The demographics of an aging population, a falling birth rate, and the shift away from fossil fuels means the UK will likely have to spend billions more pounds on health, pensions, defence, and tackling climate change moving forward. This was the prognosis from the Office for Budget for Responsibility (OBR) on the fiscal risks facing Britain over the next 50 years.
The UK's national debt stands at £2.8tr and servicing the interest on the debt costs the state circa £100bn, more than the spending of many government departments. It was against this backdrop that Chancellor, Rachel Reeves, delivered an Autumn Budget consisting of £40bn in tax rises, aimed at predominantly employers and wealth!
The question now is whether these policies that increase the tax take to an all time high of 38% of GDP, won't jeopardise economic growth? Given SMEs are the 'backbone of the UK economy' employing 61% of the workforce, the rising costs of employing staff will likely lead to a revision of their budgets, impacting investment decisions regarding future job vacancies, and potentially limiting employees wage rises moving forward, not to mention the potential for an increase in prices as businesses look to cover these increased costs.
In this blog we explain the tax changes Reeves announced, when they're coming in, and how they could potentially impact business and personal finances.
From April 2025, Employers' National Insurance (NI) contributions will rise from 13.8% to 15%, and this policy announcement was combined with a reduction in the threshold at which businesses start paying NI on workers' earnings, this being lowered from £9,100 to £5,000. The Institute for Fiscal Studies estimates this policy could raise as much as £17bn a year for the government.
The increase in rate, alongside the reduction in the threshold means that the cost for employing someone on an annual salary of £40,000 will increase by just under £1,000 per year.
Of note, the lower earnings limit relevant for pension record purposes remains unchanged, which may result in an increase in Employers' NI for those business owners who adopt a low salary profit extraction strategy.
The Employment Allowance is to rise from £5,000 to £10,500 as of April 2025. Also from this date, the £100,000 NIC cap will be removed for employers claiming the Employment Allowance, meaning accessibility to the Employment Allowance for potentially eligible employers will be increased.
The increase will in part offset the increase in costs as a result of the measures to increase the rate, and lower the threshold, as outlined above.
The increase in payroll costs to employers extends to legislation concerning the National Living Wage. The new minimum wage increases are covered in the table below:
Category | 2024/25 | 2025/26 |
Minimum wage for over 21's (per hour) | £11.44 | £12.21 |
Minimum wage for 18-20 years olds | £8.60 | £10.00 |
Apprentices | £6.40 | £7.55 |
Of note, these increases in the National Living Wage falls directly on the shoulders of employers.
There will be a 40% business rates discount for the retail, hospitality and leisure sectors for 1 year from 1 April 2025, up to a cash cap of £110,000. Meanwhile the small business multiplier will be frozen at 49.9p for 12 months in 2025/26.
Income Tax bands have been frozen at 2021/22 tax year levels and this was due to end in 2027/28. Contrary to some speculation, the Chancellor decided not to extend the freeze which means from April 2028, personal tax thresholds will increase in line with inflation.
UK Income tax 2024/25 - 2027/28 |
|
Tax band |
Tax rate |
Personal allowance Income up to £12,570 |
0% |
Basic-rate Income of £12,571 - £50,270 |
20% |
Higher-rate £50,271 - £125,140 |
40% |
Additional-rate > £125,140 |
45% |
The lower rate of Capital Gains Tax (CGT) rises by 8 percentage points, and the higher rate increases by 4 percentage points as of the 30th October 2024. This means that UK CGT rates on assets now conform with those of residential property and look as follows:
Tax band |
CGT on all assets |
Annual allowance Gains up to £3,000 |
0% |
Basic-rate tax payer £3,001 - £50,270 |
18% |
Higher/additional rate tax payer £50,271 + |
24% |
Given the new rates come into effect on the day of the budget, this means there's no timeframe left available for planning of disposals from a strategic tax perspective.
Despite speculation that Business Asset Disposal Relief (BADR) may be abolished, the Chancellor confirmed that the relief would stay. However, whilst the lifetime allowance of £1m remains, the tax rate will increase from the current 10% to 14% from 6 April 2025, and then to 18% from 6 April 2026.
The lifetime limit for Investors' Relief (IR) will be reduced from £10m to £1m for qualifying disposals made on or after 30 October 2024, and also to certain disposals made before 30 October 2024.
As with BADR, the tax rate specific to IR will rise from its current level of 10% to 14% as of 6 April 2025. It will then rise again from 6 April 2026 to 18%.
The reference to certain disposals prior to 30 October is to counter forestalling arrangements. If there's been a share re-organisation prior to 30 October, a shareholder could make an election to backdate a gain which in theory could restore the £10m limit. These changes have been drafted with provisions to counter this.
According to Reeves, only 6% of estates are subject to Inheritance Tax (IHT)!
The IHT main nil rate band of £325,000 (also known as the tax-free allowance before IHT kicks in) has been frozen at this exact level since 2009. This was set to expire in 2028. Reeves announced that the freeze will continue until April 2030! The resident nil rate band will also be frozen until 2030.
Given rising asset prices this likely results in fiscal drag whereby more estates could breach the thresholds and hence be subject to IHT in the future.
Reforms were announced to Business Property Relief (BPR) and Agricultural Property Relief (APR) effective from April 2026. The first £1m of combined business and agricultural assets will continue to benefit from 100% relief from IHT.
Anything over £1m will be subject to a 50% discount on the main IHT rate, meaning an effective IHT charge of 20%. Previously, such farms and businesses would have been eligible in full for 100% relief, meaning they could be passed down generations free of IHT.
This will no longer be the case. For example, a farm or qualifying business worth £3m will have a £400,000 IHT tax on the £2m of assets above the threshold.
“Not listed” shares, such as AIM shares, will now be subject to 20% IHT. Previously these would have qualified for 100% relief.
Rachel Reeves announced a stamp duty hike for second-home owners and landlords. The additional rate of stamp duty will rise from 3% to 5% as of 31 October 2024. The idea of this being that it will free up availability of houses for those purchasing as a main residence. However, the knock-on impact is that it may reduce availability of rental accommodation which could push up rent prices.
The triple lock stays in place and this means state pensions will increase by 4.1% in April 2025. It is said this will provide 12m pensioners with an income boost of £470 a year. Reeves also revealed that the Pension Credit would go up by 4.1% at the start of the next tax year.
In a significant, but not completely unexpected policy announcement, from April 2027 inherited private pensions will be subject to Inheritance Tax, potentially resulting in a significant increase in the taxable value of an estate.
As announced previously by the Chancellor, VAT will be applied to private school fees from January 2025. Legislation will also be put in place to remove private school business rates relief as of April 2025. These increases in costs will likely be passed on to parents in the form of higher fees.
Options to help cushion the financial blow to parents could include:
Air passenger duty will increase from April 2026 but by no more than £2 for an economy-class short haul flight. However, the increase is 50%, or £450 per person, for those that use private jets!
Fuel duty remains frozen next year, a tax cut said to be worth £3bn and that saves motorists £60 a year.
Alcohol duty rates on non-draught products are set to increase in line with inflation from February next year. Draught duty on the other hand will be cut by 1.7%, which is claimed means a penny off a pint in the pub if it's passed on to consumers.
The £2 cap on bus fares will rise to £3 as of January 2025.
It was announced that additional funding and resource would be provided to HMRC in the form of:
Given this increased resource, expect to see an increase in tax investigations raised over the coming years!
The content of this post was created on 31/10/2024 and updated on 16/12/2024.
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