The UK Autumn Budget 2024 introduced significant tax changes, targeting both revenue generation and tax equity across individuals and businesses.
Here are some key measures and their anticipated impacts:
- National Insurance Contributions (NIC): Starting in April 2025, employer NIC rates will increase by 1.2 percentage points, taking the rate to 15%, while the threshold for secondary NIC contributions will be lowered to £5,000 from the current £9,100. This change is expected to generate additional revenue, though it may put cost pressure on businesses, particularly smaller ones. However, the Employment Allowance will increase to £10,500, helping offset costs for eligible employers by reducing their NIC liabilities. This increase aims to support the broader goal of stabilizing the UK's finances.
- Value-Added Tax (VAT) on Private School Fees: From January 2025, VAT will be applied to private school fees, with certain exceptions like TEFL courses. This move is expected to raise funds, although it may lead to higher costs for affected families and potentially impact the private education sector.
- Non-Domiciled (Non-Dom) Tax Regime: A major reform will replace the current "non-dom" tax status with a residence-based regime starting in April 2025. New UK arrivals will receive a four-year tax relief on foreign income, but long-term residents will face increased tax obligations. This change could discourage certain high-net-worth individuals from establishing long-term residency, potentially impacting investments from abroad.
- Increases to National Living Wage and National Minimum Wage: With effect from April 2025, these rates will see substantial rises, with the National Living Wage for workers aged 21+ increasing from £11.44 to £12.21 per hour. Although this boosts earnings for low-income workers, the wage hikes may strain employers, particularly in labour-intensive sectors.
- Changes to Capital Gains Tax (CGT): The lower rate of CGT (for basic rate taxpayers) will rise from 10% to 18% and the higher rate from 20% to 24%. The Chancellor also reduced the annual tax-free CGT allowance from £6,000 to £3,000, making more gains taxable at the current CGT rates. These changes will impact investors and individuals selling assets like non ISA funds and shares, as they'll owe CGT on a greater portion of their gains and at a higher rate, thus raising their tax liabilities.
- Corporation Tax and Bank Surcharge: Corporation tax remains at 25% after a recent increase, with an additional 3% surcharge on large banks to reach 28%. This decision affects the banking sector specifically, reinforcing the government's commitment to taxing high-revenue industries without placing further strain on SMEs, which continue to benefit from reliefs and allowances.
- Inheritance Tax: Changes to inheritance tax include extending the freeze on the IHT threshold at £325,000 until 2030 and halving the relief on Alternative Investment Market (AIM) shares, which now only offer a 50% relief rather than full exemption. The updated policy, particularly the change to AIM share relief, targets wealthier investors who previously benefitted from AIM investments as a tax-efficient inheritance strategy. The government aims to raise around £2 billion through these IHT changes.
In addition, from April 2027, Inheritance Tax (IHT) will be applied to pension funds passed down to heirs. Previously, unspent pension pots were exempt from IHT, often allowing individuals to pass their pensions to beneficiaries tax-free, which has been especially beneficial since the lifetime allowance was abolished. Now, these pension pots will count as part of an individual's taxable estate if unspent upon death, potentially facing the standard 40% IHT rate when passed on to heirs.
This change aims to curb the practice of using pensions primarily as a vehicle for inheritance planning. It's estimated to affect approximately 8% of estates annually and is expected to generate about £1.3 billion in additional tax revenue by 2028-29, rising to £1.5 billion by 2029-30. The change may lead individuals to reconsider how they draw down retirement funds, with pensions becoming less attractive for long-term inheritance planning purposes compared to other investments, like ISAs, which remain IHT-exempt in many cases.
Impact on:
- Individuals: The reduction in CGT allowances and the IHT changes mean that more families and individual investors will experience higher tax bills. Those holding substantial investments or properties will need to reconsider tax planning strategies to mitigate their CGT and IHT exposure.
- Businesses: Corporations, especially banks, are subject to continued high tax rates, impacting profits. However, SMEs will find stability as they benefit from ongoing support through reliefs. AIM-listed companies are likely to see a shift in investment strategies due to the 20% IHT rate, potentially influencing investor behaviour towards other growth areas.
Estimated Revenue Impact
These changes collectively aim to bolster UK public finances with an estimated additional tax revenue of £40 billion over the coming years. This is part of the government's strategy to stabilize the economy while addressing fiscal challenges without increasing VAT, National Insurance, or income tax for the general population. These measures represent a shift towards taxing wealth and high-value assets more heavily, presenting both challenges and opportunities for both individuals and businesses.
If this is something that may interest you, please get in touch.
- uploaded - 01 November 2024