Labour’s First Budget-What does it mean for you?
Chancellor of the Exchequer Rachel Reeves delivered a historic budget, being the first female chancellor of the exchequer to do so and Labour’s first budget for 14 years.
With an unusually long gap between election day and budget day, the days were filled with rumours, speculation, and, quite possibly, hysteria about what would be announced and the rights and wrongs of that.
Here are the facts-or some facts from labour’s first budget as we know them, as they might well change before they become effective– what did she say, and what does it mean for you
Income Tax and National Insurance
What was announced?
The government will not extend the freeze to income tax and National Insurance contributions thresholds. From April 2028, these personal tax thresholds will be uprated in line with inflation.
What does it mean for you?
Unfortunately, the fiscal drag will continue until April 2028, and more people will pay taxes than they currently do.
Consideration should be given to investment horizons or when to draw pension income.
Labour’s budget shows that delaying these events might be more tax-efficient until the income tax thresholds increase.
Savings allowances and Dividend Nil Rate
What was announced?
The starting rate for savings will remain at £5,000 for the 2025/26 tax year, maintaining its current level.
The Personal Savings Allowance will be £1,000 for those with an adjusted net income of £50,270 and below. £500 for those with adjusted net income between £50,270 and £125,140 and will be £0 for those with adjusted net income above £125,140, maintaining the current levels.
The Dividend nil rate of taxation will remain at £500.
What does it mean for you?
It’s important to use these allowances where possible, and if savings or investments take you above the savings allowances or dividend nil rate, consider appropriate tax wrappers to place these in.
Employer National Insurance
What was announced?
The government will increase the rate of employer NICs from 13.8% to 15% from 6 April 2025.
The secondary threshold is when employers become liable to pay NICs based on employees’ earnings. It is currently set at £9,100 a year. From 6 April 2025 to 6 April 2028, the government will reduce the Secondary Threshold to £5,000 a year and then increase it by the Consumer Price Index (CPI) thereafter.
What does it mean for you?
Changes to NI rates and thresholds are business as usual in tax terms. However, these changes may prompt business owners to review their remuneration strategies.
No doubt, salary sacrifice for those not currently using it will become more beneficial.
Pension Tax Lock/Tax Free Cash
What was announced?
Despite much speculation, most things in the pension world have been left untouched.
Pre-budget, there was a request for a pension tax lock, i.e. no tax changes.
Whilst this was not described as a lock, other than changes to the tax treatment for IHT purposes, the world of pensions remained the same.
What does it mean for you?
Keep calm and carry on planning.
Pension commencement lump sums, tax relief and the annual allowance(s) remain unchanged.
Pensions have maintained their tax advantage status during the member’s lifetime and remain a vital part of retirement planning.
Is my workplace pension any good?
State Pension.
What was announced?
Under the triple lock rules, the state pension goes up yearly by the highest of either 2.5%, inflation (the September CPI figure), or earnings growth (based on the average increase in UK wages from May to June).
The chancellor announced that the state pension will increase by 4.1%.
What does it mean for you?
Simply put, those who receive state pensions will have more next year!
The current state pension is £221.20 a week. Increasing this figure by 4.1% will make this £230.27 a week.
Pension Death Benefits
What was announced?
It was announced that unspent pensions would be brought into the Inheritance Tax (IHT) regime from April 2027, to make the tax system fairer.
Currently, some pension death benefits are paid to whomever the deceased member has asked them to; it’s called a power of disposal, which means the pension is included in the estate.
This applies to both DB and DC pensions. Pension death benefits are usually paid out at the scheme’s discretion, which means they do not form part of the estate.
The planned change includes schemes with discretionary disposal into the IHT net.
Based on the details in the consultation, this would include almost all pensions (including dependents, nominees, and successor pensions) in the IHT remit.
Pensions and charity lump sum death benefits are exempt under a dependent scheme. However, the spousal exemption applies if pension benefits are paid to a spouse.
The consultation runs until 22nd January 2025.
What does it mean for you?
Many people use their pensions as intergenerational wealth transfer vehicles, so plans to pass on wealth will need to be reassessed.
However, there will no doubt be much detail needed from this consultation, with the potential for changes to be made. So, a watching brief as opposed to immediate action may be prudent.
Employer considerations
What was announced?
Nothing specifically was said about employers and pension contributions.
Rumours that NI was being applied to employer pension contributions did not materialise. With the corporation tax rates unchanged, the value of employer contributions has changed.
What does it mean for you?
Some small business owners will consider their mix of salary, dividends, and income and decide what tax/NI they would rather pay. Salary may be more attractive.
The undoubted tax benefits of an employer pension contribution remain the same.
Employer pension contributions made through salary sacrifice have become more beneficial.
Inheritance Tax thresholds
What was announced?
The Autumn Statement 2022 announced that the existing IHT thresholds would be maintained until 5 April 2028.
What does it mean for you?
The £325,000 NRB is available to all individuals and can be set against all asset types upon death. The NRB can also be used for both:
To allow individuals to make lifetime chargeable transfers up to £325,000 within a 7-year period without an IHT liability.
Capital Gains Tax Rate changes
What was announced?
The main rates of CGT are currently charged at a lower rate of 10% and a higher rate of 20%, which will be increased to 18% and 24%, respectively, from 30 October 2024. These new rates will match the residential property rates, which are not changing.
What does it mean for you?
Before the budget, there was a lot of discussion about the possibility of increasing CGT rates.
The Annual Exempt Amount has already been reduced from £12,300 in 2022/23 to £3,000 in the current tax year, so an increase in rates will not be welcome for those holding assets subject to CGT.
Individual Savings Accounts (ISAs) and Junior ISAs
What was announced?
From 6 April 2025 to 5 April 2030, the subscription limits for adult ISAs will remain at their current levels.
It should also be noted that the government will not proceed with the British ISA due to mixed responses to the consultation launched in March 2024.
What does it mean for you?
Since 6 April 2024, the government has allowed subscriptions to multiple ISAs of the same type within the tax year, with the exception of the Lifetime ISA and Junior ISA.
All subscriptions must remain within the overall ISA limit.
Stamp Duty Land Tax
What was announced?
From 31 October 2024, the Higher Rates for Additional Dwellings (HRAD) surcharge on Stamp Duty Land Tax (SDLT) will increase by 2 percentage points from 3% to 5%.
Currently, buyers of homes worth less than £250,000 don’t pay stamp duty. This was doubled from £125,000 under Liz Truss’s mini-budget in September 2022.
The threshold for buying a first property is £425,000, up from £300,000 in the mini-budget.
Labour’s first budget will keep these higher thresholds until March 2025, when they are expected to revert to previous levels.
What does it mean for you?
Quite simply, it means an increase in taxes for first-time buyers, second-home buyers, buyers of residential properties to let, and companies purchasing residential property.
EIS and VCT
What was announced?
In Autumn Statement 2023, it was announced that the previous government would legislate to extend the existing sunset clauses for these higher-risk investments from 6 April 2025 to 6 April 2035.
In the Autumn 2024 budget, the government confirmed it would extend the Enterprise Investment Scheme and Venture Capital Trust schemes to 2035.
What does it mean for you?
This will be welcome news for those able to use the income tax and capital gains tax advantages of these schemes.
This first labour budget for 14 years is lengthy but also follows on from the previous government, and taking advice on some relevant key points would be prudent.
Contact us today to discuss your concerns.
