Budget October 2024
Written by Ray Coman
The first Labour Budget in 14 years, and the first by a female chancellor, has been far reaching in scope. A wide variety of measures have significantly increased the tax burden for employers, business, investors and employees and the deceased. This report set out the key national insurance, income tax, capital gains and inheritance tax implications.
Increase in the rate of capital gains tax
Reduction in business assets disposal relief
Employers to start pay more National Insurance
Employment allowance to increase
Pension funds to become subject to inheritance tax
A new cap to apply to business property and agricultural property relief
Threshold for inheritance tax exemption to be frozen
Business rates relief to be reduced
Increase in the rate of capital gains tax
The rate of capital gains tax for assets other than non-residential property is 20% to the extent that income and gains exceed the higher rate tax threshold. Otherwise, gains are taxed at 10%. With effect from today, 30 October 2024, the rates will be increased to 18% and 24% respectively. This will bring the rate of capital gains for all assets in line with the rate that has applied since 6 April 2024 for disposals of residential property.
Reduction in business assets disposal relief
Tax relief applies to gains on the disposal of a whole business or significant (i.e. 5%) shareholding in an unquoted trading company. This tax break, known as Business Assets Disposal Relief, brings the rate of capital gains tax down to 10%. Taking effect to disposals made from 6 April 2025 the rate will be increased to 14% and again to 18% for disposal made on or after 6 April 2026.
Employers to start pay more National Insurance
The rate of employer’s national insurance will be increased by 1.25 to 15% with effect from 2025/26. Introduced at the same time, the Secondary Threshold, which is the threshold at which employer become liable to national insurance will be reduce from £9,100 to £5,000 from the same date.
Employment allowance to increase
The initial amount of employer’s national insurance is exempt by mechanism of the Employment Allowance. The first £5,000 of employer’s national insurance is exempted through the allowance. This threshold will increase to £10,500 from 6 April 2025. The fixed allowance to which each employer is entitled to once, is especially beneficial to small businesses employers.
Pension funds to become subject to inheritance tax
From 6 April 2027, pension pots will become part of the taxable estate. So much of the inheritance tax as relates to the pension will be payable by the pension administrator direct to HMRC. For instance, if an estate has £1.225m in property and £100k in pension, the first £325 would be exempt because of the nil rate band. The remaining £1m would be taxable and £40,000 would be paid by the pension administrator.
The income tax regulation of pensions will remain unchanged. By way of recap, flexible drawdown pensions can be transferred to a beneficiary exempt from inheritance tax. If the pension has been used to purchase an annuity, the annuity payments stop on death of the pension holder.
If the pension holder dies before 75, beneficiaries will not have to pay tax on withdrawals (subject to a Lifetime Allowance charges.) If the pension is transferred after the deceased had reached 75, withdrawals would be subject to income tax.
A new cap to apply to business property and agricultural property relief
The transfer of a business assets or of farmland held by an estate is currently exempt from inheritance tax. The government will limit the value of combined business and agricultural assets that can be transferred tax free to £1 million. 50% of the value of qualifying business and agricultural property over £1 million will be added to the taxable estate.
The rate of inheritance tax relief for shares on an unrecognised stock exchanged (such as the AIM) will be reduced from 100% to 50%. Unlike other business property, the £1 million exemption will not be applicable to AIM shares. By way of recap it is necessary to hold business and agricultural assets for two years for the relief to apply.
Threshold for inheritance tax exemption to be frozen
The nil rate band refers to the value above which a person’s estate is subject to inheritance tax. It is currently set at £325,000 person and there is an additional £500,000 on residential property. The inheritance tax threshold will also be frozen until 2030. The nil rate band threshold has not changed since 2009 and its value has significantly eroded as a consequence of inflation (a process known as fiscal drag.)
Freezing of allowances
The personal allowance, higher rate tax band and other fixed personal tax threshold are set to be fixed until 2028. The value of a set, tax-free limit diminishes in line with inflation, and therefore the freezing of an allowance has the effect of increasing tax revenue of a government over time. The ISA allowance will be fixed at £20,000 until 2030. The allowance represents the amount that can be invested in a specified saving and/or share dealing account each year. Income and gains from an ISA are not subject to tax.
Stamp duty to increase
The rate of stamp duty on the purchase of a second residential property will increase from 3% to 5%. SDLT for purchases by companies on dwellings worth more than £500,000 will increase from 15% to 17% with effect from the same date. SDLT changes will come into effect for transactions concluded on or after 31 October 2024 (tomorrow.)
Business rates relief to be reduced
For business in retail, leisure and hospitality, business rates relief will fall from 75% to 40% from 1 April 2025.
The current reduction in business rates will end on 31 March 2025 following the announcement in today’s Budget.
Other measures
Carried interest is a form of performance related reward for hedge fund managers. This is set to increase from 28% to 32%.
Vat is set to be introduced on private school fees from January 2025.
Energy profits tax, which is a form of windfall tax on companies in the oil and gas industry, will increase to 38% until March 2030.
The minimum wage will increase by 6.7% to £12.21 per hour for workers aged 21 or older. For workers between 18 and 20 the minimum wage will increase to £10 an hour.
Summary
The expected £40 billion in tax increases from the 2024 Budget has resulted in being the most severe since 1993. The increase in in employer’s national insurance from April 2025 is predicted to raise the lion’s share of £25 billion in revenue.
The recent succession of Budget tax rises, freezing of allowance and abolition of tax relief will have a cumulative effect on the UK economy.
