Scott Kingsley, Senior Wealth Advisor
After taking an unprecedented 100+ days since the election to deliver the first Labour budget in more than a decade, the speculation and counter-speculation are over. When Chancellor Rachel Reeves introduced the Autumn Budget on October 30, 2024, we knew the focus would be on economic stability and sustainable growth, but there was more.
The budget also brought substantial tax changes, new allocations for public services, and revised measures affecting income, capital gains, and inheritance tax. While the dust settles, I have taken this opportunity to break down the most important highlights to guide you through these updates and their implications for your financial planning.
The personal allowance remains frozen at £12,570 until April 2028, keeping the higher tax bands steady for now. However, the basic tax rate band is also locked at £37,700, with the 40% threshold applying to incomes over £50,270. The six-income tax rates add a more complex dynamic for those in Scotland, with adjustments to be announced in the December Scottish Budget.
On a more positive note, investors will be relieved that ISA regulations have not changed, and the annual allowance remains at £20,000.
Takeaway: Despite inflationary pressures, frozen tax bands mean effective higher tax rates in real terms. This measure indirectly raises the tax burden, especially for higher-income earners. Consider adjusting income streams or tax-efficient investment accounts to manage potential impacts.
Starting in April 2027, unused pension assets will be drawn into estates for inheritance tax (IHT) purposes, affecting beneficiaries who might have previously counted on pensions as a tax-efficient method of wealth transfer.
This change could impact estate planning strategies for many individuals, especially those with substantial pension savings. Including unused pension assets in the estate means they will now face IHT at 40%, which could substantially reduce the amount passed on to heirs.
Takeaway: Including unused pension assets in estates is one of the most significant changes in recent times. This will prompt a review of pension withdrawal strategies and IHT planning to mitigate the tax burden on inheritances.
In a bid to increase revenue, the Chancellor raised the basic Capital Gains Tax (CGT) rate from 10% to 18%, and the 20% rate moved to 24%.
Takeaway: In the last few years, we have seen capital gains tax allowances reduce by more than 75%, and this increase in capital gains tax rates places greater emphasis on the use of ISAs and other tax-efficient investment vehicles.
To boost fiscal stability, employer National Insurance Contributions (NICs) will rise from 13.8% to 15% in 2025, affecting both large and small businesses. The government has also expanded the Employment Allowance to £10,500 and removed previous eligibility thresholds.
National Minimum Wage rates will increase, but more on this later in the article. This will significantly increase labour costs across the board, not only for those at the lower end of the salary scale but also with a ripple effect for those higher up.
Takeaway: Businesses will face increased wage and contribution costs, particularly those with larger payrolls. Reviewing employment strategies and labour costs may be essential to maintain margins.
Corporate tax rates remain unchanged at 25% for profits over £250,000, 19% for those reporting £50,000 or less, with a reduced rate for companies reporting profits between £50,001 and £250,000 a year.
Meanwhile, full expensing on qualifying plant and machinery continues (limited to £1 million a year), which benefits businesses reinvesting in operations. However, as indicated before the budget, furnished holiday letting properties will no longer have unique tax advantages starting in April 2025.
Takeaway: This stable corporate tax regime supports reinvestment while tightening loopholes in specific asset classes. Companies may find greater benefit from reinvesting in plant and machinery given the full expensing provisions.
Starting in April 2025, the UK will shift to a residence-based tax regime, eliminating tax relief based on domicile for non-UK residents. The new rules offer a four-year exemption on foreign income and gains for new residents. However, those with foreign assets face new repatriation rules with discounted tax rates.
Takeaway: This move may significantly impact tax planning for high-net-worth individuals (HNWIs) with foreign assets. Exploring potential tax shelters within the UK or restructuring assets could offer alternative solutions.
The dividend allowance remains at £500, while the savings allowance for basic-rate taxpayers holds at £1,000. These frozen allowances mean limited opportunities to shelter savings income from tax as incomes grow. Higher-income individuals, particularly those in the additional tax bracket, should expect negligible relief from these allowances.
Takeaway: To maximise tax efficiency, consider moving income-generating assets into tax-free or tax-deferred accounts where possible, as frozen allowances reduce the efficacy of current savings strategies.
Private school fees will now incur VAT, and stamp duty on second homes will rise from 3% above the standard rate to 5%, effective October 31, 2024. Residential properties above £500,000 purchased by companies also face an increased stamp duty of 17% (up from 15%). These changes will significantly impact property investment in the UK.
Takeaway: Due to these changes, property investors may face higher upfront costs. A careful review of investment property costs will be essential for those expanding or maintaining UK property portfolios.
Eligible retail, hospitality, and leisure properties will receive 40% relief on business rates in 2025/26, partially offsetting the increase in the national minimum wage and enhanced employer national insurance contributions. Additionally, UK film and high-end TV productions can claim enhanced tax credits, supporting growth in creative industries amid economic uncertainties.
Takeaway: For investors in property-intensive sectors, the government’s relief on business rates provides a welcome cost buffer, potentially improving cash flow in these industries.
The National Minimum Wage will rise to £12.21 per hour for workers aged 21 and over starting in April 2025. The rate for younger employees is also increasing, rising from £8.60 up to £10 an hour for those aged between 18 and 20 from April 2025. This is part of a plan to eventually combine the two rates, resulting in a significant increase in wage costs for all businesses.
Going forward, new payroll software mandates will require companies to report and pay tax on benefits in kind, improving transparency in employment tax reporting.
Takeaway: Wage cost increases may compress profit margins, especially in labour-dependent businesses. Automating payroll to align with new compliance rules will be necessary for tax reporting efficiency.
Making Tax Digital for Income Tax Self-Assessment will apply to those earning over £20,000 from 2026, with expanded compliance efforts focusing on late payments and tax avoidance schemes. This modernisation aims to streamline tax submissions and increase enforcement capabilities.
Takeaway: Businesses and individuals should review their digital tax preparedness. Leveraging accounting software may help ease the transition to digital tax compliance.
Changes in Capital Gains Tax on liquidation gains of Limited Liability Partnerships (LLPs) and restrictions on charitable tax reliefs aim to close avoidance gaps. These measures prevent undue tax benefits for certain liquidations and charity-linked contributions.
Takeaway: Revisiting LLP structures and charitable giving plans will ensure continued tax efficiency within compliant parameters, minimising risks under tightened regulations.
Announced with the budget, it was encouraging to see the OBR forecast that by 2027/28, two years earlier than expected, net debt as a percentage of GDP will fall, and the government is expected to balance the current budget. However, this optimism was short-lived, with markets now focused on increased gilt auctions to fund the government's ambitious spending plans.
In the aftermath of the budget, the gilt rate, a measure of the government's borrowing cost, increased (hitting a 12-month high). This will also have a knock-on effect in areas such as mortgage rates and consumer lending due to the increased borrowing costs of retail lenders. Additional concerns about relatively low economic growth in the short to medium term and the potential for further tax rises saw sterling marked lower.
Turning to the stock market, there was an initial boost in the FTSE 250, although this has since faded, and the index is down slightly on pre-budget levels. The situation with the FTSE 100, dominated by international companies, saw a gradual slide after a modest pre-budget rise, but the net fall since just before the budget is minimal.
The Autumn Budget introduces impactful changes that may alter the tax landscape for individuals and businesses alike. There's also the issue of increased debt funding via the gilt market, which has prompted an increase in government borrowing costs. This will have a knock-on effect on areas such as mortgages and personal/business lending, which is not ideal at this stage of the ongoing economic recovery.
After a record £40 billion increase in taxes, there are concerns about the knock-on effect on business costs, employment, and future wage rises. While the national minimum wage increase could be seen as inflationary, the impact is likely to be offset by a general increase in taxation, which will reduce business and consumer spending.
As ever, the devil is always in the details, and no doubt, further revelations will emerge in the next few days. In the short term, an increase in broad taxation does not bode well for businesses or individuals and will have a knock-on effect on the economy.
Contact me today to schedule a consultation, and we can review your investments and wider finances in light of these changes.