Rachel Reeves’ first Budget as Chancellor has had the rumour mill in overdrive as she strives to fill a blackhole in the public finances.
Labour promised us a ‘painful’ budget and they sure delivered. After boxing themselves into a manifesto promise of no tax rises for ‘working people’ on income tax, National Insurance, corporate tax, or VAT, the Government had to look elsewhere for the £40 billion of taxes needed to fill their public finance black hole.
The biggest single measure designed to address that blackhole was an increase in the rate employer NICs from 13.8% to 15%.
Here is a summary of some of the key points.
Pensions and Inheritance Tax (IHT)
There were strong rumours that we could see a change to the tax treatment of pension death benefits in the Budget and this has materialised. From 6 April 2027, most pension death benefits will be included in the estate for IHT purposes.
The Government has opened a consultation on the processes required to implement the changes. Responses must be in by 22 January 2025.
The aim is that on death, the pension scheme administrator (PSA) and the personal representatives (PR) of the estate will liaise, and the scheme will let the PRs know the amount of death benefits payable and the beneficiaries. Any pension death benefits going to the spouse/civil partner will be covered by the spousal exemption.
The PRs will the use an HMRC calculator to apportion the nil-rate band between the different elements of the estate and they’ll let the pension scheme know of any IHT charge due on the pensions. The scheme would then pay the IHT directly to HMRC before paying out the death benefits to the relevant beneficiaries.
Any tax due under the normal pension rules, for example on lump sums exceeding the Lump Sum Death Benefit Allowance (LSDBA) or on all benefits on death after age 75, would be levied on the residual amount after any IHT has been paid by the scheme.
Comment – It is worth noting that Tax on death benefits is not new – it was only the changes in 2015 that allowed tax-free death benefits (up to the available lifetime allowance) to be paid where death occurred under age 75. While these changes are not reversing that, the inclusion of pension in the estate shows the new Government want pensions to be used for retirement provision and not wealth transfers.
Capital gains tax (CGT)
Main rates
Capital gains tax rates will increase to 18% for basic rate taxpayers and 24% for higher rate and additional rate taxpayers, up from 10% and 20% respectively. This will happen immediately. There is no change to CGT rates on residential property which continue to be taxed at 18% and 24% respectively.
There is no change to the CGT annual exemption of £3,000 for individuals and £1,500 for trusts.
Business Asset Disposal Relief (entrepreneurs’ relief)
This relief provides a special rate of CGT of 10% on disposals of business assets up to a lifetime allowance of £1 million. From 6 April 2025, the rate of CGT will increase to 14% and from 6 April 2026 to 18%, on disposals up to £1 million.
Inheritance tax
Agricultural property relief and business property relief:
From April 2026, only the first £1 million will get 100% relief on the combined value of agricultural and business property. For qualifying assets over £1 million, relief will be given at 50%, resulting in an effective rate of 20%.
These reliefs will also be applied to shares not listed on recognised stock markets such as Alternative Investment Market (AIM) shares.
Inheritance tax: nil-rate band and residence nil-rate band:
The nil rate band of £325,000 and the maximum residence nil-rate band of £175,000 will now be frozen until 5 April 2030, two years beyond the current freeze.
Tapering of residence nil rate band will continue from the £2 million threshold.
Comment – Planning options will not therefore change, but with estate values generally growing year on year more, more individuals will be dragged into the IHT net. Earlier planning during lifetime and ensuring that wills are properly drafted to maximise benefits from the residence nil rate band is essential.
Individual Savings Accounts (ISAs)
There are no changes to the current subscription limits. These are £20,000 for ISAs, £4,000 for Lifetime ISAs (included in the £20,000 ISA subscription limit) and £9,000 for Junior ISAs and the Child Trust Fund. These will be fixed until 5 April 2030.
The ‘British ISA’ proposed at the last budget will not go ahead.
Comment – The Pre-budget rumours of a cap an accumulated ISA savings did not materialise.
Income tax and National Insurance (NI) for individuals
The freeze on income tax and NI thresholds will continue until 2028 as announced by the previous government, but beyond that the thresholds will increase in line with inflation.
The threshold at which child benefits are withdrawn was increased from £50,000 to £60,000 from the beginning of this tax year and this will continue. Benefits are withdrawn at the rate of £1 for every £200 in excess of the £60,000 threshold. This means all child benefits are lost once the highest earner in the household has income over £80,000.
Comment – It is worth remembering that individual pension contributions are still a deduction from income used for this test. Proposals to extend this test to household income at a higher threshold will not go ahead.
National Insurance for Employers
From 6 April 2025, the rate of employer NICs will increase from 13.8% to 15% and the Secondary Earnings Threshold – the point at which employers start paying NICs on an employee’s earnings – will reduce from £9,100 a year to £5,000 a year. The threshold will be frozen until 6 April 2028 and will be increased by CPI thereafter.
Currently, the Employment Allowance allows employers with NIC bills of up to £100,000 in the previous tax year to deduct £5,000 from their NIC bill. From 6 April 2025, this allowance is being increased to £10,500 and the £100,000 threshold will be removed so that all employers will be eligible for the allowance.
Comment – The Government claim that 865,000 employers will pay no NICs and that more than half of employers with NIC liabilities will either see no change or be better off following these changes.
State Pensions
It was confirmed that the triple lock on State Pensions would be maintained for the remainder of this parliament, guaranteeing a 4.1% earnings-based increase in April.
This means that the full New State Pension will increase to £230.25 a week from 6 April 2025. We expect the full Basic State Pension to increase to £176.45 a week (single person) or £282.15 a week (married couples and civil partners).
The 4.1% increase will also apply to the guaranteed element of Pension Credit.
Changes to the taxation of non-UK domiciles
The Chancellor confirmed that the abolition of the remittance basis and removal of the concept of domicile for tax purposes will be go ahead from the 6 April 2025. This is to be replaced with a new Foreign Income and Gains (FIG) regime which is determined by UK residency rather than domicile.
Individuals who become UK resident having been non-resident for more than 10 years will not pay UK tax on their overseas income and gains for the first four tax years of UK residence and will be free to bring these funds to the UK free of any additional tax. They will continue to pay tax on their UK income and gains in the normal way.
Currently someone who is non-UK domicile is only subject to UK IHT on assets situated in the UK. However, they become subject IHT on their worldwide assets if they become UK domicile or deemed domicile.
From 6 April 2025, IHT will apply on worldwide assets where someone is deemed to be a long-term resident. This is typically where someone has been resident in the UK for more than 10 years in the last 20 years. Where someone ceases to be UK resident they will remain subject to IHT for up to 10 years after leaving the UK.
Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This blog is provided strictly for general consideration only and is based on our understanding as at 30 October 2024 of law, HM Revenue & Customs practice and the contents of the Autumn Budget October 2024. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.
