Well it wasn’t quite as bad as we all thought.
The Chancellor’s recent Budget announcement has brought in significant changes, affecting everything from income tax thresholds to pensions and Inheritance Tax.
For now, here’s a quick look at the headlines before I look at everything in more detail and assess the financial planning impacts over the next few days.
- Income Tax Freeze: The Stealth Tax Rise
While Income Tax rates remain the same, the Chancellor has continued with the Conservatives freeze on Income Tax thresholds until April 2028.
Freezing the personal allowance and higher-rate thresholds means that, as wages increase with inflation, more income is taxed at higher rates.
This move will effectively increase the tax take without directly raising tax rates, impacting many as they find themselves nudged into higher tax brackets.
This approach has been called a “stealth tax” because it increases government revenue subtly but significantly.
The government plans to raise the Income Tax thresholds by inflation from 2028/29 onwards. Don’t bet on this.
- End of Non-Domiciled Tax Status
The non-domiciled tax status, often used by individuals with foreign residency or international income to reduce their UK tax liabilities, will be abolished.
For those previously benefiting from this status, this could mean a sizable tax increase, as foreign income and gains will now be taxed in the UK.
The removal of this status aims to level the playing field and bring more global income within the UK tax net, but it may prompt some non-doms to rethink their financial and tax strategies.
- Capital Gains Tax (CGT) Increases with Private Residence Relief Preserved
The Budget introduced increases in CGT rates, impacting those selling investments or second homes.
- Capital Gains Tax (CGT) rates have increased to 18% for basic rate taxpayers and 24% for higher rate taxpayers.
- CGT rates on residential property will remain at 18% and 24%.
This change could reduce the net gains on asset sales, especially for individuals with diversified portfolios.
Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) schemes have been extended to 2035.
However, there’s good news for homeowners: Private Residence Relief remains unchanged, so the primary home sale exemption from CGT is preserved. This means those selling their main residences will not see an increase in tax liability from these changes.
- Inheritance Tax (IHT) Updates
Inheritance Tax saw multiple adjustments:
- Frozen Nil-Rate Band: The IHT nil-rate band remains frozen until 2030, reducing the effective tax-free threshold as asset values increase, which could mean more estates are subject to IHT.
- Reduced Relief for Business and Agricultural Assets: Reliefs for business and agricultural assets have been scaled back, though the AIM market rallied in response to this announcement, as many AIM-listed companies still qualify for Business Property Relief.
- From April 2026, the first £1 million of combined business and agricultural assets will continue to attract no Inheritance Tax, but for assets over £1 million, Inheritance Tax will apply with 50% relief, at an effective rate of 20%.
- A 50% relief now applies in all circumstances on inheritance tax for shares on the alternative investment market, and other similar markets, setting the effective rate of tax at 20%.
- Pensions: Reliefs Unchanged, But Prepare for 2027 IHT Impact
Most pension policies escaped further change.
The Lifetime Allowance, 25% tax-free lump sum, and contribution levels are all maintained, providing stability for retirement planning in the near term.
However a major shift is coming in 2027, when pensions will fall under the IHT regime.
This will impact pension planning significantly, as passing pensions to beneficiaries will become less tax-efficient.
- Additional Stamp Duty on Investment Properties
Landlords and property investors continue to feel pressure with the extra stamp duty surcharge on second properties.
This policy remains in place, and buying additional properties comes with significant upfront tax implications.
The government has increased the SDLT surcharge for second and additional properties from 3% to 5%, effective from 31st October 2024.
For those considering property as part of their investment portfolio, this extra stamp duty increases the initial costs and may affect overall yields, especially as rental yields struggle to keep up with mortgage and tax expenses.
- Employer National Insurance (NI) Increase
Employer NI contributions are set to rise.
Employers’ NICs will increase from the previous rate of 13.8% to 15% starting in April 2025.
The secondary threshold at which employers must pay NICs will be reduced to £5,000 from £9,100.
The Employment Allowance has been increased to £10,500.
The Office for Budget Responsibility (OBR) has noted that this will likely impact wage levels.
Companies, facing higher employment costs, may respond by slowing wage growth, which could impact workers’ disposable income over time.
This change may also impact smaller businesses more acutely, affecting hiring practices and potentially job availability.
- VAT on Private School Fees
As expected parents with children in private education may notice a financial impact, as private school fees are now subject to VAT.
This change aims to increase public funds for education, though it will likely place an additional burden on families currently funding private schooling.
For those impacted, this could mean revisiting educational budgets or evaluating alternative education funding options.
What’s Next?
Each of these changes presents unique challenges and opportunities, so reviewing your personal financial plan in light of the Budget is essential.
With changes to tax thresholds, pensions, property, and employer NI, it’s worth considering how these shifts might influence your investments and long-term goals.
The detail of Budgets doesn’t normally become fully known until the days and weeks after the Budget so rest assured I will be exploring this.
I will report back to you shortly.
If you would like to stress test your retirement plans or even to get a plan in place then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
