It feels as though we have been talking about the Budget for months now, and on reflection it turns out we have been!
The result of the extended period from the General Election until Budget Day has been media speculation on almost every area of taxation from Income Tax, National Insurance and pensions to Inheritance Tax and VAT on private school fees. The Budget saw some significant changes, although the major revenue-raising is restricted to a small number of areas.
We will dive in first to the big changes that are contributing to the record-breaking additional £40bn that this Budget will reportedly raise and then to some of the changes that, whilst not raising a lot nationally, may have a significant impact on our clients.
Employers’ National Insurance Contributions
By far the greatest revenue raising measure in the Budget is the increase to Employers’ National Insurance Contributions (NIC). From 6 April 2025, Employers’ NIC will rise from 13.8% to 15%. The more significant measure is that the earnings threshold at which NIC applies is reducing from £9,100 to £5,000, meaning that the cost of employing a person at £30,000 will increase by £865.80.
For small employers, this is being compensated for by an increase in the annual Employment Allowance – a rebate of NIC for small employers – from £5,000 to £10,500. The Employment Allowance is available to businesses or groups with a total Class 1 National Insurance liability of less than £100,000 in the previous tax year. Surprisingly the £100,000 qualification threshold is being scrapped. This means that some employers may actually pay less from April 2025 although medium and larger employers will undoubtedly pay more.
Clients in professional practices will need to update their charge rate calculations to see whether any of this increase can be passed on to customers through increased charge rates or fee proposals. All other businesses should also be amending their budgets and forecasts to take this charge into account to quantify the impact on their pricing.
National Minimum Wage (NMW) & National Living Wage (NLW)
From 6 April 2025:
- The NLW will increase for employees aged 21 and over from £11.44 per hour to £12.21 per hour.
- The NMW for those aged 18 to 20 will increase from £8.60 per hour to £10.00 per hour
- The NMW for those aged 16 to 17 will increase from £6.40 per hour to £7.55 per hour.
Income Tax and National Insurance
Income Tax and National Insurance thresholds for employees and the self-employed will remain frozen until 2028. This ‘fiscal drag’ is expected to bring yet more people into the higher and additional rates of tax as earnings tend to rise with inflation. Forecasts suggest that soon some 15% of taxpayers will pay higher rate tax, up from just 3.5% in 1991!
Whilst already announced by the previous Government, the new Chancellor’s continued support for this measure shows an ongoing commitment to stealth increases to tax.
Capital Gains Tax (CGT)
CGT rates have increased with immediate effect for basic rate taxpayers from 10% to 18% and for higher rate taxpayers from 20% to 24%. This is a much smaller increase than many had feared. The changes bring the rates of tax for different asset types in line as previously there were different rates for residential property.
CGT on disposals that utilise Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief) is increasing from 6 April 2025 from 10% to 14%, and then to 18% in April 2026. The lifetime limit for gains taxable under this regime remains frozen at £1m, and the effect of this freeze together with the rate increases is steadily stripping away this once generous relief. For those looking to dispose of assets in the near future, there is added incentive to do so before 6 April 2025.
From 6 April 2025, the effect of the abolition of the Furnished Holiday Let (FHL) regime comes into force, meaning investors in holiday lets will find their properties subject to substantially higher levels of CGT if they are sold at a gain.
For fund managers, the normal and higher rates of CGT on carried interest are being consolidated into a single unified rate of 32% from April 2025. The Investors’ Relief lifetime limit has also been reduced from £10 million to £1 million on qualifying disposals made on or after 30 October 2024.
Inheritance Tax
Inheritance Tax (IHT) is being reformed piecemeal with a series of changes that are quite technical in nature, but which will have a profound effect for some of our clients.
Business Property Relief for IHT is being reduced from 100% to 50% from April 2026 for business and farming assets with a combined value of more than £1m. This is going to impact clients holding shares in family or owner managed businesses and could have significant implications if clients pass away unexpectedly. Clients with valuable business interests would be wise to take advice on the implications of these changes.
IHT Relief is also being reduced from 100% to 50% for investments in companies listed on the Alternative Investment Market or similar exchanges. This change is less surprising as some financial advisors have heavily pushed riskier investments designed to be exempt from IHT on older clients, for whom these investments may have been too volatile. Clients holding these types of investments should review their position with their advisors over the next year.
The Government are consulting on a new calculation that will see many types of inheritable pension brought within IHT and any tax due settled directly from the pension pot. If you have a large pension pot that you had planned to leave intact for your children, advice on this change will be essential.
It will take time to fully digest the implications of the changes and to consider what planning steps might be undertaken to mitigate some of the impact.
Corporation Tax
Corporation Tax rates will remain at their current levels for the duration of the current Parliament and groups of companies will continue to benefit from 100% relief from tax for up to £1m of plant and equipment purchases each year.
R&D Tax Credit rates remain unchanged for 2025 although we are all still grappling with the new, far less generous 2024 scheme compared with the previous SME scheme. In addition, they are putting in more resources in compliance checks, so the rate of R&D enquiries is likely to continue, if not increase.
Motor vehicles
The Government will extend the fuel duty freeze that had been due to expire in April 2025 which will please drivers of petrol cars. Less welcome for company car drivers will be the news that benefit kind rates on plug in hybrid cars are being significantly increased.
Benefit in kind rates have also been published through to 2030 for different types of cars, confirming that zero emission cars remain a relatively tax efficient benefit that can be provided to employees.
Employee Ownership Trusts
In a classic ‘the devil is in the detail’ Budget measure, the Chancellor did not mention in her speech that legislation is being brought forward to tackle potential abuses of the Employee Ownership Trusts (EOTs) tax relief by business owners and EOT trustees.
VAT on Private school fees
The Government have not backed down on the policy of imposing VAT on private school fees despite objections from schools and parents potentially affected. VAT will be imposed on fees for children in primary and secondary private schools from 1 January 2025.
The Government claim that this change will ultimately raise £1.8bn per year with as little as 35,000 children being moved into the state system due to the increased cost of private education.
Stamp Duty Land Tax (SDLT)
Buy-to-let landlords will suffer another increase in the additional SDLT for owning more than one property from 3% to 5%. The government has also increased the rate of SDLT for companies and non-natural persons.
Sin taxes
In unwelcome news for those who like an occasional can of Tizer, the Government are intending to increase the Soft Drinks Industry Levy annually from April 2025.
However, duty rates on draft beer will be reduced, such that the tax on a typical pint of beer served in a pub will decrease by 1 penny. For those of you who are aware of the cost of a pint in a London pub these days, the reduction will go almost completely unnoticed!
