Labour’s first Budget for 14 years was a big one, with Chancellor Rachel Reeves unveiling a massive £40 billion in tax increases. She kept the Government’s pledge not to raise the headline rate of income tax, national insurance or VAT for workers – but only just.
However she had to find cash from somewhere to fill the £22 billion black hole the Conservatives left, plus pay for her plans to “invest, invest, invest” in public services. Pensioners, landlords, investors and small business owners all took a hit. Here are the key changes.
Income tax
First the good news. Despite predictions the Chancellor might continue the freeze in income tax thresholds beyond 2028-29, she in fact said that they would go up in line with inflation after that, finally (they have been frozen since 2022, dragging more people, especially pensioners, into paying more tax by stealth). Currently you can earn up to £12,570 before paying income tax – the Personal Allowance – so this, along with the 40% and 45% thresholds, should rise from April 2029.
IHT on pensions
Retirees may need to re-think their plans. Defined contribution pensions (the type most of us have, versus defined benefit pensions), can currently be inherited free from inheritance tax (IHT) so long as the original pension holder dies before age 75. But from 2027 these pensions will form part of their estate, meaning IHT is due at 40% on anything above £325,000 (though additional allowances for property and the fact married couples can combine their allowances mean up to £1 million could be inherited before IHT is due).
The details are scant on this at the moment. But the change is expected to lead to retirees – who had been encouraged to spend their pensions last under current rules so as to pass on any remaining wealth tax-free – choosing to take more retirement income earlier and potentially gifting more. Also announced, the IHT allowance is being frozen to £325,000 until 2030, extending the freeze announced by the previous government.
Capital gains tax
A raid on capital gains tax (CGT) – paid when you sell and make a profit on assets, like shares outside of an ISA, or a business – will hit small shareholders where it hurts. The main (lower) rate of CGT will increase from 10% to 20%. The (higher) rate will increase to 18% to 24%. Both changes apply immediately to assets other than residential property and carried interest. On residential property, the rates will remain at 18% (lower) and 24% (higher).
For investors facing higher CGT bills it may be worth considering investments in Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) qualifying companies. These government-backed venture capital schemes, one of the few to avoid reform in today’s budget, allow you to defer or reduce capital gains taxes as well as offering income tax relief of 30-50% up front.
Stamp duty
Landlords and those considering buying a second home were dealt a blow. The stamp duty land surcharge for second-homes has been raised from 3% to 5%, effective immediately. This hike, payable by buyers in England and Northern Ireland, with a different system in Wales and Scotland, adds a significant cost for those looking to purchase additional properties, including buy-to-let and holiday homes.
One thing that wasn’t mentioned in the Budget is the planned reduction in the threshold for stamp duty in March 2025. As it stands this means that first time buyers will pay stamp duty on properties costing more than £300,000 (currently it is £425,000) and home movers will pay stamp duty on properties above £125,000 (currently £250,000). This will mean a significant increase in tax for some.
Tax on AIM shares
Another hit for shareholders – a reduction of tax breaks on AIM quoted stocks was confirmed, halving the IHT relief from 40% to 20%, a blow for investors in the small-cap market. Investing in such companies, given how fledgling some are, is a risk, and some investors might have been prepared to take given that IHT wasn’t due on such portfolios as long as they had been held for two years or more. Now that’s no longer the case, investors may be less inclined to take a punt.
Agricultural Property Relief and Business Property Relief on IHT will also be reformed from April 2026, with assets above £1 million attracting 50 per cent relief, but with no threshold for AIM shares.
Minimum wages
The National Living Wage will rise in April, with rates for over-21s set to go up to £12.21 an hour, an increase of 6.7%. In addition, the National Minimum Wage will rise for people aged between 18 and 20-years old from £8.60 to £10. Apprentices will get the biggest pay bump, with hourly pay increasing from £6.40 to £7.55.
Child benefit
Labour has scrapped plans to assess child benefit on household income, undoing the Conservatives’ reforms to simplify the system and stop cliff edge cut offs penalising single-earner families. Currently you’re eligible for full child benefit if you earn up to £60,000, but not on a household income of £120,000. It means the system that punishes single earners will remain. Currently, a sole earner on £80,000 gets no child benefit while two workers each on £59,000 get the full benefit.
Employers’ National Insurance
The National Insurance employers pay per employee will rise from 13.8% to 15%, and the threshold at which they have to pay it will drop from £9,100 to £5,000, both from April 2025. There’s some relief for employers in that the Employment Allowance – which allows companies to reduce their NI liability – will increase from £5,000 to £10,500. While this change won’t affect employees directly there is a lot of speculation that, by increasing the cost of doing business, companies will be less inclined to offer pay rises, bonuses, or hire more staff.
National Wealth Fund
The aim of the newly announced National Wealth Fund – a rebranding of the UK Infrastructure Bank – is to “mobilise billions of pounds of investment in the UK’s world-leading clean energy and growth industries and support the delivery of the government’s new Industrial Strategy”. The Government is looking to encourage institutional investors, but there could be an opportunity for retail investors too.
Photo by Elena Mozhvilo on Unsplash
