Chancellor Rachel Reeves announced £40 billion of tax rises and pledged to improve public services as she delivered Labour’s first Budget in 14 years.
With fevered speculation about precisely where tax increases would land, the chancellor unveiled big reforms to pensions, inheritance tax, national insurance and capital gains tax, but some pre-Budget rumours proved wide of the mark.
Here, Katharine Lindley, Head of Advice at EQ Investors explains the key points and what the announcements could mean for you.
Pensions
Reeves announced she would close the loophole on inherited pensions, which will have inheritance tax (IHT) added from April 2027. The exemption for spouses and civil partners will remain.
The annual allowance that caps tax-efficient pension contributions stays at £60,000 with no change to the tapering rules for high earners.
Meanwhile, the triple lock (where the state pension has to go up each year by either 2.5 per cent, inflation, or earnings growth – whichever is highest) will remain in place for the duration of this Parliament.
The State Pension will rise by 4.1 per cent in April 2025.
Inheritance Tax
The IHT nil rate band of £325,000 and residence nil rate band of £175,000 will be frozen for a further two years to 2030. From April 2026, the 100 per cent rate of relief from IHT will continue for combined agricultural and business assets up to £1 million, and relief will be 50 per cent on funds over £1 million (an IHT rate of 20 per cent).
UK stocks listed on the Alternative Investment Market (AIM) will qualify for 50 per cent relief with IHT at 20 per cent.
From April 2027 almost all pensions will be brought into the IHT net. Following pension freedoms, pensions are increasingly used to pass on wealth and estate planning will need to be reviewed.
At present, most pension death benefits are paid out at scheme discretion which means they do not form part of the estate. The proposed changes mean that schemes with discretionary disposal are included for IHT. Dependant scheme pensions and charity lump sum death benefits will be exempt. If pension benefits are paid to a spouse or civil partner, then exemptions will apply.
Despite the changes, pensions are a very tax-efficient way of building up funds for retirement. There have been no changes on tax-free cash, contributions continue to qualify for marginal rate tax-relief, the standard annual allowance for contributions stays at £60,000, and income and gains continue to roll up tax-free.
The consultation runs until 22 January 2025. The proposals will increase the administration burden on personal representatives and pension scheme administrators so the practical details could change before this comes into force.
Capital Gains Tax
The chancellor announced that the lower rate of Capital Gains Tax (CGT) will rise from 10 per cent to 18 per cent, and the higher rate from 20 per centto 24 per cent. The changes will apply from today.
Rates of CGT on residential property sales (excluding the main home) will remain at 18 per cent for basic rate taxpayers and 24 per cent for higher and additional rate taxpayers.
There were no changes announced to the tax-free CGT allowance of £3,000.
The £1million lifetime limit on capital gains from the sale of all or part of a company under business asset disposal relief (BADR) stays. However, the CGT rate will rise from 10 per cent to 14 per cent from 2025 and 18 per cent from 2026.
The CGT rates on carried interest will increase to 32 per cent from April 2025, with further reforms due from 2026.
From 30 October 2024, the main rates of CGT have changed:
- Lower rate increased from 10 per cent to 18 per cent
- Higher rate increased from 18 per cent to 24 per cent
These new CGT rates will match the residential property rates.
The annual exempt amount is unchanged at £3,000, having reduced from £12,300 in 2022/23.
This means that unwrapped investments will suffer higher taxes. There is no differentiation in treatment for gains built up over time nor protection from inflationary gains. It will be increasingly important to use of tax-efficient investment allowances, such as ISAs, and consider the most suitable investment wrappers and how to distribute family investments.
It was rumoured that the CGT uplift on death would be removed. No changes were announced so there is still no CGT payable on death.
Business Asset Disposal Relief (BADR) and Investors’ Relief (IR)
Business Asset Disposal Relief (BADR) and Investors’ Relief (IR) means that certain gains are taxed at a lower rate of CGT. The CGT rate for these two reliefs will increase gradually, from 10 per cent now, to 14 per cent from April 2025, and 18 per cent from April 2026 for gains up to a lifetime limit of £1million. Standard CGT rates apply on lifetime gains above £1million.
Business owners are unlikely to sell their business based on CGT rates alone. However, those approaching retirement and already intending to sell their business may opt to retire sooner and sell at reduced CGT rates.
Employers’ National Insurance hike
Employer National Insurance (NI) will be increased to 15 per cent and the lower earnings threshold at which companies pay will reduce from £9,100 to £5,000. This will raise an extra £25 billion in tax revenue. This increase in costs for employers is likely to affect employees by scaling back pay increases or hiring plans.
The employment allowance will increase to £10,500 from £5,000, meaning some businesses will not pay any Employer NI next year.
Stamp duty
The stamp duty surcharge on second homes and investment properties will be increased from 3 per cent to 5 per cent tonight.
ISA allowances
ISA thresholds have also been frozen until 2030.
The limits will remain at £20,000 for the ISA, £4,000 for the Lifetime ISA, and £9,000 for the Junior ISA and Child Trust Funds respectively.
VCTs & EIS commitment
The Chancellor reiterated the Government’s commitment to the tax-efficient Venture Capital Trust and Enterprise Investment Schemes – extending these through to 2035.
Domicile
The concept of domicile will be removed from the tax system from April 2025 and be replaced with a new residence-based regime.
Income Tax
Reeves announced she would not extend a freeze on personal income tax thresholds, which has dragged millions of workers into higher tax bands. Instead from 2028-29, thresholds will rise in line with inflation, giving workers more headroom for salary growth before they hit the next income tax band.
VAT on private school fees
The Chancellor reconfirmed that VAT at 20% will be introduced on private school fees from January 2025 and business rate relief will be withdrawn from April 2025.
Child Benefit still based on solo income
Child benefit will continue to be based on individual income rather than household income, meaning anyone earning £60,000 or more before tax each year must pay a high-income charge above that threshold. It means the system that punishes single earners will remain. Currently, a sole earner on £80,000 gets no Child Benefit, while two workers each on £59,000 get the full benefit.
Other measures
The government has committed £1.8 billion to expand childcare services in a move that is a continuation of its predecessors’ plan to roll out 30 hours of free childcare for parents with children aged over nine months in England from September 2025.
Fuel duty will remain frozen next year, and the chancellor will keep a temporary 5p cut that was introduced in 2022 after energy prices rose following Russia’s invasion of Ukraine.
The national living wage for workers aged 21 and above will increase to £12.21 per hour from April next year. Announced on Tuesday, the rise is a 6.7 per cent increase for those aged over 21. For 18- to 20-year-olds, the hourly rate will rise by £1.40 to £10.00 per hour as the government moved towards a single adult rate.
Clean energy mission
Reeves confirmed plans to invest in battery gigafactories, carbon capture and storage projects, electric vehicle supply chains, domestic energy efficiency upgrades, and new green hydrogen production plants, as she promised to deliver on Labour’s pledge to turn the UK into a ‘clean energy superpower’.
This article is sponsored by EQ Investors
