital gains tax.

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Kyle Caldwell: Let’s now move on to the next item on the list, which is pension tax-free cash. There were a lot of rumours ahead of last year’s Autumn Budget about potential changes to tax-free cash. The pensions minister, Torsten Bell, made some recent comments to a financial publisher called Citywire on tax-free cash rumours. Craig, could you run through what he said?

Craig Rickman: So, I have the quote here. He said: ‘Some pension savers have been very badly let down by newspapers writing garbage, and they should stop it, because it has caused a lot of problems over the last few years. Some people have lost serious money.’ A very bold statement there. 

Let’s unpack that a bit. I guess it should offer some reassurance to people ahead of the Budget. The rumours about cuts to tax-free cash haven’t quite been as fierce as in previous years, but there have been a few. And it would be a very strange move by the government if the pension minister came out and said this, and then they did make the change at the end of this month.

But at the same time, he hasn’t come out and said: ‘We’re not going to change x y z elements of pension tax’. He hasn’t come out and said that. Also, in terms of the rumours and what newspapers have been publishing, I think it’s important to remember that the rumours and the speculation before the previous two Budgets have been stoked by the government. We were warned two years ago that there was a fiscal black hole, and it needed to be plugged with tax rises, and we were also warned that there was going to be a painful Budget.

So, then it’s natural that the media will then speculate about what might happen. I think we can agree that things did get out of control. However, last year, Rachel Reeves, then chancellor, two weeks before the Budget, did come out and say that they were not going to touch pension tax-free cash. In some cases, that might have been a little bit too late because some people had already reacted to the speculation.

I think that Torsten Bell’s comments, in my personal view, should offer some reassurance. But that’s something the government could do: if you’re not going to change it, come out and say that.

Kyle Caldwell: I completely agree. If they’re upset about speculation, then they can come out and end it by clarifying that they are not going to make any changes in the upcoming Autumn Budget to tax-free cash. But I think it’s important that you don’t act on speculation and wait for the hard, cold evidence, because some financial decisions that are made based on rumours are irreversible.

Craig Rickman: Yeah, and taking your tax-free cash is one of them. Particularly, as there’s no cooling-off period. So, you couldn’t take your tax-free cash now, for example, wait and see what happens in the Budget, and then reverse the decision. We’ve had direction from HMRC that you can’t do that. 

So, yeah, I totally agree to your point. Whenever you are making big decisions like this, always make them with your long-term future in mind, and go and get advice if you’re unsure.

Kyle Caldwell: Let’s now move on from pension tax-free cash to Britain’s most hated tax, which, of course, is inheritance tax. We saw at the recent Conservative Party Conference a pledge that there will be reform to inheritance tax if the Conservatives win the next election. Craig, could you run through what was said, and could we see some inheritance tax reform at the upcoming Autumn Budget?

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Craig Rickman: I would argue that there should be some reform to the inheritance tax system, that’s long overdue. We’ll come on to that in a second.

But let’s have a look at this Conservative proposal on inheritance tax, which will, because it’s a cut, inevitably pique the interest of some voters.

So, what are they proposing? They’re proposing that the family home, or your home you can leave to your children or grandchildren completely tax free. While everyone will be allowed to leave £500,000 tax free, so £1 million for couples. 

Essentially, in addition to you leaving your home tax free, and because people would be able to leave their home tax free, this would mean the residence nil rate band - the £175,000 that you can pass on tax free if you own a home and pass it to direct descendants, children or grandchildren - is scrapped, or probably more accurately that the £175,000 is added to the nil rate band, which is the £325,000 everyone can pass on tax free. So, they’ve proposed to add those together so that everyone gets £500,000. Again, it’s an interesting proposal. 

One of the key sticking points of this appears to be the cost. Conservatives reckon it will cost £6 billion, but many experts have waded in and said it could cost double that. So, it could be an expensive policy, and to introduce something like that may require tax hikes elsewhere.

The other thing is that it would create an inheritance tax loophole for the right people. So, you buy the most expensive house, upsize if you like, and make sure that you have enough money in other assets, pensions or ISAs and other savings and assets that are below £1 million if you’re a couple, and effectively, you could escape inheritance tax. So, that’s the first bit. 

Could we see an inheritance tax cut at this Budget? I think that’s incredibly unlikely. I think that if I had the choice, if I was given a magic wand, I would get rid of the residence nil rate band. I think it’s too complicated and it’s unfair in parts, so I would remove that £175,000 and I guess, like the Conservatives have suggested, I would add it to the standard nil rate band, which has been frozen at £325,000 since 2009. So, that’s something that I would do if I were chancellor. But I think IHT giveaways at this Budget are incredibly unlikely to happen.

Kyle Caldwell: You just mentioned something you’d like to see happen in the Autumn Budget. One that I would like to see is the removal of stamp duty on UK shares. I sound like a bit of a broken record because I’ve said it a number of times over the years on preview podcast episodes ahead of the Budget.

Particularly now, when the government is trying to foster a greater investment culture in the UK and trying to turn us away from a nation of savers into a greater nation of investors. There’s lots of positive things that they’re doing, including looking at things like risk warnings. But I just feel that having stamp duty on UK shares, it’s nonsensical, it’s a barrier, and I think it should be removed.

Craig Rickman: Absolutely. Yep, yep. That’s something that we’ve campaigned for at interactive investor for some time, and, yeah, I completely agree with you.

Kyle Caldwell: So, Craig, we’ve examined the rumour mill, and you’ll be back on the podcast in a couple of weeks to run through the contents of the famous red briefcase.

Craig Rickman: Looking forward to it.

Kyle Caldwell: Thank you for listening to our preview episode ahead of the Budget. As I’ve just mentioned, we will be doing a dedicated episode following the Budget, and that’ll be published on Thursday 29 October. It’ll be later in the day rather than first thing, but it will, as usual, be published on a Thursday. 

We always love to hear from listeners, and the best way to get in touch is by emailing us at: otm@ii.co.uk. 

Ahead of the Budget, we’re going to have plenty of news analysis on the ii website, which is ii.co.uk, and we’ll be back as usual next Thursday for our 200th episode in which myself and Dave Baxter will run through the golden rules that we keep on coming back to.