The Autumn Budget 2024
A big budget was promised, and a big budget was delivered. Labour’s messaging, unlike in much of the runup to the big day, was clear. The state of public finances is poor, and worse than originally thought due to the Conservatives allegedly holding back information from the Office of Budget Responsibility (OBR); what is needed, rather than austerity, is to utilise both taxation and investment to bring stability to the public finances and boost the UK’s growth in the long term.
Despite the seemingly extraordinary context of the circumstances laid out by Rachel Reeves, at a high level this is very much a traditional Labour budget, with higher taxation, borrowing and spending. A defining characteristic this time is Reeves’ claim that day to day spending will entirely be funded by government revenue within the next few years, after which all borrowing will be for investment.
One controversial measure is Reeves’ change of the fiscal rules to allow more borrowing for investment. This will mean debt will now be measured against the value of government assets as well as their revenue from taxation and other sources. This unlocks billions of pounds for badly needed infrastructure investment. The UK has had the lowest level of investment in the G7 for 24 of the past 30 years, according to research by the Institute for Public Policy Research.
On the face of it, the fiscal rule change seems to make sense. The rules exist simply to assure markets that they are lending to a safe pair of hands, and the market reaction has been muted so far. However, this is still a gamble. The investments that the government makes needs to pay off or the public finances will be in an even more sticky situation. It will be years before the results of this are seen.
A lot of fearmongering led up to this budget in the media, yet many of the speculated tax measures did not occur, or only did so in a form less severe than featured in the press. We are thankful to our clients who listened to us and held off making decisions based on speculation about the new rules, we hope they will be thankful too.
There was no reduction in tax relief on pension contributions or reduced tax free allowance for pension benefits; the pensions lifetime allowance was not reinstated; income tax bands were not frozen any longer than the Conservatives previously planned; no maximum tax free allowances for ISAs; no extension of the potentially exempt transfer period or abolishing of the residence nil rate band for inheritance tax; no changes to gifting allowances; no removal of the capital gains tax (CGT) allowance and, although rates increased, there was no equalisation of CGT with income tax rates. Finally, there were no changes to the State Pension ‘triple lock’.
The press will surely be as quick to forget about these measures as they were to insist that they would be introduced. That is, until the next budget comes around.
Having said this, the headline amount for the additional taxes raised by this budget was very high at £40bn. This defied most predictions, which were closer to £30 or £35bn, making this one of the largest tax rising budgets in history.
The main takeaways from the Autumn 2024 Budget from a financial planning perspective are listed below:
National Insurance Changes
While Labour kept their promise not to increase employee NI contributions, controversially, employer NI is to increase to 15% (from 13.8%) from April 2025. While this rise was expected, there was a surprise in that the secondary threshold will reduce to £5,000 (from the current £9,100), i.e. employer NI will become payable on an employee’s earnings above £5,000pa.
The saving grace for small businesses is that the Employment Allowance, a National Insurance exemption for smaller businesses, will more than double from £5,000 to £10,500. This means that the smallest businesses will pay less, or no NI than under the previous rules.
The £100,000 threshold to be eligible for Employment Allowance will also be removed, meaning that eligibility for the allowance is not restricted to employers with a secondary NIC liability of £100,000 or less in the previous tax year.
Capital gains Tax (CGT) changes
The main rates of CGT will increase from 10%/20% (basic/higher rate) to 18%/24% respectively for disposals made on or after 30 October 2024. Trustees and personal representatives will still pay the higher rate, 24%. CGT for residential properties (excluding principal private residences) will remain at 18% and 24%.
The rate of CGT that applies to Business Asset Disposal Relief and Investors’ Relief is increasing to 14% for disposals made on or after 6 April 2025 and from 14% to 18% for disposals made on or after 6 April 2026.
Inheritance Tax (IHT) changes
The freeze of the IHT bands at £325,000 for assets and a residence nil rate band of £175,000 has been extended to 2030, as has the residence nil-rate band taper, which starts at £2 million. This will drag many more estates into paying IHT when the time comes.
A notable change to how pensions are treated for IHT purposes was also introduced. From April 2027 pensions will be treated as part of the estate for inheritance tax purposes. This very much puts a spanner in the works of many people who have diligently saved into their pension and left it untouched with the hopes of passing it down to the next generation.
This change will have significant financial planning ramifications for many of our clients, mercifully however, there are a few years before the changes are brought into force. We will be discussing the implications of these changes with affected clients in their next annual review meeting.
There were also changes to agricultural and business relief, including for unlisted and AIM shares, that will prove very unpopular with those affected. While 100% relief will continue for the first £1m of combined agricultural and business property, relief will only be 50% on the remainder. This results in an effective rate of 20% inheritance tax after the first £1m worth of farms and businesses. Unlisted shares, including AIM shares, will be now also be wholly chargeable to IHT. This will be at the 50% relief rate, i.e. 20%. These changes will apply from April 2026.
It is important to note that while unlisted shares, such as AIM shares, will now be wholly chargeable at 20%, unquoted shares, such as those used featured in the business relief schemes some of our clients utilise, will still count as businesses for IHT purposes and will therefore qualify for the £1m exemption before the 20% tax rate.
How lifetime transfers into trust and trust property will be affected has not been fully detailed. The government will publish its technical consultation on this in early 2025.
Pension Changes
Rules around pensions remain largely unchanged except for the inheritance tax rules mentioned above. Other changes are all to do with transferring pensions overseas.
The Overseas Transfer Charge (OTC) is a 25% tax paid when transferring a UK pension to a qualifying recognised overseas pension scheme (QROPS). Effective immediately, transfers of pensions to the European Economic Area (EEA) and Gibraltar will no longer be exempt from the OTC. This is aimed at closing a loophole where some people were able to use their tax free cash allowance twice.
There are also some changes planned over the next couple of years which changes the criteria that decide how pensions in the EEA and Gibraltar are treated when transferring pensions out of the country.
Stamp Duty Land Tax (SDLT) Changes
The higher rates of SDLT for purchases of second properties and for purchases by companies is increasing from 3% to 5% above the standard residential rates of SDLT. Companies and other non-natural persons purchasing dwellings over £500,000 will also pay 2% more SDLT, a hefty 17%.These changes have been implemented immediately.
Changes to VAT on School Fees
As expected, VAT will be chargeable at 20% on private school fees from the 1st January 2025.
Changes to Non-Dom Status
Labour will abolish the non-dom tax regime in Apr 2025 in exchange for a residence based system.
In Conclusion
Tax rises are always hard to swallow. However, as predicted in our last newsletter, ‘A Note on the Upcoming Budget’, there were no hugely nasty surprises, or ones that penalised taxpayers retrospectively for their actions. This should help to give the public confidence that while this government is making big calls on tax, they are unlikely to introduce the extreme measures that some had been fearing.
Some changes, particularly around inheritance tax, will mean a notable shift in the calculations underlying many client’s financial plans. Fortunately, these changes are not to be implemented for a little while and there is time to make the necessary adjustments before their effects are felt.
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