With the unveiling of the UK’s latest budget, speculations around substantial tax changes have finally been confirmed. The newly elected Labour government, led by Keir Starmer and Chancellor Rachel Reeves, aims to tackle a £22 billion deficit through targeted tax increases, carefully steering clear of altering income tax, VAT, or national insurance rates for employees. However, there are several changes that will significantly affect businesses and individuals, particularly in areas like Capital Gains Tax, Inheritance Tax, income tax, and more.
Here’s an in-depth breakdown of the key measures and how they will impact you.
- Capital Gains Tax (CGT)
- Inheritance Tax (IHT)
- Income Tax and National Insurance (NI)
- VAT on Private School Fees
- Business Taxes and Reliefs
- Changes to Non-Dom Tax Status
Starting from 30 October 2024, Capital Gains Tax (CGT) rates will rise for both lower-rate and higher-rate taxpayers. Specifically, lower-rate taxpayers will see an increase from 10% to 18%, while higher-rate taxpayers will see an increase from 20% to 24%.
The rates for residential property will remain at 18% and 24% respectively. This increase in CGT rates means that anyone disposing of assets will face a higher tax liability, particularly those selling non-residential properties, as the government aims to equalise CGT rates between residential and non-residential property.
In light of these changes, individuals and businesses with significant investments or assets should consider carrying forward losses from previous years to offset the higher gains. It’s also wise to explore tax-efficient investment opportunities, such as Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT), to take advantage of tax reliefs and minimise the overall tax burden.
CA significant change coming into effect in 2027 is the inclusion of pensions under Inheritance Tax (IHT). As the IHT threshold remains frozen at £325,000 until 2030, many more estates are likely to exceed the threshold, especially as asset values rise in line with inflation.
This means that individuals with significant estates should plan early to avoid substantial IHT liabilities. One option is to withdraw tax-free lump sums from pensions, which can reduce the value of your estate.
Additionally, making lifetime gifts to beneficiaries is an effective way to reduce the taxable value of your estate. For those who wish to pass on wealth tax-efficiently, gifts made within the IHT annual exemption limits, such as donations to charities, can be particularly effective.
The freezing of income tax bands until April 2028, combined with an increase in Class 1 employer National Insurance Contributions (NICs) from 13.8% to 15% starting April 2025, will result in more people being dragged into higher tax brackets.
The freeze on tax bands means that even if an individual’s income remains unchanged, they may still face a higher tax burden due to inflation pushing their earnings into higher bands. On the employer side, the NIC increase will significantly impact businesses, particularly those with a large payroll, as it will increase their contribution costs.
Employers should consider revisiting salary structures and possibly exploring salary sacrifice schemes, which can help employees reduce their NICs while benefiting from tax-efficient compensation. Employees may also consider increasing pension contributions or charitable donations to maximise tax reliefs and counteract the impact of these changes.
From 1 January 2025, a 20% VAT will be applied to private school fees, significantly raising the cost of private education for many families. For parents of day pupils, this could mean an increase of £2,130 per year, adding a substantial financial burden.
Given this, parents should consider ways to mitigate the impact, such as using tax-efficient savings options like Individual Savings Accounts (ISAs) to cover the additional costs.
Additionally, gifting from family members can provide a tax-free means of helping with school fees. Exploring tax reliefs on education-related expenses can also help parents navigate the rising costs more effectively.
For business owners, the rise in Business Asset Disposal Relief (BADR) and Investors Relief (IR) rates will have a significant impact. From April 2025, the rate for BADR will increase to 14%, and by 2026 it will rise to 18%.
At the same time, the lifetime limit for IR will decrease from £10 million to £1 million. This means that business owners looking to sell their businesses or transfer assets to others will face a higher tax burden, especially if their gains exceed the new limits.
If you’re considering a business sale or asset transfer, it may be prudent to act before the rate increases take effect. Alternatively, transferring shares within a family could allow business owners to make use of both spouses’ tax allowances, reducing the potential tax exposure.
One of the most significant changes for non-domiciled individuals will occur on 6 April 2025, when the current remittance basis for non-doms will be abolished. This means that individuals who have been UK residents for 10 or more years will no longer be able to shelter their foreign income and assets from UK tax by remitting them to the UK.
Under the new regime, non-doms will be taxed on their worldwide income and assets, which could increase their overall tax liability. For non-doms, or those who may be considering this status, it’s crucial to seek professional advice well in advance to understand how the new rules will impact their personal tax situation. Planning may involve restructuring assets, withdrawing income before the change takes effect, or considering tax-efficient ways to repatriate funds.
These changes reflect a balanced approach, targeting high earners and larger businesses while providing protection for smaller businesses and households from direct tax increases. At DC Accountants, we understand the importance of staying informed about how these changes may affect your finances and business strategy. Our team is here to help you navigate these updates and make the most of available allowances.
Ready to explore your financial planning needs and confidently prepare for these new regulations? Schedule a call now!