Before Rachel Reeves, the first woman Chancellor stood up on 30 October 2024 to deliver the first Labour Budget for 14 years, we were all warned that there was a “black hole” in the public finances and difficult decisions would need to be made. There were many rumours swirling around and so many leaks that the Speaker became angry with the announcements being made before they were raised in Parliament. There were a few surprises but most of the big news stories had been leaked. In many ways, particularly from a Pensions perspective, the Budget can probably be deemed to be not as bad as feared.
Pensions
There were many rumours prior to the budget regarding restrictions on tax free cash sums and on relief granted on pension contributions. However, the actual position is:
Annual Allowance
The annual allowance is the maximum amount of contribution that you can receive tax relief on in any given tax year. With effect from the 2023/24 tax year this rose to £60,000 from £40,000 and no changes to this have been introduced. Similarly, the ability to use carry forward so that relief not used in the previous 3 tax years can be utilised will continue.
Tax free cash sum
The Budget did not introduce any changes to the rules regarding the amount that can be taken from pension arrangements in the form of a tax-free cash sum. Those who have started the process to withdraw their tax-free cash sum due to the rumours this could be restricted in future may wish to review their decision if the process has not been completed (but if it has been completed then this cannot be undone).
Tax Relief on Pension Contributions
The rumoured demise of tax relief at an individual’s highest marginal rate did not feature so the position remains as before the budget. This means that the tax planning opportunities for those earning between £100,000 and £125,140 remain as relief is effectively at 60% as for earnings between these limits you lose £1 of personal allowance for every £2 of income earned. Similarly for those eligible for Child Benefit there is a similar consideration when earnings are between £60,000 and £80,000. The potential for High Income Child Benefit Charge (HICBC) to be based on household income has been scrapped. Employed individuals will however be able to pay their HICBC through their tax code from 2025.
Pension Funds and Inheritance Tax
The big change for Pension arrangements is that going forward, any funds remaining in pension arrangements at death will form part of the estate for Inheritance Tax purposes. Currently as long as the death benefits are distributed at the discretion of the Trustees, the payment can be made without the delays of probate and without forming part of the individual’s estate. The ability to use pension funds as part of intergenerational wealth transfer will be severely impacted by this.
The intention is for there to be a new HMRC tool which will help work out how the nil rate band is distributed between the deceased’s assets. There is a consultation running until 22 January 2025 regarding the details of how this will all work in practice and the changes will not come into force until 6 April 2027. It seems inevitable that the role of Executors will become rather more complex as a result of these changes and a need for the processes to be streamlined if everything is to be achieved within 6 months of death.
State Pension
No change has been made regarding the triple lock so State Pension will continue to increase by the higher of inflation measured by CPI, average increase in wages or 2.5%. Currently there are also no changes to the already in place provisions for increasing State Pension age which is now 66 for men and women born between 6 October 1954 and 5 April 1960 and then for those born later gradually increasing to age 67 by 2028 and 68 by 2046.
Overall, with all the pension changes and the freezing of allowances, many will need to review their retirement planning to take advantage of the tax reliefs available in respect of pension funding. For those whose only income is the State Pension it remains to be seen what is proposed as with State Pensions increasing and income tax thresholds frozen, in theory the State Pension will become taxable, but this would create significant administration for little gain.
Transferring Pensions overseas
When the Lifetime Allowance was abolished an Overseas Transfer Allowance was introduced. Any payments above this limit were subject to an Overseas Transfer Charge (OTC). If the funds were transferred to a QROPS inside the EEA and Gibraltar, but the member remained a UK resident, there was an exemption from this charge. With effect from 30 October 2024, this exemption no longer applies so any transfer will be subject to 25% OTC on the total amount transferred
ISAs
There are no changes to the current subscription limits, so these remain £20,000 for ISAs, £4,000 for Lifetime ISAs and £9,000 for Junior ISAs. These levels are to remain fixed until 5 April 2030.
A rumoured cap on accumulated ISA funds did not materialise.
Income Tax thresholds
The Autumn 2022 budget introduced the freezing of the personal allowance and higher rate tax thresholds at £12,570 and £50,270 until 5 April 2028 with the 45% Additional Rate applying on income above £125,140. Despite the rumours that the period for this freeze would be extended, instead the Chancellor stated that the thresholds would rise in line with CPI once again when the freeze ends.
Savings Allowance and Capital Gains tax
The Personal Savings allowance will be maintained at current levels so £1,000 for those with adjusted net income of £50,270 and below, £500 for those with adjusted net income between £50,270 and £125,140, and drop to £0 for those with adjusted net income over £125,140. The nil rate for dividend income will remain at £500.
As expected, the rates of Capital Gains tax have increased with effect from 30 October 2024. For basic rate taxpayers it will rise from 10% to 18% and for higher and additional rate taxpayers will rise from 20% to 24%. This means the rates are now in line with the rates which apply to residential property which remain unchanged.
Business Asset Disposal Relief
This relief provides a special rate of Capital Gains Tax on the disposal of business assets. A lifetime cap of £1,000,000 is to be applied. The special rate is currently 10% but this will rise to 14% from 6 April 2025 and to 18% from 6 April 2026.
Inheritance Tax
This budget made no changes to the thresholds for Inheritance Tax (IHT) so these remain at current levels, but these levels will now be frozen until 5 April 2030. The nil rate band will remain at £325,000 with the residential nil rate band remaining at £175,000. The nil rate band has remained the same since the 2009/10 tax year so has reduced significantly in real terms. This was once deemed as a tax that only applied to the wealthy, but more and more people are being drawn into the IHT net. This will be even more the case going forward as accumulated funds in pension arrangements are included in assets taken into account.
Agricultural Property Relief and Business Property Relief
The budget has introduced a restriction on the relief available although this change will not take effect until 6 April 2026. After this date only the first £1 million of the combined value of agricultural and business property will receive 100% relief. Any qualifying assets over this value will receive 50% relief so currently a tax charge of 20% rather than 40%.
These reliefs will also apply to shares not listed on recognised stock market but investments in AIM listed shares will qualify for 100% relief up to 6 April 2026 but only 50% relief thereafter.
Tax for non-UK domiciles
With effect from 6 April 2025, the concept of domicile will disappear for tax purposes and the focus will be on residence. Individuals who become UK resident, having been non-resident for more than 10 years will not pay UK tax on foreign income and gains for the first four years of UK residence, but will pay UK tax on their UK income and gains in the usual way.
From 6 April 2025, IHT will apply on worldwide assets when someone is deemed to be a long-term resident, which typically means they have been resident in the UK for more than 10 years out of the last 20 years. Someone leaving the UK will remain subject to IHT for the 10 years after leaving.
Corporation Tax
The Chancellor has committed to keeping the current rates of Corporation Tax and following the budget the Government has published a Corporation Tax Roadmap. This has committed them to
- Cap the Corporation Tax Rate at 25%
- Maintain the Small Profits Rate (19%) and marginal relief at current rates and thresholds
- Maintain key features such as Annual Investment Allowance and Research and Development relief rates
Employers National Insurance Contribution
The change to Employer National Insurance contributions was not a surprise as this had been widely commented on before the Budget speech. This represents the biggest contributor in terms of additional revenue raised and a significant additional cost on Employers.
The Employer National Insurance contribution rate has increased from 13.8% to 15% but in addition the Secondary Threshold, which marks the level of salary when this starts to be paid has been reduced from £9,100 to £5,000.
Changes have also been made to the Employment Allowance which enabled employers with a total National Insurance bill of £100,000 or less to deduct £5,000 from their NI bill. With effect from 6th April 2025 the allowance has been increased to £10,500.
It is anticipated that these amendments will raise £25 billion although concerns have been expressed that it will be less than this as employers may seek to reduce their workforce and going forward put off pay increases or offer lower pay increases. With employers looking at various ways to offset these additional costs, those who currently pass on some of the NI savings when pension contributions are paid by way of salary exchange may consider retaining all of their savings or may look at savings on other employee benefits.
At least the rumour that NI contributions would also be levied on employer pension contributions turned out to be false.
The pension industry was keen to see increases in the required contributions to workplace pension arrangements as it is widely acknowledged that the current 8% in total contributions is not sufficient to generate good retirement benefits. But it is now considered unlikely that there will be any increase in employer contributions for a while.
Increase in National Minimum Wage
An increase in the National Living Wage of 6.7% with effect from 6 April 2025 from the current level of £11.44 per hour to £12.21 per hour was announced which will place further pressure on some employers.
Child Trust Funds
A Child Trust Fund is a long-term tax-free savings account for children born between 1 September 2002 and 2 January 2011 which then closed. However, up to £9,000 a year can be added to an existing account and it was confirmed that this level of subscription can be maintained up to 5 April 2030.
Stamp Duty Land Tax
With effect from 31 October 2024, the Higher Rates for Additional Dwellings surcharge on Stamp Duty Land Tax (SDLT) will rise from 3% to 5%. The single rate of SDLT charged on the purchase of dwellings costing more than £500,000 by corporate bodies has also increased from 15% to 17%. This represents an increase in tax for those purchasing second homes, but to let residential properties and companies buying residential properties
EIS and VCT
The favourable income tax and capital gains tax that applies to these schemes has been extended to 6 April 2035.
Tax Administration
The move to making tax digital will continue with this being extended to sole traders and landlords with income over £20,000 although the precise timing of this is yet to be confirmed. Late payment interest on unpaid tax liabilities will rise from 7.5% to 9% with effect from 6 April 2025. The reporting of P11d benefits via payroll software will become mandatory from April 2026.
Overall, a budget that has delivered significant tax increases, although in some areas not as bad as was feared, but also a significant increase in spending such that despite the additional tax revenue, borrowing will also increase. Indeed, the Office of Budget Responsibility has stated that “this budget delivers a large, sustained increase in spending taxation and borrowing”.
It should be noted that none of the budget changes are law until the Finance Act receives Royal Assent.
Robert J Young
Director & Consulting Actuary October 2024