Glass-shattering £40bn budget debut from chancellor

Rachel Reeves made history today, delivering the first budget from a female chancellor, in a debut that also marked the first Labour budget in 14 years.

Starting her speech with a call for girls and young women to break through any ceiling in achieving their ambitions, she went on to dismantle the previous government’s economic agenda with a bold, far-reaching Budget.

The unveiling of her proposals followed weeks of speculation and testing of public opinion, with the chancellor promising to bring an end to austerity with a focus on protecting working people, fixing the NHS and rebuilding Britain.

Headlined as ‘Fixing the foundations of our economy’, Rachel Reeves said many tough choices had been forced by the economic inheritance of the previous government, which she said had created a black hole of £22bn.  The result was what Reeves, a former Bank of England economist, described as a ’painful’ £40bn tax-raising budget to cover the black hole while also enabling investment in public services and stimulating economic growth. 

Having made an election promise not to increase the burden on ‘working people’ through rises in income tax, national insurance contributions or VAT, the chancellor turned to levies on wealth, targeting capital gains tax, inheritance tax, and stamp duty on second homes, as well as the long-trailed application of VAT on private school fees and the ending of non-dom status, which will be  replaced by a residence-based regime. 

Capital gains tax (CGT) rates have been increased with immediate effect: the lower rate rises from 10 to 18% and the upper rate from 20 to 24%, matching the current residential property CGT rates, which remain.  Rates of CGT on Business Asset Disposal Relief and Investors’ Relief will be held until April 2025, when they will increase to 14%, and then to 18% from April 2026.

Landlords and second homeowners will find themselves paying a higher rate of Stamp Duty Land Tax (SDLT) on property purchases.  These transactions already attract a higher rate of stamp duty, and this 3% surcharge will increase by 2% to 5% from 31 October 2024. 

For inheritance tax (IHT), the ‘loophole’ which had allowed pension pots to pass on tax-free will be closed from April 2027, and the government will reform agricultural property relief and business property relief from April 2026, with a 50% relief on combined agricultural and business assets beyond the first £1m. 

IHT thresholds were already due to be frozen until April 2028, but this is now extended to April 2030, meaning the IHT nil rate band will remain at £325,000, and the residence nil-rate band at £175,000, with the residence nil-rate band taper starting at £2 million.  

This means each person can pass on a maximum of £325,000 in assets tax free when they die, including shares and property. There is an extra £175,000 allowance when the main home passes to a direct descendant.  If someone is in a marriage or civil partnership, they can leave everything free of IHT to their partner, and when the second partner dies, two allowances are added together when calculating whether tax is due on the combined value of the estate.

This freezing, particularly alongside steep rises in property values, will see many more estates drawn into paying inheritance tax and overall changes to IHT are predicted to bring in £2bn. 

Similarly, while the chancellor has not increased income tax for ‘working people’, she retains  the freeze on personal tax thresholds, introduced by the previous Tory government.  This  means workers will continue to miss out on an annual inflation-linked rise in their tax-free personal allowance until 2028/29. The result of the freeze is more people are dragged into higher income-tax brackets, bringing additional revenue for the Exchequer.  

On the upside, the National Living Wage rises by 6.7% to £12.21 per hour from next April, worth £1,400 a year for an eligible full-time worker who is over 21.  Alongside, the 18-20 National Minimum Wage will rise by £1.40 per hour, in what has been positioned as the first step towards a single adult rate. Apprentices will see their hourly rate increase from £6.40 to £7.55 an hour.

The election pledge also included a promise to hold corporation tax rates, but employers were in her sightline, with a significant increase in employer national insurance contributions and the minimum living wage.   Employer contributions will rise by 1.2% to 15% from April 2025 and the secondary threshold at which contributions are payable reduces from £9100 to £5000, a move that will raise £25bn next year.   Smaller businesses will have additional support on national insurance contributions, with a doubling of the employment allowance discount for employers with NICs bills of £100,000 or less.  This will increase from £5,000 to £10,500.

In a radical move, the chancellor helped balance the books by re-defining the Treasury’s self-imposed fiscal rules, to allow for higher borrowing which will be routed into increased capital spending on infrastructure.  By using an alternative debt metric known as public sector net financial liabilities (PSNFL) - which includes financial assets, such as student loans and company shares, alongside government debts – she has released substantial funds to add to her spending pot. 

This move is helping her to treat the NHS to a much-needed injection of cash for capital funding through which she hopes to ward off an epidemic of delays and lack of investment with £1.5bn to fund new surgical hubs and scanners, alongside £70 million for new radiotherapy machines.

In other moves, petrol duty remains frozen for 2025/26, plus an extension to the 5p cut in rates, so the price at the pumps will not increase.  And there’s a cut to duty on pints pulled in the pub, which should see a penny shaved off a pint.  Pubs and other retail, hospitality and leisure properties are set to experience lower business rates from 2026-27.   Targeted action on fraud will involve teams working to recover funds relating to covid grants, welfare benefits and tax avoidance.

“This was a big budget, with significant structural changes,” said Paul Rothwell, tax law expert at Martin Tolhurst Solicitors “It brought a welcome shot in the arm for the NHS to tackle waiting lists, but employers will be counting the cost of the changes to national insurance. 

“Those with more complex affairs, including foreign residents, landlords and those looking to pass an inheritance to the next generation, will be re-thinking their planning and will need to take advice on if, and what, to change.”

Paul also added: “In better news for inheritance planning, other limits and allowances have remained unchanged, some of which had been expected to be reduced or cut out altogether – such as the ability to make gifts that become exempt if you survive for seven years.”

Ways to reduce the size of an estate for inheritance tax purposes while someone is alive include making gifts, either into a trust or to individuals.  A gift to an individual made out of capital is not taxed at the time of the gift and will become wholly exempt if you live for seven years after the date of the gift.  A gift into a trust is taxable at the time of the gift if its value is over the nil rate band - though the life-time rate, at 20%, is much lower - and again the value of the gift will drop out of account after seven years.  Gifts can also be made out of surplus income, where someone is able to maintain their normal lifestyle without the cash, or by making use of the automatic allowances, which include an annual exemption to allow gifting of up to £3000, together with a separate small gifts allowance of up to £250 per person.   

The full autumn statement is available here.

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This is not legal advice; it is intended to provide information of general interest about current legal issues.