This has been the most consequential Budget for at least two decades and one which we, personally, have never seen such anticipation and trepidation in the long lead up since it was first announced over 3 months ago.
This budget was not just to plug the £22bn funding gap but to raise taxes by £40bn in order to meet the spending pledges made by Labour within their manifesto. To put this budget into context, it is the largest tax raising Budget outside a time of recession.
Below are the main points from the Budget and the impact on you, your assets and, for some of you, your businesses.
Employers’ National Insurance (NI) Contributions
Employers will now pay NI on worker’s earnings above £5,000 from April 2025; the rate will increase by 1.2% to 15% again from April 2025.
Capital Gains Tax (CGT)
With immediate effect, (something not done since George Osbourne in 2010) CGT is to increase from 10% to 18% and the higher rate from 20% to 24%.
The CGT on residential property will remain unchanged at 18% and 24%.
This was highly anticipated; however, whilst the lower rate has nearly doubled the rises were not, as feared, in line with the income tax rates which is of some relief. We will as always be mindful of the allowances when putting together and managing your portfolios to ensure we minimise the tax implications for our clients.
Inheritance Tax (IHT)
The thresholds will remain frozen until 2030 – a further 2 years than had been under the previous Government. No change to the allowance of £325,000 which rises to £500,000 if the Estate includes a residence which is passed to direct descendants. When the allowance is passed to the surviving spouse or civil partner this doubles to £1m.
From April 2026, the first £1m of combined business and agricultural assets will continue to attract no IHT at all, but for assets over £1m, inheritance tax will apply with 50% relief, at an effective rate of 20%, the Chancellor says.
Pensions
This is BIG news, currently pensions sit outside of the Estate for inheritance tax; however, from April 2027, pensions will come into the Estate of the deceased. This is a fundamental shift as, previously, the pensions could be passed down generations and thus avoiding inheritance tax on the amount. It is important to note here that this only affects defined contribution schemes and not final salary or defined benefit pension schemes.z
It has been estimated that the change will bring over 10,000 estates into inheritance tax and raise £1.46bn by 2029-30 according to Budget documents.
Stamp Duty
With immediate effect, the stamp duty land surcharge for second homes will increase by 2% to 5%. Again, very significant for those looking to purchase another home to rent out.
Income Tax Thresholds
These will remain frozen until 2028-29. From April 2029, they will then rise in line with inflation.
Band | Rate | Income after allowances |
Starting rate | 0% | Up to £12,570 |
Basic rate | 20% | Up to £37,700 |
Higher rate | 40% | £37,701 to £125,140 |
Additional rate | 45% | Over £125,141 |
Minimum Wage/Apprentice
This is set to rise by an inflation busting 6.7% to £12.21 per hour from April 25. For 18–20-year-olds the rise will be from £8.60 to £10 per hour, with apprentices getting the biggest rise from £6.40 to £7.55 per hour.
Electric Vehicles (EVs)
The existing incentives for EVs in company car tax remain i.e. 100% business purchase relief for new EV’s and for company car drivers the current tax rate of 2% will rise by 1% in the following 3 years to 5% by 2027/28. However, car tax will be applied to EVs from April next year with cars valued over £40,000 taxed at £410 p.a.
Private Education
As expected, VAT of 20% will be placed on independent/private schools from 1January 2025.
Duties
Fuel Duty to remain frozen with the existing 5p cut being maintained.
Alcohol Duty cut by 1.7%.
Tobacco/Vaping Duty – Tobacco to rise at the rate of inflation +2%, plus a new flat rate of duty of £2.20 per 10ml on all vaping liquid from October 2026.
Budget will be in surplus by 2027-8
Rachel Reeves says the current Budget will be in deficit by £26.2bn in 2025-26 and £5.2bn in 2026-27, before moving into surplus of £10.9bn in 2027-28, £9.3 bn in 2028-29 and £9.9bn in 2029-30.
Reaction
Let’s be clear, this Budget was the biggest ever rise for taxes in cash terms, amounting to 1.2% of GDP, essentially, we have not seen something on this scale since 1993 under the then Chancellor Norman Lamont.
Business will bear the brunt of the tax rises (£25bn a year) with the rise in NI contributions in order to fix the public finances, with huge spending and borrowing over the parliament. There are risks with this strategy as with massive spending plans (£70bn a year) this can be inflationary which the government here and globally have been trying to reduce for the past 2 years.
Furthermore, with possibly higher inflation, this could stifle the timeframe and amount of the reduction in interest rates which homeowners have been hoping for as the larger drops in rates in the coming months would ease repayments.
Markets have responded rather benignly to the Budget with investors broadly welcoming the Chancellor’s commitment to balancing the government’s budget sooner than expected. However, the UK’s borrowing costs have climbed slightly to a five month high as investors were caught unaware of the additional borrowing needed to fund Rachel Reeves plans.
The more UK focussed FTSE 250 ended on a positive note at 0.5% higher, with the UK AIM (Alternative Investment Market) finishing nearly 4% higher, with investors breathing a sigh of relief, as it had been widely thought that the IHT relief currently applied would be abolished.
Overall, a mixed picture for investors, higher capital gains tax with low exemptions does provide some challenges as does the pension changes, which will affect the inheritance tax take, these areas will inevitably impact portfolios and the decisions for future planning. However, given the hype and discussion this Budget has caused over the past 3 months it could have been a lot worse. Let’s hope that the throwing the kitchen sink approach helps provide better public services and improves the economy…no mean feat!