UK tax changes dominate budget debate before 28 October statement

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UK tax changes before budget

Highlights

Inheritance tax receipts hit a record £8.5bn in 2025-26 with forecasts rising to £14.5bn by 2030-31 as effective rates remain well below the 40% headline.
Capital gains tax receipts surged nearly 80% to £24.3bn in 2025-26, driven by allowance cuts and higher rates, with 584,000 taxpayers—a 45% annual increase.
England’s high-value council tax surcharge begins April 2028 on homes over £2m with estimated annual revenue of £400m, affecting just over 138,000 properties mainly in London and the south-east.

Tax measures in focus before the budget

The Guardian reports that pre-budget debate is centring on taxes outside Labour’s promised "big three", with inheritance tax and capital gains tax attracting particular attention before John Healey delivers his first budget as chancellor.

Inheritance tax receipts have climbed to record levels, reaching £8.5bn in the 2025-26 tax year from £8.2bn a year earlier. The Office for Budget Responsibility forecasts that figure rising to £9.5bn this year and £14.5bn by 2030-31, even though only about 5% of estates, roughly 30,000 annually, currently pay the levy.

The standard inheritance tax rate remains 40% on assets above the £325,000 threshold, although reliefs reduce liabilities for many families. A residence allowance can lift the tax-free threshold to £500,000 when a main home passes to a direct descendant, and spouses can transfer unused allowances, allowing couples to pass on up to £1m without attracting the tax.

Government data also show effective rates are lower than the headline figure. Across estates paying inheritance tax in 2023-24, the average effective rate was 13%, while estates valued between £1m and £1.5m faced an average bill of £151,000, or 12% of total value.

Pressure is also building around capital gains tax after rule changes lifted receipts nearly 80% to £24.3bn in 2025-26 from £13.7bn the previous year. The annual tax-free allowance has been cut from £12,300 in 2022-23 to £3,000, helping push the number of taxpayers paying the levy to an all-time high of 584,000 in 2024-25, up 45% on the prior year.

HM Revenue and Customs says the burden remains concentrated among the biggest gains, with nearly half of capital gains tax revenue in 2024-25 coming from people making gains of £5m or more. Rates were raised in the autumn 2024 budget to 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers, although reports this week say Healey has rejected calls for another increase.

Property and pension issues widen household impact

Property taxation is another area in focus, with England's high-value council tax surcharge due to begin in April 2028 for homes worth £2m or more. The annual charge ranges from £2,500 for properties valued between £2m and £2.5m to £7,500 for homes worth at least £5m, and the government says fewer than 1% of residential properties in England will be affected.

The Office for Budget Responsibility estimates the surcharge will raise £400m a year, while Hamptons puts the number of affected homes at just over 138,000, concentrated mainly in London and the south-east. Consultation proposals also indicate that lower-income households in valuable properties may be able to defer the charge if household income is £35,000 or less and savings are £16,000 or less.

Council tax more broadly is also under pressure as several English local authorities consider sharp bill increases. Hammersmith and Fulham has warned residents of a possible 150% rise, which would take a typical band D bill to £2,522.50 from £1,009, while Wandsworth and Westminster are considering near-doubling charges as councils respond to funding strains.

These moves come as six councils in England are permitted to raise bills by an unlimited amount over the next two years. The disputes reflect wider tensions over the Fair Funding formula and large differences in council tax burdens between neighbouring authorities, including contrasts between Wandsworth and Lambeth, and between Kensington and Chelsea and Blackpool.

Pension taxation is adding another layer of budget sensitivity. Several million more pensioners have begun paying income tax since the personal allowance was frozen at £12,570 five years ago, with the number rising from 7.1 million in 2022-23 to 9.6 million this year.

When the full new state pension rises above £13,000 next April under the triple lock, the government faces fresh questions over how tax will apply to retirees whose income only just crosses the threshold. Pensions minister Torsten Bell has said people in that position will not need to pay tax, and the budget is expected to set out how that approach will work in practice.

Our earlier coverage of John Healey’s pre-Budget stance outlined his commitment to sticking with deficit-reduction plans and presenting a fiscally disciplined package while still trying to support growth and ease some cost pressures. The piece also pointed to modest GDP growth data and the mounting political debate over what the Budget should prioritise.

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