After waiting what felt like an age for one of the most eagerly anticipated Budgets, with endless rumours spreading about where the new Government might wield the axe, we now have clarity on Labour’s plans.
Taxes
Income tax & Dividend Tax
Income tax rates and bands remain the same, but they will begin to rise in 2028, then with inflation.
Dividend tax rates remain the same at 8.75% for Basic Rate (BR) Taxpayers, 33.75% for Higher Rate Tax (HR) and 39.35% for Additional Rate Taxpayers (AR), with a de minimis dividend allowance remaining at £500.
CGT
The rates were immediately raised to 18% (BR) and 24% (HR & AR), bringing them into line with CGT rates on Property. The annual exemption remains at £3,000.
Offshore and Onshore bonds could be used to manage the tax on your investments more efficiently.
Property
Stamp duty rates for second-home buyers and buy-to-let investors will increase to 5% above the standard residential rates.
The thresholds will also be reset as the additional support for property purchases is removed from April 25. The main threshold will be reduced to £125,000, and the First-time Buyers’ threshold will be reduced to £300,000, therefore removing any buy-side support from the government for property.
Furnished Holiday Lets: The special tax rules will be abolished from April 2025, and profits will be taxed in similar ways to other rental businesses.
IHT
The headline rate remains at 40% with the Nil Rate Band of £325,000 and Residence Nil Rate Band of £175,000 (for estates below £2m) frozen until 2030.
Farmers and Estates will be hit hard by the new rules on Agricultural Relief starting in April 2026. The first £1m of value will continue to remain free of IHT, but the balance above £1m will attract a relief of only 50%, meaning the effective rate of IHT will be 20%.
AIM stocks will no longer be fully exempt from IHT but will also attract a 50% relief, so the effective rate will be 20% for holding AIM stocks that qualify for Business Relief. The AIM market had a relief rally on Budget day after as it was deemed not as bad as it could have been, ending up c.4% after being weighed down year to date due to uncertainty.
Business Relief: Similar to Agricultural Relief, a new lifetime limit of £1m will apply from April 2026 for 100% relief, with the balance above £1m benefiting from 50% relief. This brings the effective rate to 20% on BR assets above £1m. Careful consideration will be needed regarding how these types of assets are currently split between spouses.
Non-Doms
The Non-Dom status will be abolished and replaced with a new residence-based test. The concept of ‘domicile’ will also be removed from the UK tax system, which will provide a clearer system for those who have left the UK. From April 25, IHT will apply to individual residents who have been in the UK for at least 10 out of the last 20 years on both their UK and non-UK assets.
School fees
As per Labour’s manifesto, VAT will be applied from the Lent term in 2025 to all private school fees.
Assets
ISAs
The ISA allowance will remain frozen at£20,000 until 2030; this includes JISAs (£9,000), and LISAs (£4,000).
Pensions
The annual allowances remained unchanged, and the feared reduction of the 25% tax-free lump sum did not come about. The biggest change is that Defined Contribution pension funds and death benefits from Defined Benefit pensions will now be included in the calculation of IHT from April 2027, all but ending the use of pensions as an efficient route of passing assets to the next generation. The pre- and post-75 rules continue to apply, and leaving the pension to a spouse will not attract IHT, as is the case for assets outside pensions.
However, where the pension is left to someone other than the spouse post-75 there will be an effective rate of between 52% (BR) and 67% (AR) on the pension left to the beneficiary if they choose to draw from the inherited pension. We urge reviewing your pension planning to discuss the consequences of this upcoming change.
Spousal benefits under Defined Benefit pensions remain untouched by the new rules.
Business Owners
Business Asset Disposal Relief (BADR) will reduce, with the effective tax rate rising from 10% to 14% from April 2025 and increasing further to 18% from April 2026. The lifetime limit will stay at £1m.
Employer National Insurance Contributions (NICs) will increase to 15% from April 2025, and the employee earnings threshold will also decrease to £5,000. The employment allowance will increase to £10,500, which now all eligible employers will receive, whereas this was restricted to smaller businesses with Class 1 NICs liabilities of less than £100,000.
This is the largest tax rise (£25bn) in the Budget, which, in effect, reverses the employee NIC cuts (£20bn) by the previous administration and places the burden on the business. However, employees (working people) will undoubtedly suffer through decreased benefits or reduced future pay rises.
Corporation Tax will be capped at 25% for this Parliament.
Wealth Tax
None was introduced.
Comment
This Budget was very much an assault on those with assets and businesses, with the private sector bearing the brunt of rising spending in the ever-growing money pit that is the public sector. There are some significant changes to personal finances that will need further discussion, and financial plans will need to evolve to reflect the new rules coming into effect. We look forward to guiding you through the most tax-efficient routes for your assets and income.
To view a more detailed commentary click here.
If there are any matters you would like to discuss in relation to the Budget, or any aspect of your financial planning, then please do not hesitate to get in touch.
This note is intended as a summary only and should not be regarded as a specific or personal recommendation. The Financial Conduct Authority does not regulate tax advice.
Certain measures remain potentially subject to change until enacted into legislation.