Leading up to the 30th of October Budget Announcement Sir Keir Starmer, promised a fresh approach seeking…
“wealth and opportunity for all”
The news was dominated by several leaks and rumours prompted many taxpayers to take action before the official announcement.
The highly anticipated Budget announcement itself was a lengthy and detailed 80-minute speech delivering some expected changes and a fair share of surprises.
The tax increases are the second highest in history, and it is who the tax increases are aimed at which could cause concern amongst taxpayers. The national insurance and minimum wage increases, and inheritance tax changes could have a significant impact on the stability of the country.
Inheritance tax
Inheritance tax (IHT), which is currently 40%, is paid on the value of a deceased person’s assets above a threshold of £325,000. The Chancellor announced a freeze on the reduction in inheritance tax thresholds until 2030.
At present, any money saved in a pension does not count towards this but, from April 2027, inherited pensions will be included.
Plus, the government is planning to impose taxes on inherited retirement benefits, whilst also overhauling and restricting agricultural and business deductions.
More on the inheritance tax implications for pensions is below.
Pension taxation
The personal finance landscape is about to undergo a significant shift as changes to capital gains tax rates and the inclusion of pensions in inheritance tax calculations take effect.
From 2027, private pensions, specifically those under defined contribution schemes, will no longer be excluded from inheritance tax calculations. It’s time for individuals to reassess their retirement strategy.
Privately held pensions have long enjoyed many advantages, including tax relief and exemption from inheritance tax. That is about to change – a reformation that could drastically alter the way many people approach their pensions in retirement.
This removes planning opportunities to use pensions as a vehicle for tax planning, making the freeze to the IHT threshold until 2030 more significant with an increase in assets assessable and therefore pulling more people into the scope of IHT. It will encourage the spending of savings rather than saving the funds for their children or grandchildren.
In addition to this, pension payments received after death are subject to income tax when received by beneficiaries. There was no mention of this in the budget documents, which potentially exposes beneficiaries to an overall tax liability of between 60 and 85% on inherited pensions. A key point which I’m sure will be raised in consultation.
Capital gains tax and dividends
The was a lot of pre-budget discussion about what the chancellor would do with capital gains tax. They had trialled a 33-39% rate and statistics showed that any rise above 5% would likely result in a tax receipt net deficit over the next 3 years.
The rise from 20% to 24% for the higher rate was not a surprise. However, the large increase from 10% to 18% for the lower rate means that lower earners, those up to £50,270, will see a dramatic increase in their capital gains liabilities should they sell chargeable assets.
Those who have worked hard in the build-up to the budget to get deals across the line will be happy to know they have been proved correct to have done so, saving 4%.
This was a hotly anticipated change as it has long been argued that charging significantly lower tax on capital gains than other income is unfair and unjustifiable. The changes announced were more modest than anticipated with no increases to the rates on gains on property.
Private Residence Relief will also be maintained meaning that main residential properties are exempt from capital gains tax.
However, the government will increase Capital Gains Tax rates on carried interest, a form of performance-related reward received by fund managers, from 28% to 32%.
Much to many small business owners’ relief there was no increase announced for Dividend tax.
The rates remain as follows:
- Basic rate band 8.75% until 2026
- Higher rate band33.75%until 2026
- Additional rate band 39.35% until 2026
Employers’ national insurance contributions
Perhaps the most controversial change, also leaked in advance is the 1.2% increase in employers’ national insurance contributions to 15%. In isolation this may seem like a small increase for business owners, however, it was accompanied by a significant reduction in the threshold from £9,100 to £5,000. Initially, this could disproportionately hit small businesses especially when coupled with the increased employment allowance cap. Another announcement that business owners need to consider is the above-inflation rise of the 6.7% in the national minimum wage.
Employer NICs rate increase
- The rate will be increased from 13.8% to 15% from 6 April 2025.
- Employers Class 1 National Insurance Secondary Threshold (ST) will be reduced to £5,000 per year.
- Employment Allowance will be increased to £10,500 and the £100,000 threshold removed.
Carried interest taxation reform
The government will reform the way carried interest is taxed to be within the Income Tax framework.
From April 2026 a 72.5% multiplier will be applied to qualifying carried interest that is brought into charge.
As an interim step, the government will introduce legislation in Finance Bill 2024-25 to increase the 2 Capital Gains Tax rates for carried interest to 32% from 6 April 2025.
ISA’s and personal savings allowance
Before the budget announcement there was much uncertainty about the future of the Isa allowance and personal savings allowance. This caused a flurry of activity among savers.
This included predictions around changes to the no cap on lifetime contributions to an Isa and annual deposits of £20,000.
Think-tank, Resolution Foundation, urged the Government to propose a lifetime cap of £100,000 for Isa savings which would primarily affect those with higher disposable incomes. However, there were no changes to either the annual deposit limits or lifetime contributions.
As announced at Autumn Budget 2024, the annual deposit limit for:
- ISAs will remain unchanged at £20,000 until April 2030
- Junior ISAs will remain unchanged at £9,000 until April 2030
- Lifetime ISAs will remain unchanged at £4,000 until April 2030
Despite predictions to the contrary, the personal savings allowance did not change. Interest earned on regular savings accounts will continue to be taxed when it exceeds the allowance, which is £1,000 for basic-rate taxpayers £500 for those in the higher-rate bracket. Additional-rate taxpayers get no allowance at all.
R&D Tax Relief
The Autumn Budget has provided some welcome stability to Innovation Incentives by maintaining and not announcing further changes to R&D tax relief and the Patent Box, which is essential for supporting UK innovation allowing businesses to move forward confidently with R&D investments crucial to growth.
This stability in R&D tax relief reflects the importance of fostering innovation within our economy under the Labour government. However, correctly, and accurately identifying and quantifying R&D activities is the first essential step in a robust and compliant R&D Tax Relief Claim process.
With the announced increase in Employers’ NI from 2026, it’s essential for businesses to accurately identify staff involved in qualifying R&D activity and capture all associated NI and pension contributions to ensure they do not miss out on any relief.
DSW Tax can help businesses confidently navigate R&D tax claims with a strong focus on compliance, ensuring they maximise their reliefs and stay aligned with evolving regulations.
Non-doms
The Chancellor confirmed the end of the non-dom regime despite a last-ditch effort from the community and its advisors to warn against the move.The abolition of domicile status for tax purposes had already been announced and will be enacted with effect from April 2025.
In the future, there will be a three-year temporary repatriation relief as part of a residence-based scheme for short-term visitors.
“I have always said that if you make Britain your home, you should pay your tax here. So today, I can confirm, we will abolish the non-dom tax regime and remove the outdated concept of domicile from the tax system from April 2025,” Reeves said in her speech.
The Chancellor introduced a new residence-based scheme in its place intended to incentivise investors and affluent foreigners to the UK for a limited period.
However, this new incentive is likely to have a shorter duration compared to its two-century-old predecessor.
Reeves added:
“To further encourage investment into the UK, we will also extend the Temporary Repatriation Relief to three years and expand its scope bringing billions of pounds of new funds into Britain. The independent Office for Budget Responsibility say that this package of measures will raise £12.7bn over the next five years.”
The decision ends months of speculation around the fate of the regime, which has been the subject of heated debate since the new government was elected.
Maximising revenues
A stream of new appointments directed towards shoring up and recovering amounts lost to fraud and neglect were announced.
These included:
- A COVID corruption commissioner
- A new office of value for money
- A crackdown on fraudsters
- The modernisation of HMRC with particular concentration on umbrella companies and the promoters of tax avoidance schemes
In addition, the interest rate on late paid tax is to increase to encourage better compliance,
Private school fees will rise
Official confirmation has emerged regarding the much-debated Labour policy. As of the 1st of January 2025, a VAT at the standard rate of 20% will be imposed on private schools. The extent to which this will impact the operational costs of these schools hinges on their individual decision-making.
It’s also highly improbable that parents can sidestep the extra costs by prepaying their fees.
Other measures
- Stamp duty land tax on second homes will increase immediately, taking effect on 31 October.
- There will be an increased levy on oil and gas companies.
The future
It will take some time to discover the long-term impact of the announcements on both savers and the government’s growth goals.
We will unpack some of the more complex changes to aspects such as; the abolition of non-dom status and increases in capital gain tax in future updates.
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