We outline the key points from the Labour's government's first Budget on 30th October that may affect you and your family's pensions, income, savings, investments and legacy.
It was billed as “painful”, but much of the speculation about the first Budget for the new Labour government didn’t come to pass. The Chancellor, Rachel Reeves, set out spending plans of £74 billion and tax rises of £40 billion, with much of the tax burden likely to fall upon workers and employers.
The main impact for the majority of Goodmans clients comes from the changes to inheritance tax.
Pensions
A big change is bringing pensions into scope for inheritance tax. Currently you can pass your pension on tax-free if you die before 75 (after that, heirs pay income tax), but from 2027, all pensions will become subject to inheritance tax. Thankfully, the delayed start offers a bit of time to review and adjust your financial planning to minimise the potential impact on your family.
In more welcome news, Reeves confirmed the government’s commitment to the State Pension triple lock, which means a 4.1% increase from April 2025. However, the extra £360-£470 a year will be largely offset by the loss of the £300 winter fuel payment.
Fortunately, there were no changes to pension tax relief, the tax-free lump sum, the annual allowance or other areas that would adversely affect your pension savings.
Personal taxes
As promised, there were no increases to income tax, employee National Insurance or VAT. Reeves also stated that there would be no extension to the frozen income tax thresholds set by the Conservatives, which means that allowances will go up in line with inflation in April 2028.
However, in the meantime, many people remain on track for a bigger tax bill as income increases beyond the threshold and potentially triggers a higher tax bracket.
Inheritance tax
There was no such thawing for inheritance tax, as IHT thresholds will be frozen for an extra two years, up to 2030. As savings, property prices, assets – and all pensions from 2027 – increase in value over time, this makes it easier to fall into the IHT net.
It’s not just pensions coming into IHT liability, as the rules are also set to change for business property relief (BPR) and agricultural property relief (APR). Currently, there’s a 100% relief for small business and family farm assets passed to family on death, but from April 2026 this will be capped at £1 million, with a 50% relief above that. This means that family members who could previously inherit businesses and land, machinery, farm buildings and property tax-free could soon face 20% tax on anything over £1 million. However, the usual IHT exemptions still apply so, in effect, tax should generally only become an issue over £2 million.
There were no changes to the gifting rules, trusts or other estate planning options, so there may still be avenues to mitigate any potential IHT.
Capital gains tax
As expected, capital gains tax (CGT) will increase, although not in line with income tax rates or other higher taxes. Taking immediate effect:
- The lower rate rises from 10% to 18%.
- The higher rate rises from 20% to 24%.
- The rates on residential property stay at 18% and 24%.
- The annual allowance remains £3,000.
While CGT hasn’t gone as high as some speculated, it could still have a significant impact on affected asset sales.
Business taxes
From April, companies will pay significantly more employer’s National Insurance, with an increased rate of 15% and a slashed threshold from £9,100 to £5,000. As employers try to recoup costs, a knock-on effect could be lower wage increases and less generous pension contributions for those still working.
Better news for businesses is that Labour has honoured their pledge to keep corporation tax the same, so it stays capped at 25%.
Lifestyle
- No increase to fuel duty and the 5p reduction stays in place next year.
- Duty on draught alcohol to go down by 1.7%, other alcohol to go up with inflation from April.
- Tobacco tax to go up and a new tax is being introduced for vaping liquid.
- The bus fare cap will remain but increases from £2 to £3 in 2025.
Other measures
- Stamp duty for second properties increases to 5% – an immediate change to further discourage buy-to-lets and holiday homes.
- The Carer’s Allowance limit will increase so that people can remain eligible when earning up to £195 a week/£10,000 a year.
- The National Living Wage for over-21s rises by 6.7%.
- VAT of 20% will be added to private school fees from January.
- The non-domicile tax regime will be abolished.
The fallout
While there was nothing to impact ISAs or dividends, the new pension liability for inheritance tax and increased capital gains tax may be enough to warrant a rethink of your financial planning over the coming months. Business owners and farmers have a bit more to think about.
We'll be discussing these measures along with any recommended actions with Goodmans clients at our regular reviews. In the meantime, we're always on hand to address any concerns.
If you’d like to book in a financial planning review, give us a call.
