As the dust settles on the first Budget of the new Government, I am putting out a quick summary of the impact from a personal tax and small employer perspective.
In terms of the spending plans, it’s a case of “to the victor the spoils”. Labour won the election and there are no surprises on some of their plans.
What is encouraging is that there was an announcement of specific investment in additional staffing and IT infrastructure at HMRC. HMRC as an organisation is in a desperate state and plans to collect more tax, and prevent tax evasion, are non-starters without better resources.
In terms of the announcements on tax, a few days later, it all seems a bit less dramatic than many of the scaremongering rumours had suggested. Labour stuck to the promise “not to raise [tax] on working people”, so Income Tax, VAT, and Corporation Tax remain unchanged.
The State Pension will continue to rise at rates above inflation. And because of this, we have prospect before the next election of pensioners having to pay tax as the State Pension will be higher than the Personal Allowance of £12,570.
I do accept that if you were planning on selling shares to buy a second home for your children to enjoy during private school holidays, or jetting off on a private plane, then that plan has become a lot more expensive. However, for the most part, I think the budget has largely seen variations on themes introduced by the previous government.
The focus on rates of tax and not thresholds allowed the previous government to escape more vitriol than they perhaps deserved, so, rather cynically, it is not a surprise that the new Government has not increased any thresholds for paying tax.
As things stand, the factor that will affect most people’s tax in the coming years was, in fact, a non-decision. Freezing the current tax thresholds until April 2028 means that more income will fall within higher rates and highest rates. The opportunity for radical change, such as smoothing the ‘cliff edge’ thresholds – £50,270 for higher rate taxation and £100,000 where the Personal Allowance is lost, was not taken.
So, to the main changes:
Employer National Insurance and the Employment Allowance
From April 6, 2025, the rate of NI that employers pay on gross salaries rises from 13.8% to 15%. More significantly, the point at which that rate starts to be applied falls from £9,100 to £5,000, which increases the burden for many larger employers.
For small employers though, the Employment Allowance – which currently means the first £5,000 of Employer NI is not collected – rises to £10,500. Therefore, many smaller employers should actually be unaffected by this change. However, there is one exception to this: personal companies whose sole employee is also a director still have no access to the allowance.
The National Minimum Wage and National Living Wage will continue to rise above inflation, from £11.44 an hour for over-21s in April 2024, to £12.21 in April 2025, and from £8.10 to £10 for 18-20 year olds. However, this is merely a continuation of a policy implemented by the previous government.
The most likely consequence of the employer national insurance rise is that more people will look to self-employment as an option as Class 4 NI rates for the self-employed remain at 8% on income above £12,570.
Capital Gains Tax
It is important to note that the changes in CGT have been introduced immediately. The rate of CGT on the sale of shares has increased from 10% to 18% for basic taxpayers, and from 18% to 24% for higher rate taxpayers. It will be a challenge for HMRC systems infrastructure to be able to cope with different rates of CGT for different dates in the same tax year, but they have six months to work on any changes required.
Rates of CGT on the sale of residential properties have not changed.
The rate of CGT charged where Business Asset Disposal Relief applies has risen from 10% to 14%, but the cap of £1 million remains unchanged. So for those selling shares in their business, or disposing of a sole trade, they will pay an additional £4,000 in tax for every £100,000 of sale proceeds.
Stamp Duty
As noted above, there are no changes to CGT on the sale of residential property, such as a second home. However, if you want to buy an additional property that is not your principal private residence, then the Stamp Duty on that purchase rises from 3% to 5% immediately.
Inheritance Tax
While there are no changes in rules around lifetime pension contributions, there has been a significant change in respect to pensions and Inheritance Tax. Currently, pension funds belonging to someone who has died do not form part of that person’s estate and can be passed on to beneficiaries ‘unfettered’. However, from April 2027, pension funds will be added back to a person’s estate.
The Chancellor also announced a £1 million cap on the availability of the 100% rate of relief on agricultural and business property. The changes to agricultural property relief have been termed a “farmers’ death tax”, but with good tax planning, it is likely that the changes are far less dramatic than they seem.
