Labour’s first Budget in over 14 years has finally arrived, and as with most cases when governments change, there are plenty of new taxation considerations for UK residents to take into account.
Before Labour’s landslide election victory on July 4th, one of the party’s core pledges was to avoid raising worker’s taxes. This presented a series of challenges for the new Chancellor of the Exchequer, Rachel Reeves, who has claimed that a £22 billion fiscal black hole had been inherited upon taking office.
So, how were the challenges posed by the Autumn Budget approached by Reeves? And how will you be affected by the main tax changes as a result?
Employers Bear the Brunt
The headline of Labour’s budget was a significant £40 billion increase in taxes overall, representing a UK government’s largest tax hike since 1993.
However, Reeves took aim at employers for raising the lion’s share of the increase, with a £25 billion rise in the national insurance contributions of businesses.
To supplement this, the amount that businesses will pay on their employees’ NI contributions is set to increase from 13.8% to 15% starting in April 2025. The threshold at which employers start paying national insurance on employee earnings has also been lowered to £5,000 from £9,100.
Changes to Capital Gains Tax
One of the biggest changes for investors and the many Britons who regularly save money can be found in the alterations made to Capital Gains Tax (CGT).
Although there were rumours of CGT climbing as high as 40% in some speculative reports, Reeves opted for a more measured increase from 10% to 18% for the lower rate and from 20% to 24% on gains made on investments.
To illustrate the changes, the government offered a scenario in the case of making a taxable income of £20,000, with taxable gains amounting to £12,600.
With the current CGT allowance of £3,000 offering a buffer, the investor would have £9,600 left that’s liable for taxation. This forms part of your taxable income, and if the total combined amount is less than £37,700, you’ll pay the lower rate of Capital Gains Tax.
If this gain was made between the 6th of April 2024 and the 30th of October 2024 when the new CGT rate comes into effect, you’ll pay £960 in tax. However, if your profit is made from 30th October 2024 onwards, the tax you’ll pay will rise to £1,728.
The changes to CGT align with residential property Capital Gains Tax on second homes, which was kept at 18% and 24% per tax rates respectively.
One key way to overcome the Budget’s capital gains hike is to make use of Individual Savings Accounts and their £20,000 tax-free allowances, which have been left unchanged and frozen until 2030.
Inheritance Tax Implications
Although Inheritance Tax (IHT) thresholds have been frozen at 40% until 2030 in the Budget for property, possessions, and money external of somebody who has died above a £235,000 threshold, changes have been made to how IHT applies to unused pension pots.
Starting from the 6th of April 2027, most unused pension funds and death benefits are set to be included within the value of an individual’s estate for Inheritance Tax purposes.
This will make pension scheme administrators liable for reporting and paying any IHT due on pensions to HMRC.
In effect, these IHT changes will mean that pension pots could form part of an individual’s estate upon death, with anything falling above tax-free allowances that aren’t left to a spouse or civil partner liable for the 40% Inheritance Tax rate.
Apart from the decision to revise the IHT exemption for pension pots, the Budget left pensions largely unscathed despite speculation that reformation was on the cards.
Frozen Thresholds Could be a Concern
Although Labour’s pledge to protect the tax rates paid by workers appears to have been kept in the short term, the longer-term outlook can be a little more complex.
Because Reeves opted to freeze income tax thresholds until 2028, this could see more employees finding themselves paying more tax further down the line as their household incomes grow and salaries increase over time.
The move will see income tax bands increase in line with inflation from the 2028-2029 tax year, which is likely to provide more relief for workers moving into the next decade.
How Will Our Investments be Affected?
On the face of things, the prospect of the National Living Wage rising to £12.21 in a Budget that saw more employers bear the tax burden than employees could be a cause for optimism over the amount of money investors will have to build savings in the future.
However, this increased burden on businesses could see the price of products rise and worker wages remain static for longer as a result, impacting the ability of many workers to invest their earnings into stocks and shares.
Additionally, increases in Capital Gains Tax may not be as significant as some investors feared, but it could be enough to cause more savers to think twice about moving away from the comfort of an ISA and into alternative investment strategies.
The long-term impact of the Autumn Budget will become apparent as the key taxation changes come into effect. It’s only then that we can fully get to grips with the implications of Labour’s pledge to protect the interests of working taxpayers.
Also Read : Financial Freedom 101: Best Budgeting Practices for Small Businesses
