UK Tax News

Budget October 2024

Published: 30 Oct 2024

Updated: 17 Nov 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, 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

Freezing of allowances

Stamp duty to increase

Business rates relief to be reduced

Other measures

Summary

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.

2024 Budget

Published: 06 Mar 2024

Updated: 06 Mar 2024

Written by Ray Coman

Last attempt of the Tories to recover popularity before the election, the Budget included a generous national insurance rate cut for basic rate taxpayers while targeting wealthier individuals through abolition of furnished holiday lettings regime and non-dom tax concessions.

Further cut to main rate of employee’s national insurance contributions

National insurance reduction for the self-employed

Reduction in High Income Benefit Charge

Scrapping of non-domiciled tax concession

Capital gains tax on residential property to reduce

British ISA

VAT threshold to rise

Furnished holiday letting regime to be abolished

Summary

Further cut to main rate of employee’s national insurance contributions

The employee national insurance rate is to be cur by 2 pence in the pound starting 6 April 2024.  This cut follows a similar cut in the Autum statement of the rate from 12% to 10%.  When combined with the NI cut in November a taxpayer on £50,270 or higher will save £1,508 a year, as a result.  The cut affects the rate between the primary threshold (of £12,570) and the Upper earnings limit (of £50,270 per year.)  There are no further savings for employees or directors with an income over the upper threshold.

National insurance reduction for the self-employed

The rate of sole trader national insurance rate between the Lower and upper Profits Threshold also reduced from 8% to 6%.  This mirrors the cut given to employees and will save sole traders and partners in a partnership about £650.  The cut increases the tax benefit of working an unincorporated business (or LLP) as compared with operating as a company.

Income tax rates and thresholds remain the same

Despite inflation falling from 10% last year, the rate is still about 4%.  This means that the real terms value of fixed thresholds such as the personal allowance and higher rate tax band are being eroded over time.  The process by which inflation reduces the value of fixed allowances is referred to as fiscal drag and it is estimated to cause the current tax burden on the UK taxpayer to be the highest in history.

Reduction in High Income Benefit Charge

The High Income Benefit Charge is the threshold at which child benefit needs to be pad back through a self-assessment Tax return.  Currently set at £50,000, the threshold is due to increase £10,000 to £60,000 from April.  Child benefit is available to parents with children under 16 or under 20 if in full time higher education.

The rate of tapering is also halved.  Currently, the amount of Child Benefit to repaid increases at a rate of 1% for every £100 that income exceeds the threshold.  Therefore, the amount to pay back is equal to the benefit received when income reaches £60,000.

From April 2024, the charge is equal to 1% of benefit received for every £200 that income exceeds the threshold.  Consequently, HIBC is equal to child benefit received when income reaches £80,000.  The benefit clawback is assessed on whichever partner has the higher income.  As of next month, child benefit will be £25.60 per week for the first child and £16.95 per week for subsequent children.

Scrapping of non-domiciled tax concession

Currently a person who is ‘domiciled’ outside the UK can claim the remittance basis on overseas income and wealth.  The measure is designed so that wealthy foreign nationals (who have the potential to contribute towards the UK economy and support the sterling currency) are not deterred from migrating to the UK.

The length of time during which the remittance basis can be claimed is currently 15 years, although a remittance basis charge makes it ineffective for the majority of non-doms after just 7 years.  Mr Hunt announced that a new simpler system will apply based on residency will allow the concession to apply to overseas income and gains for the first four years of residency only.

Capital gains tax on residential property to reduce

The rate of tax applied to gains on disposal of residential property will reduce from 28% to 24% with effect from April 2024.  Currently, a person’s home is exempt from tax. Residential real estate which is not being occupied by the owner is however subject to capital gains tax.

British ISA

In addition to the ISA- currently set at £20,000 per annum-, savers will be able to contribute up to £5,000 starting 2024/25 into a fund invested exclusively in British companies.

VAT threshold to rise

Long overdue the VAT threshold will be rising from 1 April 224 from £85,000 to £90,000.  The Vat threshold has been fixed at 85,000 since April 2017, and has not kept pace with inflation since.  However, the most recent increase will be welcomed by small businesses and the self-employed who can reduce red tape and stay more competitive by remaining unregistered for VAT.

Furnished holiday letting regime to be abolished

The current regime allows investment property that is let to short term to benefit from preferential rates.  In particular, a full deduction from mortgage interest against profits is allowed.  The sale of a furnished holiday let can benefit from business asset disposal relief, which is 10% and considerably lower that the rate of capital gains tax applied to other types of residential property.  Staring April 2024, landlords will no longer be able to treat their property as FHL and most properties will be treated the same as other types of buy-to-let.  The aim is to make more long-term rental accommodation available in holiday spots.  The Budget also included an abolition of Multiple Dwellings Relief (from stamp duty land tax) available to landlords of multiple properties.

Summary

As the final Budget before the election, and the Tories lagging in the polls, a raft of tax cuts were inevitable.  The tax concessions were enabled by continuing drops in inflation which is expected to reach 2% in the coming months.  Fiscal drag continues to be the hidden method of funding the fiscal changes, with changes to non-dom legislation making a smaller contribution.

2023 Autumn Statement

Published: 22 Nov 2023

Updated: 22 Nov 2023

Written by Ray Coman

Since the Spring Budget, falling inflation has given the chancellor more scope to promote growth through tax cuts.  The most significant change was made to national insurance which applies to income from work (employment earnings and self-employment profits) as applied to all individuals between 16 and state pension age, which is usually 68.  Incentives for the working population were complemented by tougher access to Jobseekers’ Allowance benefit.

Employee’s National Insurance rate to drop

Class 2 to be abolished

Drop in the rate of class 4 NIC

Minimum Wage to rise

Annual allowance to be fixed permanent at £1 million per annum

Commentary and criticism

Employee’s National Insurance rate to drop

The highest rate of employee’s national insurance applies on earnings between the Primary Threshold (currently £12,570) and the upper earnings threshold (currently £50,270.)  That Class 1 NIC will be cut from 12% to 10% starting from 6 January 2024.  While the tax cut will benefit all employees earning over £12,570, it will have the greatest impact in percentage terms on those whose income is nonetheless beneath £50,270.

The combined income tax and NIC rate for an employee (with income over the personal allowance) is 30%.  This is the lowest rate since the 1980s and is intended to reward work.

Class 2 to be abolished

Ensuring that self-employed workers are not left out by the National Insurance cut, The Chancellor also announced an abolition of Class 2 NIC.  The measure amounts to an annual tax saving £192 for a self-employer worker with profits over £12,570 a year.  The current rate of class 2 NIC is £3.45 a week.

It will continue to be possible to opt into obtaining national insurance credit (towards the state pension) provided profits are over the the Small Profits Threshold of £6,725.

Drop in the rate of class 4 NIC

The rate of class 4 NIC, which applies to income between £12,570 and £50,270 will also be cut from its current level of 9% to 8% starting April 2024. The NI cut further tips the balance in favour of sole trader over limited company status for the self-employed.

Minimum Wage to rise

The Minimum Wage (which the government increasing refer to as the National Living Wage) will increase to £11.44 from April 2024.  The age threshold for entitlement to the Minimum Wage will at the same time lower from 23 to 21 years old.

Benefits will increase with inflation (as measured by CPI) and the State pension will rise in line with the Triple Lock system.  The 8.5% annual hike is tagged to earnings rather than CPI as a measure of inflation.

Annual allowance to be fixed permanent at £1 million per annum

The annual investment allowance permits the cost of plant and machinery to be deducted in full against taxable profits in the tax year in which the expense occurs.  Plant and machinery covers: computer equipment, office fixtures and furniture, specialist equipment and intangible assts such as patent rights.  Unlike many other types of business expense, this type of item can last in a business for several years, and is therefore referred to as an asset.

Without an annual investment allowance only a portion of the cost can be deducted from profits each year.  The system (which still applies to motor vehicles) is referred to as a capital allowance.  Full expensing accelerates the rate at which tax relief is obtain on a business’s’ longer term investment in its growth.

Previously, in the Spring 2023 Budget, full expensing of asset expenditure had been set to last three years starting 1 April 2023.  The announcement made in today’s statement will make that provision permanent.

Commentary and criticism

The opposition were keen to point out that because none of the thresholds have increased in line with inflation, the overall tax burden had increased significantly under the current government.  The tax giveaway achieved through a cut in national insurance in no way compensates for the rising tax bill caused by fiscal drag.  Tax as a percentage of GDP is at historical highs.

The Office for Budget Responsibility have estimated that by 2028/29, nearly three million more people will pay tax at the higher rate and a further £400k at the additional rate because of thresholds being frozen despite the continued rise in inflation.  Conservatives are still lagging Labour in the polls and with an election set for next year.

Despite rumours in the approach to the Autumn Statement, no cuts were made to inheritance tax.

2023 Budget

Published: 15 Mar 2023

Updated: 18 Mar 2023

Written by Ray Coman

Against a background of high inflation, national strikes and global unrest, Jeremy Hunt gave his first Budget since becoming chancellor.  A rise in energy prices and defence spending have placed fresh demands on the Treasury.  In response, the government has been able to harness rapid inflation to raise revenues through freezes in allowance thresholds.  This process, referred to as Fiscal Drag, has the benefit to a policymaker of causing less headline alarm than tax rises.  Indeed, stability has been in focus, after recent inflation related tremors through the banking sector and in the aftermath of the Liz Truss crisis.  By comparison with recent years, the 2023 Budget contained fewer dramatic moves on tax policy.

In the context of the above, the delivery of incentives to the investment and business world, especially by way of relaxation to pension rules, came as some relief.  An election less than two years away against an opposition leading in the polls could provide some explanation.  The evaporation of lockdown costs also offered to relieve pressure on government spending, and allowed for the extension of covid related measures to encourage business spending, principally through annual investment allowance.

Lifetime allowance to be abolished

Capped tax free lump sum on start of pension

Pension allowance to increase

Pension allowance taper threshold to increase

Extension of annual investment allowance

Measures to prevent abuse of research and development tax concessions

Freezing of allowances despite inflation

Increased reporting for crypto

Lifetime allowance to be abolished

The lifetime allowance is the value that a pension can reach before it will suffer an excess charge.  The pension is valued against the lifetime allowance on a vesting event, which is typically when the pension holder starts to draw benefits.  The lifetime allowance charge will be abolished from 6 April 2023.  Certain lifetime allowance related processes will need to be in place until 2024/25 which would be carried out by the pension administrator.

The chancellor sited incentivises for doctors as the reason behind the change. However, the regulations will affect UK pension holders of all occupations.

Capped tax free lump sum on start of pension

Currently, an amount equal to 25% of a pension can be withdrawn as a tax free lump sum when the pension holder starts receiving a pension.  This tax relief will continue to apply up to a limit of £268,275.  The limit on the pension commencement lump sum happens to be the same as 25% of the current lifetime allowance.

Pension allowance to increase

An amount invested into a pension for a given tax year in excess of the pension allowance, is subject to an excess charge.  The charge effectively adds the pension contribution back into income so that it is taxed at the taxpayer’s marginal rate.  The maximum pension allowance is currently £40,000, but announced in the Budget was an increase in the allowance to £60,000.  This will allow taxpayers to obtain greater tax relief on pension contributions.

Pension allowance taper threshold to increase

The limit at which the allowance starts to taper will also increase from £240,000 to £260,000 on 6 April.  Once income exceeds this “adjusted income limit” the pension allowance will start to taper at a rate of £1 for every £2 that it is over that limit.  The tapering continues until the allowance reaches a minimum.  That floor will also rise from £4,000 to £10,000 with effect 2023/24.

The allowance for brought forward years will not alter.  Once the current year allowance is exhausted, the taxpayer can make use of unused allowance for the preceding three tax years.  The allowance applicable to preceding years will remain as the allowance in force at that time.

The money purchase allowance is the amount a person can contribute to a pension if that person has already started drawing benefits.  It can be an effective tax plan for individuals who continue to work after they have started receiving a pension.  The money purchase allowance is set to increase in 2023/24 from £4,000 to £10,000.

50% rise in annual allowance and scrapping of the lifetime allowance were the most significant aspect of the Budget.

Extension of annual investment allowance

The annual investment allowance is the amount that a business can deduct from taxable profits for investment in equipment, machinery and other capital assets.  Where the amount of investment exceeds the allowance, the rate at which tax relief is available drops.  The annual investment allowance was increased to encourage spending by businesses during lockdown.  It was set to reduce from £1 million to £200,000 on 6 April 2023.  However, the government announced that the limit will be fixed at £1 million indefinitely.

Measures to prevent abuse of research and development tax concessions

In the Autumn statement, the government announced a reduction in the rate of enhanced deduction for small and medium sized businesses from 130% to 86%.  Where a company is loss making, the loss can usually be set against profits of a preceding year or carried forward to profits of a future tax year.  However, R&D companies might have to operate for several years before becoming profitable and therefore the usual loss rules present a cashflow strain.  As a result, the regulation allows the loss to be exchanged for a government pay out, known as an R&D tax credit.  The R&D tax credit for large business is set to increase from 13% to 20% and for small and medium sized business it is set to drop from 14.5% to 10%. All of the above changes will be effective 1 April 2023.

The reduction in tax relief was in response to abuse by SMEs of the R&D tax relief.  Therefore, the Budget included an announcement that research and development claims will have to be accompanied by additional information which among other requirements must categorising qualifying expenditure.  For SME businesses that invest over 40% of expenses in R&D the legacy rates continue to apply.

Freezing of allowances despite inflation

Fiscal drag is the process by which inflation causes an increase in tax liability for the taxpayer as a result of fixed allowances.  With current rates of inflation, it is notable that the personal allowance, higher rate and additional rate tax thresholds are not increasing.  On the contrary, as announced in the November statement, the capital gains tax allowance is halving in April and halving again next April to just £3,000.  The additional rate limit is also reducing to £125,000. The nil rate band, which is the rate above which inheritance tax is applicable to an estate, has not increased since 2009. The individual savings account limit has also not changed from £20,000 per annum.

Increased reporting for crypto

From 2024/25, it will be a requirement for cryptoassets to be identified separately on the capital gains tax supplement of the self-assessment Tax Return.

Autumn statement 2022

Published: 17 Nov 2022

Updated: 30 Nov 2022

Written by Ray Coman

Jeremy Hunt has been brought into his role during a cost-of-living, war in Ukraine, high inflation and soaring energy prices.  The Autumn statement 2022 which was delivered about 11:30 today outlined the government’s plan to cut spending and increase taxes.

Additional rate tax

Freezing of allowances

Cut on capital allowance threshold

Dividend allowance to be dropped

Freeze to employer NIC threshold

Cut to research and development tax relief

Stamp duty sunset

Business rates

Vehicle exercise duty exemption to end

Windfall taxes

Public spending

Summary

Additional rate tax

The threshold at which taxpayers start to pay the additional rate tax of 45% will reduce from £150,000 to £125,140.  Inflation, forecast by the Office for Budget Responsibility at an average 9.1% this year and 7.4% next year, will further increase the number with income over the £125,140 rate.  The additional rate tax threshold will coincide with the level at which the personal allowance is fully abated.

Freezing of allowances

Fiscal drag explains the erosion of tax threshold by inflation.  Given the sharp rates of inflation which prevail, and which are forecast, a suspension of allowances at their current rates is a form of tax rise.  The following will frozen until at least April 2026/27:

The personal allowance, of £12,570

National insurance upper earnings limit also £50,270.

The higher rate tax threshold, currently £50,270

An inheritance tax nil rate band of £325,000 (the rate has been in force since 2009)

Pension lifetime allowance of £1,073,100

Cut on capital allowance threshold

The limit on which a taxpayer becomes liable to capital gains tax is set to decrease to £6,000 from 6 April 2023 and again to £3,000 in April 2024.  By way of recap, the rate of capital gains tax on residential property is 18% to the extent that an individual I a basic rate taxpayer and 28% thereafter.  The equivalent rates on other types of capital gains, for instance on shares, cryptocurrency and other investments is 10% and 20% respectively.  Evidently, the UK’s capital allowance system will remain more generous than many developed nations including Germany, Ireland, Canada and France

Dividend allowance to be dropped

Coinciding with the capital allowance cut is a lowering of the dividend allowance to £1,000 from 6 April 2023 and again to £500 in April 2024.

Freeze to employer NIC threshold

Small businesses are not liable for the first £5,000 of employer’s national insurance threshold.  The Chancellor committed to hold the allowance at this higher level.  Evidently, this measure will keep 40% of all business exempt from employer’s NIC until March 2026.

Cut to research and development tax relief

In response to widespread abuse of research and development corporation tax breaks, the Chancellor revealed a reduction in the rates.  The R&D enhanced expenditure relief will fall from 130% to 86% and the R&D tax credit from 14.5% to 10%

Stamp duty sunset

The previous chancellor announced a generous increase in the level of stamp duty as part of a growth plan.  The cut in stamp duty will now be temporary and is set to expire on 31 March 2025.  The rise announced in the growth plan earlier this year increased the threshold from £125k to £250k.

Business rates

In a bid to soften the impact of tax rises on smaller businesses, the government will proceed with property revaluation which are expected to reduce or eliminate business rates for a larger port of restaurants, pubs, retailers and other commercial premises.  The chancellor estimates the revaluations will benefit 700,000 businesses.

Vehicle exercise duty exemption to end

The government forecasts that over half of new vehicles by 2025 will be electric.  From April 2025, electric vehicles will no longer be exempt from vehicle excise duty

Windfall taxes

As so called ‘made in Russia energy crisis’ has led to a dramatic rise in wholesale gas and electricity.  Along with a plan to help Britain achieve greater energy independence was a set of taxes on energy giants who have profited most from this ‘windfall’ unexpected increases in energy prices.  Increase Energy profits levy from 25% to 35% from 1 January to March 2028, and a temporary levy of 45% on electricity generators was announced.  In recognition of the cyclical nature of energy business, it was also acknowledged that these taxes are likely to be temporary in nature.

Public spending

The government set out its commitment to reducing inflation, mortgage rates, unemployment and the severity of the recession.  It was confirmed however that while public spending will increase, it will be a bow inflation increase.  Unemployment has not returned to pre-pandemic levels.  Claimants of universal credit which remain at approximately 600,000 will be required to meet with a work-coach.

The UK maintains the second highest spending on Ukraine after the US.

Summary

The Autumn Statement laid out a plan to tackle cost of living crisis through countering inflation.  High inflation, in the chancellor’s words, is the enemy of stability, eroding inflation and leading to industrial unrest.  A measured response to which recognises the increase pressure on public finances will places less demand on government borrowing and thereby protect the credibility of the UK economy through these troubled times.