The UK’s Autumn Budget 2024: Tricks, Treats, and Tax Hikes for Halloween

James Yardley 31/10/2024 in Basics

In a spooky twist on fiscal policy, the UK’s first Labour government budget in 14 years was delivered by Chancellor Rachel Reeves yesterday, 30th October. Touted as a serious approach to “fiscal reality,” the Budget comes amid warnings of a £22 billion deficit and vows to stabilise public finances without penalising “working people.”

However, many of Reevess measures may feel like Halloween tricks for taxpayers, investors, and businesses alike. Keir Starmers promise of a budget that didnt “punish” working people was upheld in some areas, but several announcements will impact the finances of households and investors over the coming years.

Lets break down the key measures announced and what they mean for UK taxpayers and investors.

1. Inheritance Tax (IHT)

Inheritance Tax remains unchanged at 40% on estates up to £325,000, but Labour introduced new adjustments. Notably, pensions will be included in IHT calculations from 2027, meaning larger pension pots could be subject to the same rates as other inherited assets.

Leading up the Budget, investors had been holding out on the AIM market in fear that the favourable treatment of AIM shares for inheritance tax would disappear completely. As it was, Chancellor Reeves said that instead of being fully exempt from IHT, AIM shares will now be charged at 20%. This means that for many investors it will still be worth using AIM portfolios to minimise their liability. Certainly, the FTSE AIM market had anticipated worse and staged a relief rally, up 4% on the day*.

For agricultural and business properties, Labour retained the 100% IHT relief on the first £1 million in assets but will apply a 50% rate on anything exceeding this amount from April 2026. For companies not listed on recognised stock exchanges, business property relief will also reduce from 100% to 50%. While business owners might sigh in relief at the maintenance of some reliefs, these changes are likely to raise costs for many family-owned farms and businesses, impacting legacy planning.

2. Capital Gains Tax (CGT)

Reeves confirmed one of the major anticipated changes: a rise in Capital Gains Tax (CGT). For individual investors, CGT rates will increase from 10% to 18% on lower rates and from 20% to 24% on higher rates. This change aligns CGT rates for assets such as stocks and bonds with those for property, which were previously frozen for landlords. This is a significant rise, but in the context of having to pay 40% or 45% on all capital gains, it seems reasonable.

Reevess argument? The UK still boasts the lowest CGT rate in the G7, meaning UK-based investors continue to benefit from favourable terms compared to other European countries. However, the increase has rattled some investors who fear that higher CGT could discourage investment in stocks, property, and small businesses, potentially curbing economic growth over time.

Equally, after all the debate on what constituted a ‘working person’ and clarity that it didn’t include people who owned shares, it was a relief to see no changes to the fundamental building blocks of a long-term savings strategy. ISAs were untouched, and allowances remained the same.

3. National Insurance (NI) Contributions

Employers face a chilling rise in National Insurance Contributions, which will increase by 1.8% to reach 15% in 2026. Additionally, the NI salary threshold per employee will drop from £9,100 to £5,000, increasing the employers NI liability.

To offset the impact on smaller businesses, Reeves doubled the Employment Allowance to £10,500 and scrapped the requirement that employers must earn over £100,000 to qualify. While this will support some smaller businesses, larger employers and industries with numerous employees will face higher hiring costs, which could discourage expansion and potentially drive up unemployment.

4. Fuel Duty Freeze

For UK drivers, the freeze on fuel duty remains in place for another year, coupled with a 5p per litre cut thats predicted to save the average driver around £60 annually. With the cost of living still high and global uncertainties affecting fuel prices, the Chancellor argued that raising fuel duty at this time would be the wrong choice for working people.” This temporary reprieve will be a relief to households and businesses dependent on transportation, though questions remain about what will happen after next year.

5. Stamp Duty on Second Homes

One surprise in the Budget was the increase in Stamp Duty on second homes, rising from 3% to 5% effective immediately. The move is expected to hit buy-to-let landlords and second homeowners hardest, costing them around £7,000 on average based on current property prices.

6. Income Tax Threshold Freeze

While some expected changes in income tax thresholds, Reeves announced that these would remain frozen until 2028. The freeze, initially imposed by the previous Conservative government, means income tax thresholds wont rise to account for inflation until 2028-29. This decision will likely result in more workers moving into higher tax brackets over time due to fiscal drag,” effectively increasing their tax burdens without raising tax rates — meaning “working people” won’t see the benefits for at least another four years.

7. Private School Fees and Education Funding

The Labour Government confirmed a 20% VAT on private school tuition and boarding fees starting January 2025. Alongside this, the removal of charitable rate relief for private schools in England will begin in April 2025. These measures aim to fund public education initiatives by redirecting revenue from private institutions to public sector programs. For parents with children in private education, these changes will increase annual school fees significantly.

Final Thoughts

While the Budget was less severe than some feared, the response has been mixed. Investors and businesses are eyeing the tax hikes with concern, especially in light of increased CGT rates and higher NI contributions, which could hit profits and discourage growth. Savers can rest easy with the ISA allowance intact, but the lack of fresh incentives for UK investment left some disappointed.

On the plus side, those facing financial hardship will benefit from increased benefits support and the fuel duty freeze. As always, the real impact of these changes will depend on how the UK economy fares in the coming months.

For now, taxpayers and investors alike will want to keep a close watch on their finances—and hope there arent more Halloween tricks in store!

*Source: FTSE AIM All-Share, 30 October 2024

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