“The only way to drive economic growth is to invest, invest, invest. There are no shortcuts. We must restore economics, stability and turn the page,” said the chancellor, before unleashing a £40 billion package of tax rises.

This speculation can now be put to bed; for now, at least. And while some sections of society will feel the brunt of today’s package of reforms, others will be somewhat relieved as the rumour mill proved off target in crucial areas of the pension tax system.

The definitions of “broadest shoulders” and “working people” threw up plenty of debate in the lead up to Labour’s first Budget in 14 years, and the discourse here will undoubtedly continue for some time yet. The Government must also parry accusations about breaking a manifesto promise.

Here we examine the strengths, challenges, and potential risks, and clarify their implications.

Employer national insurance hike

Reports late last week indicated that Rachel Reeves was planning to increase employer national insurance (NI) and these turned out to be true.

The main rate of employer NI will rise from 13.8% to 15%, and the secondary threshold, the level which employers start paying NI, will fall from £9,100 to £5,000 – a move that is expected to raise £25 billion a year. These will take effect from 6 April 2025.

In April 2023, corporation tax was given a new top rate, rising from 19% to 25%, and the cuts to NI at the previous two major fiscal events benefitted employees and the self-employed – employers were left out.

This decision has fired up debate around whether Labour has broken its manifesto promise not to raise taxes on working people. Higher employer NI rates will hurt the profit margins of incorporated businesses of all shapes and sizes, even those with either a small number of staff, or freelancers and contractors who draw a salary of more than £5,000.

If you operate as a sole trader or in partnership with one or more others, the hike won’t impact you.

Capital gains tax on shares to rise

Increases to capital gains tax (CGT) have dominated the rumour mill in the past two months.

The rates payable on sales of shares have been hiked from 10% to 18% on anything (when added to income for the year) that falls below £50,270, and from 20% to 24% at the higher rate. Importantly, the changes will take effect from midnight.

This means the CGT regime has been equalised across all assets, as sales of residential properties are already taxed at 18% and 24%.

While this will jack up the tax bills of those who sell investments outside tax wrappers, such as individual savings accounts (ISA) and pensions, it could’ve been a lot more painful.

Early reports suggested rates could be raised in line with income tax, and this would’ve been the nuclear option, but fortunately for investors, the Government opted for something tamer.

There was also reform for business asset disposal relief, which will remain at 10% for this year, but hike to 14% April 2025, and to 18% in 2026-27. 

Big changes to inheritance tax

Another tax that hogged pre-Budget speculation was Inheritance Tax (IHT) and Rachel  Reeves announced several big changes here.

The biggest was the move to scrap the IHT exemption on pension savings, which will take effect in April 2027.

I’m yet to check the finer details, but presumably this means that your pension pot will form part of your estate on death and anything above your allowances will be taxed at 40%. This will be a blow to many savers who have beefed up their pension pots to harness the IHT benefits and may lessen the allure of using the tax wrapper for estate planning purposes.

Business and agricultural relief 

Elsewhere, there were significant changes to business relief and agricultural relief.

These will remain 100% tax free for the first £1 million of any assets passed down, but only 50% relief will be available for anything above. The chancellor said that three-quarters of claims will be unaffected by the changes.

The chancellor also revealed that the tax-free lifetime thresholds, the nil rate band and the residence nil rate band, will be frozen at £325,000 and £175,000, respectively, until 2030.

Finally, as many had predicted and, the IHT perks on AIM shares were also targeted. You will now only get 50% relief on eligible shares held for two years, instead of 100%.

Other parts of pension framework left alone

Other than the decision to scrap the IHT-exemption on pensions, everything else is untouched, despite pre-Budget rumours which pointed towards heavy reform. Speculation here had become so feverish that savers were hooking out their tax-free cash in fear that the maximum would be axed or heavily reduced.

However, the maximum amount you can draw tax free from your pension remains at £268,275 (or 25% if lower), and you can still claim upfront tax relief at your marginal rate.

Frozen tax thresholds to end in 2029

Labour’s claim that it will not increase taxes on working people is only partly true. That’s because the party pledged to keep income tax thresholds frozen until 2028. This way of raising tax revenues, means more people will either trip into the tax net or be pulled into higher bands as their incomes rise.

There were concerns the Government may prolong the freeze for two more years until 2030. But in a surprise move, Rachel Reeves said that from the 2028-29 tax year, income tax bands will increase in-line with inflation, bringing fiscal drag to an end.

State pension rise rubber stamped

Retirees were given something to cheer after the chancellor confirmed that the state pension will rise an inflation-beating 4.1% from April, as expected. This will increase the full state pension to £11,975 a year, while the annual basic state pension will tick up to £8,821.

What we didn’t get was any clarity on the state pension’s future, namely whether the current schedule to increase the claiming age to 68 will be accelerated.

VAT on private school fees confirmed

This was one of the big policy announcements during the early weeks of Labour’s return to power.

The chancellor used this Budget to confirm the Government will be pressing ahead with its promise to charge VAT on private school fees.

A report published in late July outlined “As of 1 January 2025, all education services and vocational training supplied by a private school, or a ‘connected person’, for a charge will be subject to VAT at the standard rate of 20%. Boarding services closely related to such a supply will also be subject to VAT at 20%.”

The report added: “Any fees paid from 29 July 2024 pertaining to the term starting in January 2025 onwards will be subject to VAT.”

National living wage to increase

Yesterday it was revealed the national living wage will rise to £12.21 an hour from April, a 6.7% jump, with more than three million low-paid workers set to benefit. The baseline amount for workers aged 18 to 20 will go up 16% from £8.60 to £10.

British ISA officially scrapped

In the red pages, the Government confirmed it will not proceed with the British ISA due to mixed responses to the consultation launched in March 2024.

Remember of course that tax rules can change, and the tax benefits described above may depend on your personal circumstances. 

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