1 November 2024
Chancellor Rachel Reeves presented a pivotal Budget for the UK’s new Labour government, aiming to plug the country’s fiscal "black hole" while investing in critical infrastructure and public services.
As widely predicted, there were significant changes to employers’ national insurance contributions (NIC), the future impact of which is likely to challenge both employment opportunities and wage growth.
This comes on top of the previous days announcement that the minimum wage is to increase to £12.21 an hour for 21-year-olds from the 2025 financial year.
Other significant measures included changes to both Capital Gains Tax and Inheritance tax regimes.
Employers National Insurance
Class 1A and 1B employer National Insurance contributions from 6 April 2025 will be increased from 13.8% to 15.0% on earnings over £5,000.
The Secondary Threshold, from which employer contributions start to be paid, will reduce from £9,100 a year to £5,000 a year.
The Employment Allowance which allows employers to reduce their National Insurance bill, will increase from £5,000 to £10,500 from 6 April 2025.
The previous eligibility threshold for the Employment Allowance of £100,000 will be removed from the same date, allowing all employers to be able to claim a reduction to their Employer’s Class 1 National Insurance liability of up to £10,500.
Inheritance Tax
Pensions:
Previously, pension assets were typically exempt from IHT. From April 2027, unused pension funds and death benefits payable from a person will be included in an individual’s estate for IHT calculations, which means they will be subject to a 40% tax.
The Government will consult on the processes needed to implement these changes.
Removing Business Property Relief:
Currently, investors can pass on certain business assets to their beneficiaries free from IHT when they die. This is known as ‘business relief’ and it includes shares listed on the Alternative Investment Market (AIM). To qualify for business relief, the shares must have been held for more than two years at the time of death. From April 2026, AIM shares will be subject to IHT of 20%. Other business relief-qualifying assets will be IHT-free up to £1 million, but assets over £1 million will be subject to IHT of 20%
Freezing The Nil-Rate Band:
The chancellor announced a two-year extension to the IHT threshold freeze until 2030. That means the main threshold – or ‘nil-rate band’ – remains at £325,000, rising to £500,000 for assets passed to direct descendants. Assets held beyond this amount are taxed at 40%. Married couples and civil partners can transfer any unused element of their IHT nil-rate band to their living partner when they die, which means a couple effectively has a joint nil-rate band of £650,000.
There is also an additional ‘residence nil-rate band’, which is £175,000 (depending on the total estate value). This allowance applies to those leaving property to direct descendants. Again, this can be transferred to the surviving spouse or civil partner, meaning a couple has a joint residence nil-rate band of £350,000.
Overall, a couple could potentially pass on up to £1 million before IHT becomes due.
Capital Gains Tax
The following increases to the main capital gains tax (CGT) rates were announced, effective immediately:
- Lower CGT rate increases from 10% to 18%
- Higher CGT rate increases from 20% to 24%
There will also be a two-stage phased increase to the CGT rates for Business Asset Disposal Relief and Investors’ Relief, rising to 14% from 6 April 2025, and then to 18% from 6 April 2026.
In addition, the lifetime limit for Investors’ Relief will be reduced to £1 million for all qualifying disposals made on, or after, 30 October 2024.
From April 2026, Carried Interest will no longer be subject to CGT and instead become subject to Income Tax.
State Pensions
The Government is keeping the triple lock. The Basic State Pension, new State Pension and Pension Credit standard minimum guarantee will be uprated in April 2025 by 4.1%, in line with earnings growth in September 2024.
- The new State Pension will rise by £474.85 to £12,016.75 a year.
- The Basic State pension will rise by £361.40 to £9,175.40 a year.
Verlingue View
The increases in the main rate of Employer’s National Insurance will have the biggest impact from the Budget in the short-term. Only time will tell what kind of impact this could have on employment opportunities and wage growth going into 2025.
There was much talk in recent weeks regarding introducing Employer’s National Insurance on pension contributions, however this did not materialise, and no mention was made by the Chancellor. We welcome this news and believe it reinforces the case for pension salary sacrifice if not already in place, particularly given the potential increase in NIC savings for employers, compared to previously.
If you would like to discuss salary sacrifice for pensions or any other benefits, please get in touch at pensions@verlingue.com.