Wow! I know this is the first Budget for a new party’s government in a long time, but I wasn’t expecting quite as much as there actually was in this announcement. I have read through the full Budget document and this is my attempt to summarise some of the most important changes, at least from the perspective of the financial planning that I can offer. As such, read on to see how the Budget 2024 affects you.
HMRC and Tax Avoidance
Perhaps most conspicuously absent in the Chancellor’s speech was any talk about new powers for HMRC to tackle tax avoidance. Instead the Budget includes a reference that the government will spend £1.4 billion over the next 5 years to try to close the existing gap. This is perhaps an acknowledgement that HMRC, like so many other public services, has been woefully underfunded for a long time, but the underlying message is clear, namely that tax avoidance and non-compliance will become a lot harder going forward even without any new rules.
This makes it more important than ever to make sure that your financial affairs are squeaky clean.
Non-Domicile Status
The Chancellor announced plans to abolish the non-domicile tax status altogether. Although this was mooted in the latter days of the last Conservative government, this provided clarity that the status will no longer exist from 6 April 2025, replaced instead by a simpler system of residence (which is already complicated enough, incidentally).
National Insurance
Although the main employee rate of National Insurance remains unchanged, the employer rate is set to increase to 15% (up from 13.8%) from 6 April 2025. Although this is not a direct cost that the average worker will see, anyone running their own company will appreciate that this is an increase in the tax they pay their workers, and as a result this is likely to have an impact on take home pay indirectly.
This was partially offset by a doubling of the Employment Allowance from £5,000 to £10,000, which allows companies with cumulative National Insurance bills under £100,000 to deduct that amount from the total they owe to HMRC. This means that the smallest companies likely won’t be affected by this increase.
Pensions and Inheritance Tax
At present, pensions enjoy the very privileged status where they are not subject to inheritance tax. For many years I have been saying that there was no way that the pension framework would continue to allow potentially huge amounts to bypass all forms of tax, and this Budget has made that warning a reality. From 6 April 2027, the intention is for pension death benefits to be taxable as lump sums for a deceased person’s estate. This potentially means that death benefits are much less valuable and that pensions are not seen as an ideal vehicle for accruing further capital, but as with all such pronouncements the devil will be in the detail, and I will therefore be reviewing this further when a Bill is put forward to legislate for this.
If you are someone concerned about the tax treatment of your pension following death, please get in touch if you would like my analysis of the proposed changes.
Business and Agricultural Relief
Another very long-standing oddity of inheritance tax was the unlimited allowance for investors in either private companies or farmland to enjoy full exemption from inheritance tax after a holding period of 2 years. This was originally intended to be something that allowed family businesses and farms to pass down the generations without forcing a sale, but the rules expanded through successive iterations such that anyone could invest in a collection of companies listed on the Alternative Investments Market (AIM) and benefit from this exemption.
For reference, the AIM now includes several companies worth over £1 billion, and these can be bought and sold in almost an identical manner to shares listed on the main exchange which do not qualify for the exemption. In short, this has become something of a baffling feature of inheritance tax planning that goes far beyond what was originally intended.
Ever since I first heard of this allowance, I have been predicting that it would eventually be restricted because of how easily abused it was. Today the Chancellor announced that Agricultural and Business relief will have a combined £1 million limit per person for the full 100% exemption, after which the rate of exemption will fall to 50%.
There is a confusing sentence in the document which bears reporting in full:
The rate of relief will be 50% thereafter, and in all circumstances for quoted shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM.
This somewhat contradicts what the Chancellor said, and I am minded to believe the written document where such an apparent contradiction is found. In this case, it seems as though portfolios of AIM shares will no longer benefit at all from 100% inheritance tax relief and will instead only receive 50% relief. Again, I will need to wait until the details are available before commenting further, but there is definitely some uncertainty as to what rate will apply to smaller portfolios of AIM shares.
ISAs and other savings allowances
No change to any of the savings allowances. Probably what we all expected given this was a Budget about the government saving money rather than giving it out.
Starting Rate Band
There was some speculation ahead of the Budget that the Starting Rate of income tax would be abolished. It hasn’t. It hasn’t gone up either, meaning the maximum you can earn from employment and other regular income while still benefiting from any Starting Rate tax is £17,570. If you earn above that from employment, pensions, rent, etc, then the Starting Rate band is not available to you.
British ISA
The last Conservative government announced that there would be a new British ISA offering savers tax incentives to invest specifically into British companies. This idea has been abolished.
Capital Gains Tax
Increases to Capital Gains Tax were probably the most anticipated (I purposefully do not say “eagerly anticipated”) measure in the Budget. There was plenty of talk about equalising Capital Gains Tax with Income Tax, together with talk about how awful that would be. In contrast, what we got is actually quite benign. Capital Gains Tax rates have been announced as going up to 18% for basic rate taxpayers and 24% for higher rate taxpayers. This is considerably below the equivalent income tax rates, though more so for higher rate taxpayers than basic rate ones. For basic rate taxpayers, the headline income tax rate is 20% vs the CGT rate of 18%, while for higher rate taxpayers it is 40% income tax vs 24% CGT.
This does potentially have some consequences for investors with portfolios held outside ISAs, pensions and investment bonds, as well as anyone with significant non-investment assets held in a similar manner. If you would like to talk through the consequences, please get in touch.
VAT on School Fees
As expected, the Chancellor announced that VAT would be due on private school fees from now on. The expectation is that this will increase the cost of privately educating your children, if you were planning to do so. As such, it might be worth reviewing your financial plans to check whether your goals are still affordable.
Stamp Duty Land Tax
SDLT on additional dwellings will increase from 3% to 5% from 31 October 2024. This is a tax on purchasing the properties, but the expectation is that this will also affect the sale prices because buyers will have to pay more.
Conclusion
As mentioned, this was not an exhaustive look into the Budget, but rather a whistle-stop tour of the highlights (or lowlights) from a financial planning perspective. If you would like to review the full document, I thoroughly encourage you to do so, and if you spot something in the 170 pages that I ought to include, please get in touch and let me know!
