💸 Welcome to today’s episode, where we look into the highlights and implications of the Budget 2024. On October 30th, Chancellor Rachel Reeves (UK's first female chancellor!) presented Labour’s first Budget in 14 years, announcing significant changes that could impact your finances. 

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First, let’s talk about your taxes: Income Tax and National Insurance (NI)

The government has kept its promise not to increase income tax rates directly, but tax burdens are still rising due to a hidden effect called *fiscal drag*. 

This happens when income tax thresholds (the points where you start paying higher tax rates) stay frozen while wages go up. 

When you earn more, you end up paying a bigger chunk of your income in higher tax brackets, even if the tax rates themselves haven’t changed. The current freeze on these tax thresholds will last until 2028, when they’re expected to start increasing with inflation again.

For National Insurance, there’s no change in employee or self-employed rates. But employers will see their contributions go up and that may have an indirect impact on employees, we’ll cover that later in the episode.

What’s the Impact on Pensions and ISAs?

No big changes here, especially as the government plans a broader review of the retirement savings system. The key elements remain the same: pension tax relief and the ability to take 25% of most pensions tax-free (up to £268,275) are unchanged. Additionally, the annual pension allowance, ISA, and Junior ISA limits stay as they are.

Here's a quick refresher on key ISA and pension rules:

• ISAs: You can invest up to £20,000 per year across cash, stocks & shares, innovative finance, and Lifetime ISAs (LISAs) without paying tax on income or capital gains. For Junior ISAs, the annual limit is £9,000 per child.

• Pensions: The annual pension contribution limit is £60,000 or 100% of your salary, whichever is lower. Contributions receive tax relief based on your income tax rate, making pensions a tax-efficient way to save for retirement. 

The basic and new State Pension will increase by 4.1% from April 2025, in line with earnings growth. This increase boosts the full New State Pension from £11,502 to £11,976 per year ( or £470 a year). Remember that the UK's state pension is usually not enough to live on by itself, and is intended as a top-up to other income.

Capital Gains Tax (CGT) Changes

Capital Gains Tax (CGT) is what you pay on the profit from selling an asset, like shares or a property, that’s increased in value. 

Previously, CGT rates were 10% for basic-rate taxpayers and 20% for higher-rate taxpayers on shares, while for second properties, they were 18% and 24%. Now, from today, CGT rates on shares have been raised to match property rates—18% for basic-rate and 24% for higher-rate taxpayers. 

You pay Capital Gains Tax (CGT) on investments when you sell an asset for more than you paid for it, realizing a profit. If your total gains exceed the annual tax-free allowance, you will owe CGT on the amount above that threshold. This tax-free allowance stands at £3,000 for 2024/25.

For business owners, there’s a special 10% CGT rate on the sale of eligible businesses (up to a lifetime limit of £1 million), thanks to Business Asset Disposal Relief. However, this rate will gradually increase—first to 14% in April 2025, then matching the general 18% rate in April 2026. This may prompt some business owners to sell sooner to lock in the lower tax rate.

Inheritance Tax (IHT) Threshold Frozen Until 2030

The Inheritance Tax (IHT) threshold freeze has been extended to April 2030, meaning estates under £325,000 remain tax-free until then. 

Starting April 2027, unused pension pots (money left in your pension when you pass away) will also count towards an estate’s taxable value. As a result, more individuals might find themselves liable for IHT, even if they wouldn’t have been previously.

This makes IHT planning even more important if you wish to pass on assets without incurring a heavy tax burden. Other updates include a £1 million cap on reliefs for business property and agricultural land, reduced relief on AIM-listed shares, and allowances for tax-free regular gifts, provided the donor keeps detailed records and maintains their standard of living.

Property Taxes With Stamp Duty

Starting October 31st, 2024, buying a second home, buy-to-let, or residential property through a company will become more expensive as stamp duty rises from 3% to 5%. This change aims to favor first-time homebuyers and movers over investors and landlords. 

Stamp duty is a tax based on the property’s price and whether you're a first-time buyer or buying an additional property.

From the 1st April 2025, the Stamp Duty threshold will drop from £425,000 to £300,000 for first-time buyers, and any properties worth over £500,000 will be subject to the same stamp duty rates as second-time buyers. As a result, many first-time buyers will incur additional tax liabilities, which could affect affordability in some regions.

Rising Employer Costs in Business Taxes

The Budget introduces significant changes to employer National Insurance Contributions (NICs), raising the rate from 13.8% to 15% and lowering the threshold at which NICs apply from around £9,100 to £5,000 per year.

These changes will increase costs for businesses, particularly affecting roles with lower salaries. Employees won’t immediately see this impact in their paychecks. This puts pressure on employers, who may need to consider freezing salaries or limiting hiring. This higher NIC rate may also push businesses to favour contractor roles or encourage self-employment, avoiding these additional employer costs.

Note: Salary sacrifice can benefit both employees and employers by lowering National Insurance contributions (NICs) for both parties. Employees can redirect their pre-tax income into their pension, reducing their taxable income and allowing them to keep more of their earnings, while employers save on NICs.

On the positive side, smaller businesses will see an increase in the Employment Allowance, allowing them to offset more of their NIC liability, rising from £5,000 to £10,500. Meanwhile, the corporation tax rate on profits over £250,000 remains steady at 25% until the next election, providing some stability for larger companies in their financial planning.

Childcare Costs

Childcare in the UK is among the most expensive globally, with parents spending an average of two-thirds of their salary on nursery costs for children under two. Unfortunately, recent Budget announcements haven’t offered much relief.

I read a great article by Claer Barrett in the Financial Times and some insightful posts from Joeli Brearley, founder of the charity Pregnant Then Screwed which campaigns for more affordable childcare, who said the NI increase would “hit working parents hard, particularly mothers, who still bear the brunt of childcare costs”.

First, childcare costs outside funded hours could go up due to the rise in employer National Insurance contributions. For parents employing a nanny, expect costs to increase by around £1,000 a year, based on the average London nanny salary of £46,000 (source: @nannytaxuk).

Importantly, the Employment Allowance, which helps small businesses offset NICs, isn’t available to people employing nannies, gardeners, or cleaners in a personal capacity. 

Lastly, the Government has chosen not to adjust child benefit eligibility to consider household income. This means that the current rule remains :if you and your partner each earn less than £60,000 a year, you can claim for the full amount of child benefit. But if either of you earns more than this, you will have to pay some or all of the benefit back to the government in the form of the high-income child benefit charge (HICBC).

Wages, Benefits

Starting in April, the National Living Wage for those 21+ goes up 6.7%, raising to £12.21 an hour, while the national minimum wage for 18 to 20-year-olds increases by 16.3% to £10.00 per hour.

Furthermore, the eligibility for the allowance paid to full-time carers will expand, with the maximum earnings threshold increasing from £151 to £195 a week, allowing more carers to receive support.

Universal Credit repayments drop from 25% to 15% of the standard allowance, lightening the load for low-income households. This change will allow claimants to repay their debts over a longer period of time. On average, over 1.2 million of the poorest households could receive an extra £420 per month.

New Protections for Workers

The Budget highlighted the government’s commitment to safeguarding workers from unfair dismissal—a plan initially outlined in the Employment Rights Bill introduced on 10 October 2024.

Reeves reaffirmed the long-term goals to make flexible working the default, enhance bereavement leave rights, and grant paternal leave from day one of employment. 

Travel Costs Rise

The UK government has announced an increase in air passenger duty (APD) in the autumn Budget – with passengers paying £2 more for the cheapest seats and 50% more to fly on private jets.

Private School & Other Tax Changes

Private school fees and boarding charges will be subject to 20% VAT from 1 January 2025.

The tax on carried interest will rise from 28% to 32% in April 2025, with plans to tax all carried interest as trading income under a new regime. Carried interest is a share of the profits that investment fund managers earn as a reward for successfully managing a fund, typically taxed at a lower rate than regular income.

The government is also abolishing non-dom tax status as of April 2025, replacing it with a residence-based system. 

RESOURCES

Be sure to visit gov.uk (government website for updated information) and vestpod.com for the latest updates and detailed insights on how these announcements could affect your financial future.