Labour’s long-awaited autumn budget has been delivered. Whilst we continue to dig into the detail and do our research, in this update we cover our initial thoughts on yesterday’s £40bn tax-raising budget: the rabbits out of the hat and the ghouls in the closet, and, of course, what it means for your finances.
Hello, and welcome to Astute Private Wealth’s update on Labour’s autumn budget. We are working hard to research, analyse and dig into the details of yesterday’s budget announcements, and we’ll be back next week with a thorough update. However, in the meantime, allow me to touch on the big announcements and give you our thoughts.
This budget has been a long time in the making – the Labour government got into power in July after leaving office 14 years ago. Since then, the suspense has built as Labour set the date for their budget – 30th October – and warned us of painful decisions and a growing fiscal black hole that needed to be closed.
Let’s dig into some of the most pressing topics.
Taxes on Working People
Labour promised in their summer manifesto not to raise taxes on working people, specifically that they would not increase Income Tax, National Insurance or VAT, and they didn’t. If you look at your payslip as an employee, your tax payments won’t increase. However, as you will hear later, a hefty burden has fallen on employers.
Reeves announced that the current freeze to individuals’ personal tax thresholds will now end in 2028, and this allowance will be uprated in line with inflation from April 2028.
This freeze caused the phenomenon “fiscal drag”, meaning that, as employees get pay rises over the years whilst thresholds for taxation are frozen, additional revenue flows to the government each year. The ending of this freeze in 2028 was one of the rabbits out of the hat.
Pensions
It was looking likely that the government were going to change pension taxation rules one way or another, and they did. A huge change announced in this budget was the plan to make pensions subject to Inheritance Tax from 6th April 2027, with a technical consultation now underway.
Inheritance Tax is charged at 40% on the portion of your estate that exceeds your threshold. Individuals currently have a £325,000 threshold and then an extra £175,000 main residence nil rate band. Essentially, this means that you can die with up to £500,000 of assets in your estate that won’t be subject to inheritance tax, or up to £1million for a married couple. Pensions currently do not sit within your estate, meaning that if an individual had an estate worth £500,000 and a pension worth £300,000, their estate wouldn’t be subject to Inheritance Tax (as long as the main residence nil rate band conditions were met).
From April 2027, your pension pot will be subject to inheritance tax, meaning that in the same scenario, £300,000 would now be brought into your estate and taxed at 40%.
Currently, most estates in the UK do not pay Inheritance Tax (IHT). With this tax change, the government estimates that around 1.5% of total UK deaths in the tax year 2027/2028 will become liable to pay IHT who previously wouldn’t have been.
Whilst this is a huge change for taxation of pensions, the government are prioritising tax relief on pension contributions, which cost around £70billion in 2022. They make it clear that they are supporting pensions for their intended purpose of allowing individuals to save during their working life to provide an income in retirement, rather than being used as a vehicle to pass assets intergenerationally. They also made no changes to the amount of tax-free cash that can be taken from a pension, which is usually 25%.
Still, this change could particularly be a sting in the tail for those nearing retirement, who have prepared well, but sadly die young.
We still have two full tax years between now and implementation, meaning that there is ample time to plan properly with your financial planner.
The implementation of this policy is unlikely to be smooth, and the devil is in the detail – as mentioned, there is a consultation underway, and you can be sure that we will provide you with further details in part 2 next week.
Sticking with pensions, the triple lock has been maintained, which Labour already committed to in their manifesto. This means that we will see a 4.1% state pension increase in April 2025.
Inheritance Tax Reliefs
On the subject of Inheritance Tax, there was speculation beforehand that allowances may be reduced or the 7-year rule for gifting might change, however there were, thankfully, no surprises or changes here.
One area we are keeping an eye on, however, is the change made to Business and Agricultural Reliefs.
From April 2026, only the first £1M held in qualifying business and agricultural assets will attract 100% inheritance tax exemption; any assets held over £1M will now only attract inheritance tax relief of 50%.
In addition, the inheritance tax treatment of stocks that are not listed on the main stock exchanges, Alternative Investment Market shares, or “AIM” shares, will change. As things stand, once you have held shares that qualify for Business Relief for 2 years, they attract 100% inheritance tax relief regardless of the amount held. However, from April 2026, the relief will be 50% on all shares held, and there is no £1M allowance.
Capital Gains Tax
It was widely telegraphed that the government would increase Capital Gains Tax (CGT), but the details were unclear. Yesterday, they increased CGT from 10% to 18% for the lower rate, and from 20% to 24% for the higher rate, with immediate effect. Rates for residential property remain unchanged.
Some investments in stocks and shares held outside of a “tax wrapper” are subject to CGT. Individuals have an annual exempt amount of £3,000 each tax year, which is the amount of gain that can be realised before CGT is levied. Furthermore, money in an ISA grows without being subject to tax, therefore take this as your reminder to consider utilising these two allowances together, your CGT allowance and ISA allowance. Whilst this is good practise anyway, it is even more so now, given that if you realise a gain over your Capital Gains tax-free allowance, you will pay more tax than you would have last week. The capital gains tax-free allowance has already been slashed by the previous government from £12,300 to £6,000 and now to £3,000.
Employer National Insurance Contributions
The government published a table of their policy decisions, outlining each decision’s projected impact on the fiscal books. The biggest revenue raiser is an increase to employers’ National Insurance contributions, forecast to bring in nearly £24bn next tax year, rising to almost £26bn in the tax year 2029/30.
Typically, employer National Insurance contributions (let’s call them NICs) are 13.8% on employees’ earnings over £9,100p.a, unless employees fit under a certain criteria, for example, they are under 21 or are apprentices under 25. In a double blow, Reeves increased this rate by 1.2% to 15%, and also decreased the threshold to £5,000p.a, meaning that a lot more employees will fall into taxable territory. Furthermore, reducing the allowance from £9,100 to £5,000 means that employers will pay at least an additional £615 per employee who was meeting that threshold already.
Alongside this, the Employment Allowance will increase from £5,000 to £10,500 – this allows eligible small employers to reduce their annual NIC liability.
This will be implemented from April next year.
Winter Fuel Payment
Although it was already announced that the Winter Fuel Payment would cease to be paid to every pensioner, it was confirmed in the budget. This payment, a maximum of £300 depending on age, will be targeted to those in receipt of Pension Credit or other benefits and will save an average of £1.5billion each year, according to the government.
Other
Well, the budget was feared by many, and in true Halloween style, we have focused mainly on the tricks. But what about the treats?
Welcome news for those caring for loved ones: Carer’s Allowance will increase slightly, and the earnings threshold to qualify will increase. This means that carers can earn additional income without losing their carer’s allowance.
The National Living Wage will increase by 6.7% from £11.44 to £12.21, effective as of April 2025.
Alcohol Duty on draught products will be reduced from February 2025, essentially reducing a pint by a penny, and the chancellor steered away from austerity.
We’ll take some time to digest the budget, and I’ll be joined by my colleague Elliot next week for part 2, to give you a comprehensive overview.
If you have any questions in the meantime, please don’t hesitate to get in contact with your financial planner.
See you next time.
