The Autumn Budget was announced by Chancellor Rachel Reeves on 30 October 2024. Although we have a new government, a close reading of many of the Budget measures indicates that there is plenty of continuity between the current and previous governments rather than a complete break. This insight delves into the key changes that the Budget will implement and their implications.
Income tax: the deep freeze continues
The last Chancellor, Mr Hunt, announced that the income tax bands and allowances would remain frozen until April 2028. This means that the personal allowance remains at £12,570 until 5 April 2028 and the income after allowances thresholds at which higher and additional rate income tax kick in remain at £37,700 and £125,140 until 5 April 2028.
This freeze in allowances and bands is a revenue raiser through a process called “fiscal drag”.
The Chancellor, Ms Reeves, has followed her predecessor’s step by continuing this freezing process until 5 April 2028.
There had been talk that the threshold and allowances freeze would be extended further but the Chancellor did not change her predecessor’s policy.
Employer’s National Insurance
Employer’s National Insurance is a levy imposed by the Government on a business’s payroll costs. It applies to any form of business which has employees.
The Chancellor announced an increase in the rate of employer’s national insurance today from 13.8% to 15% with effect from April 2025 with the desired intention of funding the NHS.
There is not a complete disconnect between this development and the last government’s thinking. In September 2021, the then Prime Minister, Boris Johnson, announced a 1.25% Health and Social Care Levy to fund the NHS which was to be levied on employers in a similar way to employer’s National Insurance in April 2023. This levy was subsequently cancelled in September 2022. Is this a driver for the Chancellor’s decision here?
It is worth noting that the employer’s National Insurance rate increase is not the end of the story. From April 2025, the Chancellor will also cut the salary threshold at which businesses have to start to pay employer’s National Insurance from £9,100 to £5,000, although a measure of relief has been given to business by increasing the employer’s National Insurance allowance from £5,000 to £10,500.
There are a number of points which come from this employer’s National Insurance change:
- It is already considerably cheaper in National Insurance terms for individuals to be self-employed rather than to be retained as employees. Today’s employer’s National Insurance rise moves this differential into even sharper focus.
- There are certain employee share option schemes, such as CSOPs and EMI options, which can be used to deliver a National Insurance free reward for employees. The increase in the National Insurance rate may make these arrangements even more attractive.
- There was some pre-Budget speculation that employer contributions into registered pension schemes would lose their employer’s National Insurance free status. However, no changes have been announced in this area, which is good news for salary sacrifice schemes under which employees sacrifice NIC-able salary for NIC free contributions to their pension schemes.
Capital gains tax
There has been considerable media comment on this topic before the Budget.
Business asset disposal relief gives a 10% capital gains tax rate on certain assets such as trading company shares, assets used for the purposes of a trade and for gains on EMI share options, subject to a two-year holding period. There is a £1m lifetime allowance. The Chancellor announced that the £1m lifetime allowance would be kept. However, she also announced that the 10% tax rate would increase to 18% by 2026. These changes begin to take effect from April 2025 when the rate goes up to 14%.
The rate of capital gains tax has been under review too. The Chancellor has increased the capital gains tax rate to 24% from 20% with effect from 30 October 2024. It is worth noting that capital gains on residential property are already taxed at the 24% rate, so this is a neat bit of tax harmonisation as well as a tax raising measure.
We are now seeing in the market a fair number of sales to employee ownership trusts (EOTs). The interesting feature is that a sale of a controlling interest in a trading company to an EOT can be structured so that it occurs on a no gain no loss basis for capital gains tax purposes. The last government announced a consultation which recommended that EOT tax reliefs should be maintained, subject to some tightening of the conditions, notably as to who can and cannot be a trustee. The Chancellor has announced via consultation that it will implement this consultation meaning that we should have business as usual in the EOT sector.
Carried interest
Carried interest is the reward which is payable to fund executives in the private equity sector. Typically fund executives are given (via a partnership structure) a small interest in the fund’s equity portfolio, which increases in value depending on how the fund performs. This return is typically taxed as capital gain.
As capital gains are taxed at lower rates than income, some have said that it is unfair that fund executives pay tax at these lower rates on part of their package. However, others have said that the private equity industry is internationally mobile and that changes to capital gains tax rates on carried interest in the UK might lead funds to relocate from the UK to where their executives would enjoy a more favourable rate of tax on carry.
The last government carried out a partial reform of the taxation of carried interest under which it would always be taxed at a minimum rate of 28%. However, the Government announced in its pre-election manifesto that it was going to review the taxation of carried interest, leaving the Chancellor with a challenging balancing act.
In order to square the circle, the Chancellor has announced an increase in the rate from 28% to 32% by April 2025, with further reforms being introduced which take effect from April 2026.
The taxation of non-domiciled individuals
Although there are clear differences between the current and the last governments, there are similarities too. The proposed reform of the taxation of non-domiciled individuals is a fine example of this.
Currently individuals who are non-UK nationals who are UK tax residents for under 15 tax years can adopt the remittance basis on their non-UK source income and gains. Broadly speaking, if the remittance basis applies, non-UK source income and gains will not be subject to UK tax unless and until such income and gains are remitted to the UK.
Essentially Jeremy Hunt, the then-Chancellor, announced a reform with two key features. First, the remittance basis would be abolished with effect from April 2025. Instead, individuals who become a UK tax resident without having been tax resident in the UK in the previous 10 tax years would enjoy a four-year tax holiday during which they would not be subject to tax on their non-UK income and gains.
In broad terms, the Chancellor has confirmed that she will be adopting the broad thrust of her predecessor’s policy, subject to a few small tweaks.
Pensions
Although Chancellor Reeves has announced some changes to the taxation of pensions, there is still much continuity between her and her predecessors.
Jeremy Hunt, the former Chancellor, announced a pensions annual allowance of £60,000, on which tax relief on pension contributions could be obtained. Further, Jeremy Hunt abolished the lifetime limit on the total amount which an individual can have in pensions savings. Chancellor Reeves has kept these two important planks of her predecessor’s policy.
As discussed in the section on national insurance above, Chancellor Reeves has maintained the exemption from employer’s national insurance on pension contributions.
However, despite the continuity, there has been change. Currently if an individual dies leaving an undrawn pension pot, this falls outside the individual’s estate for inheritance tax purposes. Going forward, pension pots are to be brought within the scope of inheritance tax.
SDLT
Continuity and change are the order of the day for SDLT too. Broadly, the structure of the tax is being maintained.
The Government has a manifesto commitment to increase the non-residents’ SDLT supplement to 3% on the acquisition of residential property. The non-residents’ SDLT supplement was introduced by the last government. There was no discussion of this in the Budget speech. Will it make its way into the Finance Bill in due course?
Previous Chancellor Kwasi Kwarteng extended the nil rate band on residential property purchases from £125,000 to £250,000, but this was time-limited with the extension expiring on 1 April 2025.
Chancellor Reeves is continuing with the last government’s policy of reversing out this extension.
There has been one new announcement. The SDLT surcharge on second home purchases is to be increased from the current 3% to 5%. Care will need to be taken on this point as the change may take effect for company purchasers as well as individuals too. The change is scheduled to take effect from 31 October 2024.
Corporation tax
Corporation tax is the area where there is the most continuity and the least change between the present and the previous governments.
Corporation tax remains at the 25% rate and it should remain at this rate throughout the duration of this Parliament.
Further the present Government is keeping its predecessor’s corporation tax incentives, notably the full expensing of expenditure on plant and machinery for capital allowances purposes, the structures and buildings allowance, the R&D tax credit regime, and the patent box. Depending on the precise circumstances, companies who are eligible for these reliefs may enjoy an effective tax rate below the headline rate of 25%.
Tax avoidance
All governments look for opportunities to mitigate the effects of tax avoidance and the current government is no exception. More money will be spent to hire further HMRC staff and to modernise its systems. Further work is to be carried out to prevent umbrella companies being used as vehicles for tax avoidance.
The interest rate on unpaid tax debts is to be increased, and further measures will be taken to challenge the promoters of egregious tax avoidance schemes.
Inheritance tax
Inheritance tax is perhaps the area where there is the most discontinuity between the new and the previous governments.
Although the headline rate remains at 40%, there have been significant changes announced. The freeze on inheritance tax thresholds is to be extended by a further two years until April 2030.
There will then be some changes which take place from April 2026: Individuals are to be given a £1m business asset relief and agricultural property relief allowance but once this allowance has been exceeded, inheritance tax will be charged at the 20% rate on business and agricultural property.
Further, there is to be a change in the business property relief treatment of shares in AIM-listed companies. Shares in such companies are to be subject to inheritance tax at the 20% rate as distinct from the current treatment under which they qualify for 100% relief from inheritance tax.
VAT
Last but not least there is VAT. The Government is proceeding with its plan to remove the VAT exemption on private school fees.
This gives rise to a couple of points which are interesting for VAT specialists. First, in the days when the UK was bound by EU law, it would not have been possible for a UK government to make this change because the VAT exemption was embedded in EU Directives. Second, when a school moves from making exempt to VAT-able supplies, it may be entitled to a recovery of some of the historic VAT charged to it on its capex under what is known as the capital goods scheme.