So now, after some four months of waiting, we have the Budget measures, in outline at least. As ever, in the immediate aftermath of the Budget speech, there is limited detail available, but we will be watching the announcements over the next few weeks and will update clients as relevant details emerge. In the meantime, here is our initial take on the Budget tax measures as we expect them to affect our clients.
Owner-managed business – employer’s National Insurance (NICs)
Much of the speculation around the Budget measures has been driven by Labour’s commitment not to raise the three ‘big’ taxes namely, income tax, national insurance and VAT. However, national insurance did feature as a major source of £25bn of revenue, albeit in the guise of employer’s rather than employee’s national insurance.
The proposal is that the rate of employers’ NIC will rise from 13.8% to 15%. Additionally, the employee salary threshold at which employers have to start paying contributions goes down from £9,100 to £5,000.
There are wider questions about the impact this move will have on employer behaviour, but for owner-managed companies, it could affect decisions on how owner-directors extract funds. Taking a bonus will result in payroll taxes, including employer’s NIC, on the bonus but gives a deduction for the bonus and NIC against corporation tax. On the other hand, taking a dividend gives no relief for corporation tax purposes but personal tax is at the dividend rates, which are generally lower than the main income tax rates.
For a long time, the combination of a low corporation tax rate and lower dividend rates meant that owner-managers were best advised to extract funds from companies by way of a small salary with the balance in dividends. The increase in corporation tax to 25% last year changed that dynamic, as the corporation tax relief for the payroll costs became more valuable.
Along with recent increases in dividend tax rates, the result gave bonuses the edge over dividends. Putting up the employers’ NIC rate and lowering the threshold will narrow the gap between bonuses and dividends, but initial review indicates that bonuses still give a marginally better result for top-rate taxpayers.
Significantly, there was no sign of charging an employer’s NIC on pension contributions made by salary sacrifice. The government may have found this too difficult but employers will be pleased that this route to tax-efficient pensions appears to remain intact.
Owner-managed companies – corporation tax
One of the main complaints from businesses has been that the lack of certainty around taxes makes it difficult to invest. Rachel Reeves has tried to confront that by providing a ‘Road Map’ for corporate tax. This confirms that corporation tax is to be capped at 25% for the duration of the current parliament and the present regimes for capital allowances and research and development are to be maintained.
Capital gains tax (CGT)
Without the ability to raise revenue from the most lucrative taxes, speculation was rife that capital gains tax would increase, possibly moving in line with income tax rates. In fact, the response was more low-key, with an increase to the lower rate of CGT from 10% to 18% and the higher rate from 20% to 24%. As predicted, the increased rates take effect immediately to pre-empt (further) asset sell-offs to avoid the higher rates. The new thresholds match the residential property rates which are unchanged.
Business asset disposal relief, formerly known as Entrepreneurs’ Relief, has allowed business owners making a disposal of business assets to access a lower rate of 10% CGT on the first £1 million of their gains. A similar relief is available for angel investors. The 10% CGT rate is to rise to 14% from 6 April 2025 and to 18% from 6 April 2026.
Whilst anyone disposing of a business asset will be grateful for relief, the business asset disposal relief threshold had already been reduced so it was worth £100k in tax terms before this announcement. That value now reduces to £60k from April 2026, being the lifetime limit of £1 million gains at 6%, being the difference between 18% and the new top rate of 24%.
Inheritance tax (IHT)
Rachel Reeves mentioned that IHT only affects some 6% of estates, but her measures are likely to ensure that that percentage rises. The nil rate band threshold has been £325,000 since 2009 and is now set to remain frozen until 2030. Estates have therefore already been subjected to a significant element of fiscal drag over the last fifteen years, albeit estates worth £2 million or less qualify for a residence nil rate band of £175,000 too.
Business property relief and agricultural property relief can be immensely valuable to business owners and farmers, offering up to 100% protection on the value of qualifying assets without a cap. That is to change; the 100% rate of relief will continue for the first £1 million of combined agricultural and business assets to help protect family farms and businesses, and relief will be cut to 50% on any excess. The reliefs were designed to ensure that families were not forced to sell their business assets to pay the IHT so the new system undermines the concept of generational businesses and in particular farms.
The new rates operate for deaths after 5 April 2026 and the small print notes that this will include lifetime gifts on or after 30 October 2024 where the donor dies after 5 April 2026. Clearly, for those wanting to pass a significant family business or farm down the generations, this raises the spectre of liquidity problems to pay the IHT. We will be looking at the options for farm and business owners in terms of planning and debt or insurance solutions to tackle the liquidity issue. An instalment regime exists for payment of tax in some circumstances too.
The business property relief for AIM shares which are designated as unlisted for IHT purposes is also to be restricted to 50%. It remains to be seen what impact this has on the junior market.
Pensions
A widely predicted measure which did appear in Rachel Reeves’s speech was to bring unspent pension pots into the IHT net, undoing part of George Osborne’s pension freedom reforms. Over the last 9 years, received estate planning wisdom has been to spend down other funds in retirement, leaving the IHT-free pension pot for one’s beneficiaries to inherit IHT free.
Given that the tax reliefs attached to pensions are designed to allow taxpayers to fund their old age rather than their children’s inheritances, this move is unsurprising. It takes effect from April 2027, which implies that it needs some detailed thought, possibly around the interaction between the IHT and the income tax which beneficiaries of an inherited pension pot can pay when drawing down funds from that pension.
Property taxes
Whilst CGT remains unchanged on residential property sales, Stamp duty land tax (SDLT) is going up. The 3% surcharge on the purchase of second homes will increase to 5% immediately.
Non-domiciles
Jeremy Hunt began a reform of the tax regime for non-UK domiciles in the Spring, but Rachel Reeves is going further and formally abolishing it from 6 April 2025. She proposed to introduce a simpler residence-based regime, which will take effect from 6 April 2025 and allow temporary residents to avoid UK tax on their foreign income for the first four years of UK residence.
Reeves proposes extending the ‘temporary repatriation facility’ offered by Jeremy Hunt for one year to fund repatriation over a three-year period. It’s clear that Labour have been unhappy with the use of offshore trusts to shelter assets from IHT and they now plan to introduce a residence-based IHT scheme as well, which will end this practice.
At the moment, it’s not clear whether this is part of a wider move to put IHT onto a residence basis rather than the present system based on the legal concept of domicile.
Summary
It has been a long run into Rachel Reeves’s first Budget and first impressions are that things could have been worse. Yes, some of our clients will need to rethink the approach to sourcing funds for spending in retirement and owner-managers will need to consider again how they extract funds from their companies.
Farm and business owners are to be faced with IHT problems not seen for generations. Nevertheless, the system for pension contribution relief was left unchanged as was the ability to take 25% of the fund as tax-free cash subject to the lump sum allowance.
Given that this government has a clear 5-year term at least, this did not feel like a reforming budget – issues like the cliff edge at £60,000 for child benefit and £100,000 for the personal allowance are increasingly important as frozen thresholds mean they affect increasing numbers but were unmentioned. We expect more details to emerge in the coming days and will provide updates on anything we believe to be relevant to our clients.
Clare Munro is our Senior Tax Adviser. Within her day-to-day role, she provides tax advice to high-net-worth clients in relation to their banking and wealth management needs. With a particular interest in inheritance tax and capital gains tax planning, Clare helps clients to structure their wealth tax efficiently to preserve it through family generations.
Important information
This article does not constitute advice. Tax laws are subject to change and taxation will vary depending on individual circumstances.