Budget brings in £40 billion of tax increases but how does this affect you?

Streets Whittles Michael Greene, Dan Insley and Amy Stubbins comments on just some of the key points of Rachel Reeves’ announcements Wednesday,

 In a budget which promises to ‘invest, invest, invest’ to drive growth and ‘restore economic stability’, Rachel Reeves is looking to fund a rise by 4.7% in day-to-day spending on NHS and education in England and an injection of £2.9bn in defence by next year. So how is she going to achieve this and other significant public service investment and what does it mean to you?

BUSINESSES
National Insurance
Employers have been asked to do a lot of the heavy lifting in this year’s budget with the headline change in National Insurance (NI) contributions set to raise a staggering £25bn. Employers are to pay NI at 15% on salaries above £5,000 from April, up from 13.8% on salaries above £9,100.
There is, however, some good news for smaller businesses in that The Employment Allowance, which allows those with NICs bills of £100,000 or less to deduct £5,000 from their employer NIC bill, will be increased to £10,000.
Living Wage
At the same time the national living wage will increase by 6.7 per cent from £11.44 an hour to £12.21 for those aged 21 and over. The increase is worth up to £1,400 a year for full-time workers.
Business Rates
The retail, hospitality and leisure sectors have continued to be cushioned in that for 2025/26 eligible properties will receive 40% relief on their business rates liability, capped at £110,000 per business for next year and 2026. In addition, the small business multiplier is to be frozen for 2025/26.

COMMENT from Michael Greene
“It was probably inevitable that businesses would be expected to take most of the strain in terms of the new government’s fiscal objectives. We will have to wait and see how these changes will lead to businesses further reviewing their recruitment strategy.”

 INDIVIDUALS
Income Tax
One fear has at least been quashed in terms of income tax – there will be no additional freeze in the income tax thresholds and from 2028/29 they will be uprated with inflation, bringing to a halt the rapid rise in those paying more tax at higher rates.
Capital Gains
This tax rises to 18 per cent and 24 per cent on the sales of land, shares, and other assets, from 10 and 18 per cent,  with immediate effect. This brings the rates into line with the rates for residential properties which remains unchanged. The rate of 10 per cent which applies when people are selling their own businesses (Business Asset Disposal Relief) will rise to 14 per cent from April 2025 and 18 per cent from April 2026. Rates applying to carried interest are to be increased to a flat rate of 32% irrespective of income levels from 6 April 2025.
Non-dom tax regime
The non-dom tax regime that allows foreign nationals living in the UK to avoid paying tax on their overseas income will be replaced from 6 April 2025 with a new tax regime based on residence. This removes a 50 per cent discount for non-doms bringing foreign income into the UK in the first year, and instead a 100% relief is available for the first four years of UK tax residence if the individual has not been resident in the prior 10 years.
Stamp Duty
The stamp duty surcharge on second homes has been raised by 2 percentage points from 31 October 2024.

COMMENT from Amy Stubbins
“There were no real surprises in light of the Chancellor’s manifesto commitments not to increase taxes on the working people. The non-dom issue had already been decided; Second homers were confirmed targets as was the acceptance that private schools would start charging VAT in January. When it comes to assessing significant impact on individuals, I think the Chancellor saved her sting for the treatment of pensions in terms of inheritance tax.”

 INHERITANCE TAX (IHT) AND PENSIONS
The inheritance tax threshold of £325,000 has been extended until 2030; the residence nil rate band remains but is also frozen.
Those still accumulating a personal pension were able to breathe more freely, at least for now, in that despite much speculation, there was no change to the 25% tax-free lump sum withdrawal from pension pots, although still subject to the recently introduced maximum of £268,275.
The current domicile-based system of inheritance tax will be replaced with a residence-based system, bringing offshore assets into the charge to UK inheritance tax.
Having perhaps most impact is that from 6 April 2027, inherited pensions will be brought into the IHT regime. Currently pensions are usually passed on tax free if you die under the age of 75, and retaining a pension pot to some degree has been an important part of many retirement strategies.
There was also a potential blow to farms and other agricultural businesses in the announcement that whilst Agricultural Property Relief (APR) would continue to mean no inheritance tax due on combined business and agricultural assets worth less than £1m, above that threshold, assets would benefit from only a 50% relief and taxed at 20%, from April 2026.

COMMENT from Dan Insley
“These IHT measures are definitely a blow to those who saw their pensions as a way of passing on wealth to their family through tax free inheritance. We envisage there will be many of our clients reviewing their retirement strategies in the coming months. However farmers will be particularly focused on next steps. The Chancellor believes she has protected ‘small family farms’ with the continuation of APR up to assets of £1m but with land prices ever increasing it will not take much to use up this allowance without taking into account other assets an individual might own”

 A more detailed breakdown of all the highlights can be found in the summary produced by our Streets colleagues.

 For further insightful commentary you can read the article “The Budget – trick or treat?” – written by Streets Chief Marketing Officer James Pinchbeck.

 There is also still the opportunity to catch up on the Streets webinar in which colleagues from Streets Tax and the financial services team presented on the impact of the announcements. You can register here.