The autumn Budget saw the most significant announcement of tax increases since 1993, generating an additional £40 billion in revenue for the Exchequer.
While the tax burden will fall primarily on employers – the changes to employer’s NICs are expected to raise £25 billion, more than covering the budgetary “black hole” – the changes to capital gains tax and inheritance taxes are nonetheless significant.
Capital gains rates tax will increase, effective immediately, to 18% / 24%. Whilst significant, it is still less than expected and a far cry from aligning with income tax rates. And with Business Asset Disposal Relief remaining at 10% until the end of the tax year, forward momentum should remain on business sales and exit planning.
The inheritance tax changes are significant. Business / Agricultural Relief is to be halved to 50% (i.e. 20% IHT) on qualifying assets exceeding £1m and AIM shares. IHT will also soon apply to undrawn pensions. Estate planning options will need to be revisited for many affected taxpayers.
Find out more below:
EMPLOYER TAXES
National Insurance Contributions
The most significant tax raise in in respect of Employer’s national insurance contributions (NICs), which is expected to raise £25bn.
The Budget has introduced two increases. The rate of tax is increased from 13.8% to 15%, and the threshold at which Employer’s NIC starts to be paid was reduced from £9,100 to £5,000 per annum. These changes apply from 6 April 2025.
Based on the average salary in the UK of £34,000 the employer’s NIC payable from April 2025 on £24,900 at 15% is £4,350. This represents an increase of £914 per annum (or £686 after Corporation Tax Relief).
Smaller employers will have relief under the Employment Allowance, which is increased from 6 April 2025 to £10,500 from £5,000. However, even smaller businesses employing 6 average earners will face an increased NIC cost.
National Minimum Wage
Compounding the additional burden employers are expected to bear is the significant increase in National Minimum Wage (NMW).
Rachel Reeves has announced a 6.7% increase to National Minimum Wage for over 21 year olds increasing the hourly rate from £11.44 to £12.21 from 6 April 2025.
There is an even steeper increase in the rates paid to 18–20 year-olds with a 16.3% increase from £8.60 to £10.
Benefits in Kind
Whilst there was some expectation of change, the generous Benefit in Kind rates applicable to electric vehicles will continue.
However, double cab pickups – which are currently taxed favourably as vans (which face far lower benefit in kind taxation than cars) – will no longer benefit from this treatment, from April 2025 onward.
INCOME TAXES
Given the Government’s commitment not to raise taxes for working people, it is not surprising that income tax rates and thresholds remain unchanged.
Perhaps more unexpected – given the Government’s recent clamour to define “working people” is that fact that not only employment earnings, but other forms of income, have been saved from increased tax cost.
However, the freezing of income tax thresholds continues the process of fiscal drag. The effects of inflation will result in more taxpayers paying tax, or higher rates of tax, even without increases.
Rachel Reeves did however confirm that the threshold freeze would end 2027/28, confirming that from the 2028/29 tax year the thresholds are to increase in line with inflation.
High Income Benefit Charge
Currently it is possible for a single parent earning £61k to lose their child benefit – due to the High Income Benefit Charge – whereas two parents each earning £59k (i.e. £118k in total) are not impacted.
The previous government suggested resolving this unfairness by looking at household income, rather than individual income, which was a broadly welcomed measure. However, it has been confirmed in the Budget that this will no longer be proceeding. Instead some minor changes to administration in this area have been announced, allowing employed people to include the charge in their tax code.
CAPITAL GAINS TAX
With all the speculation regarding the potential alignment of capital gains tax (CGT) with income taxes, the actual changes to CGT were not as drastic as feared.
The lower rate of CGT will see an increase from 10% to 18%, while the higher rate will be upped from 20% to 24%. This remains lower than historic rates of 28%.
These new CGT rates will generally apply to transactions from 30 October 2024 onward, although it is possible in limited circumstances – for transactions that took place under unconditional but uncompleted contracts before this date – that higher rates of CGT may apply on historic transactions (if you think you may be caught by these rules, advice should be sought).
Capital gains rates for qualifying disposals of residential property will remain the same at 18% and 24% respectively.
Business Asset Disposal Relief and Investor’s Relief
Business Asset disposal Relief (BADR) is a capital gains tax relief on qualifying business disposals including shares in a personal company, sole traders, partners, or trustees of a settlement with a qualifying beneficiary.
Where relief is available, CGT is payable at only 10% up to the lifetime allowance of £1m per individual. Qualifying gains in excess of this are taxed at ordinary rates. An extension of the above BADR rules is Investor’s Relief (IR) which applies to disposals of qualifying shares in an unlisted company. It also attracts a reduced rate of CGT at 10% however the lifetime limit for IR is currently set at £10m. IR is only available in instances where availability of BADR has been ruled out.
In a move that will be widely celebrated by entrepreneurs and investors, BADR and IR will remain with their current lifetime limits of £1m and £10m respectively.
The tax rates remain at 10% until 6 April 2025, from which time rates will increase to 14%, with a further increase from 6 April 2026 to 18%.
This provides a continued degree of forward momentum on transactional deals, as an opportunity is still available for shareholders of owner-managed and smaller businesses to undertake exit / succession planning at more favourable tax rates before the end of the current tax year. Please get in touch if you would like to explore options.
Carried interest
Carried interest is a performance-related reward received by a small population of fund management executives and where certain conditions are met, can be subject to Capital Gains Tax (CGT) at rates of 18% or 28%, rather than Income Tax which could be taxed at rates as high as 45%.
The Budget has announced a reform on the taxation. Whilst it was expected by many that income tax would apply immediately, instead an increased capital gains tax rate will apply at 32% from April 2025. Income taxes are however expected to apply from April 2026.
INHERITANCE TAX
Nil rate bands unchanged
Inheritance tax is taxed at 40% on the death estate, after deduction of the nil rates bands – this is the amount of value within an estate which is effectively taxed at 0%.
The nil rate band entitles individuals to a tax-free estate value worth £325,000 with an additional £175,000 residential nil rate band available for when your main home is left to direct descendants (although it is tapered where the estate exceeds £2m). Married couples have a combined tax-free nil rate band of up to £1m.
These allowances are to be frozen until April 2030. When coupled with the expected rise in asset values this change is expected to result in a further 86,200 estates becoming subject to Inheritance tax.
Unspent pensions no longer free from IHT
From 6th April 2027 most unused pension funds and death benefits will be included within the value of a person’s estate for inheritance tax purposes.
This will not only increase the inheritance tax liability proportionately, but may also result in a “double” impact, as the residential nil rate band is reduced where the estate exceeds £2 million as a result.
Pension scheme administrators will become liable for reporting and paying any Inheritance Tax due on pensions. This will represent a significant burden on pension providers, but is intended to ensure that income tax is not due on amounts that need to be drawn down to cover the inheritance tax cost.
Nonetheless, when the pension is accessed by the recipient after it has been inherited, income taxes will be due as normal. Many are concern about the potential total tax cost. As a example, a £2m pension pot – assuming the nil rate band used on other assets – will face £800k IHT. The remaining £1.2m is paid to beneficiaries, who may be taxed at rates of up to 45% income tax (a further liability of £540k). In the worst case scenario, the heirs will be left with only £660k from a £2m fund. This would represent an effective rate of tax of 67%!
Pension schemes will no longer represent efficient for inheritance tax purposes. Affected taxpayers may wish to draw on pensions earlier than previously planned, and consider alternative inheritance tax planning strategies.
Changes to APR / BPR
Another major change to inheritance tax came in the reform of business property relief and agricultural property relief. Relief of up to 100% is currently available on qualifying business and agricultural assets, regardless of value.
From 6th April 2026 onward these reliefs will be capped at £1 million of combined agricultural and business property for each taxpayer. The remaining value will then qualify for a 50% relief (i.e. inheritance tax at 20%).
A great deal of concern has been raised, particularly in the agricultural sector. Given the illiquid nature of many assets that currently qualify for relief, finding the funds to pay an inheritance tax cost – even at a reduced rate of 20% – is expected to prove difficult.
The expected solution here is two-fold: either seek life insurance to spread the potential inheritance tax cost over an affordable period; or ensure the business or farm passes down to the next generation far in advance (and at least 7 years before death) so inheritance tax is not due. Advice should be sought with the latter approach if the transferor intends to continue their involvement in the business, to ensure the gift with reservation rules do not apply.
Trusts are also expected to be significantly affected, as trustees will face a similar £1 million combined allowance for 100% inheritance tax relief applies, on each ten-year anniversary charge and exit charge.
Finally, the Government will also reduce the rate of business property relief available from 100% to 50% in all circumstances for shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM. This rules out many existing estate planning strategies.
Many estate planning strategies involving BPR / APR assets – including investing in AIM shares – may need to be considered as a result of these significant changes. We recommend speaking a professional advisor if you are impacted.
OTHER CHANGES
HMRC Interest rates
The rates of interest which apply to unpaid tax will rise – by 1.5% to Bank Rate plus 4%. At present this represents a 9% interest rate.
When coupled with the potential increased inheritance taxes, and possible difficulty in finding the cash to pay the resulting tax (due to the illiquid nature of relevant assets),m this is likely to represent a significant increase HMRC receipts.
No increase in interest rates has been introduced where HMRC are in debt to taxpayers.
Taxation of Employee Ownership Trusts
Employee Ownership Trusts (“EOTs”) represent a structure for business ownership, under which the business is held for the benefit of the staff.
This can provide several favourable tax advantages, including a potential tax rate on sale to an EOT at 0%. They can provide an excellent exit planning vehicle for business owners, particularly where a purchaser is not readily available.
For disposals on or after 30 October 2024, these qualifying conditions are now made more stringent. Many introduced measures are sensible and should not deter genuine commercial transactions and are generally sensible in nature.
EOTs continue to represent a highly advantageous structure for exit planning, which will only improve as capital gains tax rates increase. We remain positive about the transactions in this area, and are available to provide a comprehensive service.
Non-Domicile Changes
Under the current tax rules, UK residents who are not domiciled in the UK – i.e. are considered to have their “permanent home” overseas – can choose to be taxed on a remittance basis (unless deemed to be UK domiciled).
This means non-doms can elect to pay tax on their UK income and gains in the same manner as other UK residents, but only pay tax on Foreign Income and Gains when these are brought into, or remitted to, the UK.
In a move that was largely expected to be dropped by the Government – given the international mobility and wealth of many non-doms – starting 6 April 2025, HMRC will abolish the current remittance basis taxation regime. This will be replaced by a new and generally more modern four-year regime based on the taxpayer’s residence status (with some transitional reliefs).
There will be both winners and losers, but it is certainly a major shake-up and not one that was truly expected. Existing trusts – a common planning strategy for non-doms – are not protected. Advice should be sought by affected taxpayers.
Tax Treatment of Umbrella Companies
Umbrella companies are employment intermediaries that employ workers on behalf of agencies and end clients. Although many of the businesses which operate in this way are fully compliant with relevant tax legislation, some have been used to facilitate tax fraud, often leaving workers with unexpected tax liabilities.
Under newly introduced legislation, if an agency uses an umbrella company to employ workers, the agency is responsible for ensuring that the correct income tax and National Insurance contributions (NICs) are deducted and paid to HMRC. If there is no agency involved in the supply of the umbrella company worker, the end client itself will take on this responsibility. The new rules will take effect from April 2026.
There should be no impact on workers involved in these arrangements as they will continue to receive their pay net of PAYE and NIC.
VAT and private schools
Despite the calls for postponement of the implementation date to September 2025 to give schools more time to prepare, the Chancellor confirmed the new rules relating to the supply of education by private schools will apply for terms starting on or after 1 January 2025.
Any payments received or invoices issued from Budget Day will be liable to VAT at 20% if relating to the supply of education starting on or after 1 January 25. As previously announced, any payments received between 29 July 2024 and 30 October 2024 which relate to the January 25 term will also be liable to VAT at 20%.