After months of speculation about potential tax increases, Rachel Reeve’s Budget announcement today confirmed £40 billion in tax hikes, exceeding earlier estimates. One significant change is the more aggressive approach to raising employers National Insurance, with the earnings threshold for this tax decreasing from £9,100 to £5,000 starting in April 2025, along with a rate increase to 15%. Additionally, DC pension assets will be included in estates for Inheritance tax purposes beginning in April 2027, and access to Business Relief and Agricultural Relief for mitigating IHT will be restricted.
Despite these tax changes, some aspects remained untouched. There were no cuts or lifetime caps placed on ISAs, which had been a concern for some think tanks. Similarly, the amount of tax-free cash that can be withdrawn from pensions remains unaffected, providing relief for many individuals who had feared potential reductions. Savers who hastily withdrew their tax-free cash from pensions recently may have the opportunity to reconsider their decisions, depending on any applicable ‘cooling-off’ periods, typically around 30 days.
Expectations of a Capital Gains Tax (CGT) increase were met, with the main rate rising from 20% to 24% for higher and additional rate taxpayers, and from 10% to 18% for basic rate taxpayers. The surprising aspect is that these new rates are effective immediately. Such mid-year tax adjustments are rare, and individuals who sold shares this morning in hopes of avoiding the increase will likely be subject to the higher rates.
While the CGT rise may be seen as a negative development, the decision not to align CGT rates with Income tax rates, as some had suggested, provides some relief. The increase, particularly for higher rate taxpayers, is within earlier estimates, although it may have a more significant impact on basic rate taxpayers. Despite these changes, a more punitive CGT regime could have contradicted the Government’s pro-investment stance.
Given the less investment-friendly tax environment resulting from higher CGT rates and reduced annual exemptions in recent years, individuals are encouraged to consider utilizing tax-efficient vehicles like ISAs and pensions. These options protect investments from taxes on capital gains and dividends, emphasizing the importance of maximizing the use of annual tax-exempt allowances. For couples, leveraging both sets of allowances and transferring savings and investments to minimize tax liabilities is crucial in navigating the evolving tax landscape.
