Budget

Whilst not delivering some of the more outlandish predictions that had been suggested in the media over recent weeks, the measures announced in the Budget statement certainly provide opportunities for effective financial planning in a number of areas. We will delve more deeply into these planning opportunities in future issues of Wealth Matters; however, for now, we provide our summary of the key measures announced.

Employer’s National Insurance

The rate of National Insurance (NI) paid by employers will increase from 13.8% to 15% from 6^th April 2025. In addition, the salary threshold at which employers begin to pay NI has been reduced from £9,100 a year to £5,000 a year. Small businesses will see an extension to the employment allowance. There have been no other changes to NI, with the main rate payable by employees remaining at 8% on earnings between £12,570 and £50,270.

The increased rate of employer NI from April 2025 is likely to enhance the attractiveness of salary sacrifice arrangements, and the ability for company directors to make employer contributions into a personal pension.

Capital Gains Tax

The rates of Capital Gains Tax (CGT) applicable to the sale of non-residential property assets will increase from 10% (for basic rate taxpayers) to 18% and from 20% (for higher and additional rate taxpayers) to 24%, with the changes effective immediately. The new rates for gains on share disposals match the rates that currently apply to residential property gains, which remain unchanged. The hike in CGT rates is lower than many people had anticipated, which reinforces the need to carefully consider whether to dispose of assets that may give rise to a CGT liability.

Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) will gradually become less attractive over the course of the parliament. Currently business owners who sell all or part of their business can benefit from a rate of 10% on all gains up to a lifetime limit of £1m. The rate will increase from 10% to 14% from 6^th April 2025, and again to 18% from 6^th April 2026, aligning this rate with the rate of Capital Gains Tax payable by basic rate taxpayers.

Inheritance Tax

The Government has announced the intention to bring pensions into the Inheritance Tax (IHT) regime from 2027. The Budget statement is light on detail, and clearly further clarification is needed, particularly in respect of the tax treatment that applies when beneficiaries draw from an inherited pension. The impact of the new rules will no doubt become apparent during the consultation process.

In addition to the proposed changes to pension death benefits, the Chancellor announced a new combined limit of £1m for assets that qualify for Agricultural Relief and Business Property Relief. Expected to come into force in April 2026, qualifying assets under £1m will continue to benefit from 100% relief from IHT; however qualifying assets above this level will only benefit from 50% relief, leaving such assets subject to an effective rate of IHT of 20%. This is a punitive move for those holding agricultural assets or family businesses.

The IHT rate payable on qualifying shares quoted on the Alternative Investment Market (AIM) will be set at an effective IHT rate of 20%. Previously, qualifying assets listed on AIM have been covered by the Business Relief exemption.

All other IHT bands remain unchanged, although the freeze on thresholds has been extended until 2030. The main nil-rate band will continue at £325,000 with the additional £175,000 being available in respect of a residence bequeathed to a direct lineal descendent. These allowances remain transferable between spouses, so that the surviving spouse can continue to pass up to £1m without an IHT liability. With increasing asset prices, the number of estates liable to IHT is set to increase over the course of the parliament.

Pensions

Apart from the proposals to bring pensions under the IHT regime from 2027, there were no other major changes to pension rules announced in the Budget. Existing rules on tax relief remain unaltered, as does the current maximum level of Tax-Free Cash available (£268,275). Additionally, there have been no changes to the pension annual allowance.

Personal Tax Thresholds

Whilst Personal Tax thresholds will remain frozen until 2028, the Chancellor confirmed that the Personal Allowance for Income Tax will increase in line with inflation from the 2028/29 Tax Year and beyond.

Stamp Duty Land Tax

The rate of Stamp Duty charged on second or additional properties will increase from 3% to 5% with effect from Thursday 31^st October. The Budget Statement also appears to rule out any extension to the temporary Stamp Duty discount for first-time buyers which is due to end in March 2025.

Individual Savings Accounts

The annual subscription limits for Individual Savings Accounts (ISAs) will remain frozen at £20,000 until April 2030. The limits for Lifetime ISA and Junior ISA will also remain frozen at £4,000 and £9,000 per tax year, respectively. The British ISA, a policy idea announced by the previous Government, has been scrapped.

Summary

Taken in the round, the measures announced are not as painful as many had been predicting in the weeks leading up to the Budget statement. Our initial assessment of the Budget statement does present interesting planning opportunities, which we will cover in more detail in future editions of Wealth Matters. Contact our experienced advisers if you would like to discuss the impact of the Budget on your financial plans.

Chancellor of the Exchequer, Jeremy Hunt, announced what could be the final Budget statement before the next election, last week. Whilst the speech was light on surprises, it delivered several changes of note from a financial planning perspective.

National Insurance reductions

Building on the National Insurance cuts announced in the last Autumn Statement, Hunt announced a further cut of 2% in the main rate of National Insurance from April 2024. This will reduce the main rate from 10% to 8%, and will save an employed individual who pays higher rate income tax just over £750 a year.

The chancellor has also cut national insurance for self-employed individuals, with rates falling from the expected 8% to 6%.

The changes will further reduce the advantage of a Salary Sacrifice arrangement, which is an increasingly common way of making pension contributions; however, Salary Sacrifice remains a tax-efficient way to structure regular pension contributions, in particular if the Employer National Insurance savings are rebated.

British ISA

Amidst growing pressure to reform the current Individual Savings Account (ISA) allowances, the Chancellor announced the intention to create a new British ISA. The new ISA will have an allowance of £5,000, which will be available in addition to the current ISA allowance of £20,000. The aim of the new ISA will be to promote investment in UK-focused Equities; however, the measure is currently light on detail, and a consultation period will run until June 6^th to decide how the new ISA rules will be implemented. It is likely that both directly-held UK shares and Collective Investments that invest in UK Equities will be eligible for the new ISA, and UK Corporate Bonds and Gilts may also be permitted.

NS&I British Savings Bonds

The Chancellor announced that National Savings & Investments (NS&I) will launch a new 3 year Fixed Rate British Savings Bond in April 2024. Press releases from NS&I have indicated that the new Bonds will offer “mid-market” interest rates in comparison with similar products offered by other Banks and Building Societies. This seems to suggest there is less prospect that the new Bonds will offer a market leading rate, which was the case when the last set of one-year NS&I Bonds were launched last year.

Reduction in Property CGT rate

One of the measures announced was a cut in the rate of Capital Gains Tax (CGT) payable when higher or additional rate taxpayers sell residential property (other than their primary residence). The rate is currently 28%, but this will fall to 24% from 6^th April. The rate paid by basic rate taxpayers will remain unchanged at 18%. The Treasury hope the measure may encourage more property transactions; however, those selling after 6^th April need to be aware that the tax-free CGT allowance is halving from £6,000 to £3,000 in the next tax-year.

Child Benefit Charge adjusted

Individuals whose net income exceeds £50,000 in a tax year have previously seen their Child Benefit tapered away until income reaches £60,000, at which point Child Benefit is lost completely. This High Income Child Benefit Charge will remain, although the Chancellor announced that the thresholds have been increased. To completely lose Child Benefit, individuals will need to earn £80,000 and the lower level of the band on which Child Benefit is tapered has been raised to £60,000.

In addition, the Treasury will consult on ways to alter the High Income Charge, so that it is based on household rather than individual income. Under the current rules, a couple who both earn just under £50,000 a year would receive the full rate of Child Benefit. In contrast, a household where one parent earns more than £50,000 would see a reduction in the amount of Child Benefit received.

Pension contributions remain an effective way for an individual to bring down their net income so that more Child Benefit can be obtained. As H M Revenue & Customs uses “adjusted net income” to calculate the High Income Child Benefit Charge, the Charge can be reduced by the individual making personal contributions to a pension in the tax year in question.

Update on the economy

The Budget speech always provides an update on the prospects for the UK economy, and the forecasts announced by the Office for Budget Responsibility (OBR) last week underlined the difficult conditions faced in the near term.

The OBR predicts the UK economy will grow by 0.8% in 2024, which is higher than the estimated 0.1% growth seen last year. In future years, the OBR estimates growth of between 1.7% and 2% per annum in the period from 2025 to 2028.

Inflationary pressures are likely to ease substantially over the course of the year and into next year, according to the OBR estimates. They see headline inflation falling below the Bank of England 2% target by the middle of the year, and falling further to stand at 1.5% next year. These estimates reinforce our expectation that the Bank of England will take action to reduce base interest rates in the second half of the year and into 2025.

Key Takeaways

The Budget measures announced did not include any further changes to pension legislation, and apart from the National Insurance change, to personal taxation rules. The British ISA appears an interesting concept, although the details of how the ISA is to work have yet to be ironed out. Nonetheless, any additional tax-free allowance that is provided for investors is welcome, in particular given the impact of the reduction in the dividend allowance.

As always, our advisers are on hand to discuss the measures announced, and whether these have any impact on your financial plans.

National Insurance

The headline announcement in the Autumn Statement was the reduction in the main rate of Class 1 National Insurance Contributions (NICs) paid by an employee. Whilst speculation had mounted prior to the Statement that the cut to NICs would be 1%, Jeremy Hunt extended the cut to 2%, reducing the main rate (i.e. the rate payable on earnings between £12,570 to £50,270) from 12% to 10%. This will take effect from 6^th January 2024 and provide a maximum saving of £754 per annum.

From the perspective of pension contributions, many employers now offer Salary Sacrifice arrangements, which provide NICs savings for both employers and employees. The reduction in the main rate of Class 1 NICs does slightly reduce the benefit achieved from a Salary Sacrifice arrangement; however, such an arrangement remains a tax-efficient way to structure regular pension contributions.

For the self-employed, Class 2 contributions have been abolished for those with profits above £6,725 a year. The main rate of Class 4 contributions has been reduced from 9% to 8% on profits between £12,570 and £50,270. Employer rates of NICs remain unchanged at 13.8%.

Extended support for VCT and EIS

The Statement confirmed continued support for Venture Capital Trust (VCT) and Enterprise Investment Schemes (EIS) until 2035, which is welcome news. VCT and EIS were previously subject to a “sunset clause” which would have ended tax relief on investment in new VCT and EIS shares in 2025. The announcement provides clarity to the sector and continues to underline the Government’s intention to support small and growing businesses with funding through tax efficient investments.

Pension rules clarified

Following the announcement in the Spring Budget 2023 that the Lifetime Allowance for pension savings is to be abolished, the Treasury and HMRC have provided further guidance on how the new regime will operate from 2024/25. The most important clarification was in respect of the tax treatment of funds in a Defined Contribution pension, where the member dies before the age of 75. Subject to confirmation in the Finance Act, it appears that annuity and drawdown income payable to nominated beneficiaries will remain tax-free beyond 6^th April 2024.

IHT – no change…yet

Despite significant press speculation in the run up to the Autumn Statement, no announcements were made to alter the current Inheritance Tax (IHT) rules. Treasury receipts from IHT continue to grow year on year, and reducing or abolishing IHT would leave a gap in the public finances that would need to be filled elsewhere. It therefore remains the case that careful planning is needed to consider whether any mitigation to reduce or eliminate exposure to IHT is required.

Given that there is at least one more Budget before the next general election, we would not entirely rule out changes to IHT next year; however, it is likely that families will still need to consider and plan ahead to ensure that intergenerational wealth is cascaded in a tax-efficient manner.

ISA changes

Whilst some of the more radical changes that the Government could have made to Individual Savings Accounts (ISAs) have been left out of the Autumn Statement, some useful adjustments have been made to the ISA rules from April 2024. From the next tax year, investors and savers will be able to open more than one ISA of each type in the same tax year. Under current legislation you can only open one ISA of each type (i.e. one Stocks and Shares ISA and one Cash ISA) in a tax year, and the new rules introduce interesting opportunities to split Stocks and Shares ISAs across different providers, or save into both a fixed rate and a variable rate Cash ISA with different deposit takers. It will also be possible to arrange partial ISA transfers from contributions made in the current tax year.

The total ISA allowance remains at £20,000 and this is the hard cap on contributions across all different ISA types in a single tax year. This is slightly disappointing, given the fact that the ISA allowance has remained at £20,000 since the 2017/18 tax year, and inflation has eroded the real value of the ISA allowance over time. Junior ISAs will continue to have a £9,000 limit per tax year.

State Pension

The “triple lock” on State Pensions remains in place and therefore State Pensions will increase by 8.5% from next April, as this was the published rate of average earnings growth in September 2023. As a result, the full New State Pension will increase to £221.20 a week from April, or £11,541.90 per annum.

Those in receipt of State Pension will need to consider the effect of fiscal drag on other income they receive such as personal pension income, or savings or dividend income above the Personal Savings and Dividend Allowances. As the bands for Income Tax are frozen until 2028, the increase in State Pension may well push more income into the basic rate, and potentially higher rate, tax bands. It would, therefore, be sensible to consider using tax allowances where possible to shelter investment and savings income.

Planning Opportunities

The Autumn Statement provided clarification on the pension rules that will apply from 6^th April 2024, and also ended some of the uncertainty around the long term future of VCT and EIS investments. The measures announced may also present some useful opportunities in the way ISAs are structured from the next tax year; however, with tax bands still frozen, it would be sensible to review the tax-efficiency of existing investment portfolios. Speak to one of our advisers to discuss your financial planning requirements in light of the Autumn Statement.