The Chancellor, Rachel Reeves, delivered the first Labour Budget since 2010. She promised not to increase taxes on ‘working people’. She announced tax rises worth £40bn to help fund the NHS and other public services, with businesses paying more than half of that amount.
The proportion of the UK’s income being paid in taxes to HMRC is set to be the highest on record since World War Two, and will hit 38% of income by 2030.
The Office for Budget Responsibility forecasts that the UK economy will grow by just over 1% this year and around 2% over the next two years. However, inflation is forecast to increase by around 2.5% pa over the next three years.
Personal taxes
The rates of income tax and national insurance, paid by employees will remain the same.
The income tax rates and bands will not increase now. Instead, the bands will increase in line with inflation from April 2028. This will prevent more people being dragged into the higher band, of £50,270 before 40% higher rate tax is payable as wages, salaries and general business profits rise. The additional rate of tax of 45% will continue to apply from £125,140 of taxable income. It should also see an increase in the personal allowance of £12,570, the amount of income you can receive each year before paying 20% income tax.
The rates of dividend tax will stay at 8.75%, for a basic rate taxpayer, and 33.75%, for a higher rate tax payer. The tax-free dividend allowance will remain at £500 in 2025-26.
Capital gains tax
For disposals and capital gains made on or after 30 October 2024, the lower and higher main rates of capital gains tax will increase to 18% and 24% (from 10% and 20%) respectively.
The basic rate of capital gains tax, on profits from selling assets, like shares in businesses, under Business Asset Disposal Relief (aka Entrepreneurs’ Relief), will increase from 10% to 18% (over two tax years) and the higher rate of capital gains tax increase from 20% to 24%. This will bring the current main rates of capital gains tax in line with the higher rates that are currently paid on gains on the sale of residential property, of 18% and 24%.
Capital gains tax that may be due on the disposal of a UK residential property will continue to be payable within 60 days of the completion of the disposal.
The lifetime limit for Business Asset Disposal Relief will remain at £1 million. However, the rate for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) will increase to 14% from 6 April 2025, and will increase again, from 6 April 2026, to match the lower main rate of 18%.
Capital gains made by companies are not affected by the rate changes as they pay corporation tax (at 19%, 26.5% or 25%) on corporate gains.
Employers’ national insurance
The Chancellor increased the rate of employers’ national insurance by 1.2% from 13.8% to 15%, with effect from 6 April 2025.
Currently, employers pay national insurance on employee’s earnings over £9,100 pa. This threshold will be reduced to £5,000 pa, from 6 April 2025. The threshold will remain at £5,000 until 6 April 2028. It will then increase in line with the Consumer Prices Index.
The rate increase and the lower threshold, when national insurance is payable, is estimated to raise £25bn per year, i.e. more than 60% of the total £40bn tax rises.
It appears highly likely that employees will ultimately be affected by the increase in the rate of employers’ national insurance, with lower business profits and potentially lower levels of pay increases.
Employment Allowance
The Employment Allowance allows employers to offset their employers' Class 1 national insurance liabilities for the tax year.
To help smaller businesses, the government will increase the Employment Allowance from £5,000 to £10,500 and remove the previous £100,000 eligibility threshold, making it available to all eligible employers. Smaller business will therefore not need to pay the first £10,500 pa of employers’ national insurance.
The Employment Allowance applies to the employer and not to specific employees. The allowance cannot be used to offset Class 1A or Class 1B employers’ national insurance.
The rate of employers’ national insurance is increasing, potentially leading to an additional £615 cost per employee, i.e. 15% x (£9,100 - £5,000), plus an extra 1.2% on the rest of their pay above £9,100.
For an employee earning £30,000, this will mean an extra £615 of national insurance on their salary up to £9,100 and a further £251 on the salary over £9,100, i.e. a total increase of £866 per employee.
However, the smallest businesses will not have to pay the first £10,500 of employers’ national insurance because of the increased Employment Allowance. This equates to an aggregate £70,000 of wages and salaries paid above the new £5,000 limit per employee i.e. £70,000 x 15% = £10,500.
Putting this another way, an employer with four employees, each earning £22,500, would not pay any employers’ national insurance i.e. (£22,500 - £5,000) x 15% = £10,500.
Smaller businesses, with fewer than around 5 to 6 employees, may make savings on their employers' national insurance costs. This is because of the increase in the Employment Allowance, despite the increase in the rate of employers' national insurance payable on employees' salaries over the lower £5,000 threshold.
Directors of ‘one-person’ personal service companies will also be affected. They pay both employee’s and employers’ national insurance, based on the level of their salary. One-person companies, or where no other employers’ national insurance is paid for any other employee, are not eligible for the Employment Allowance. This may mean a restructuring of the way they pay themselves and extract profits from their company, through dividends etc.
Employers can claim the Employment Allowance at any time during the tax year. It will then reduce the amount of employers’ national insurance due to HMRC each month until the full allowance has been claimed or the tax year ends.
Employers can backdate their claim for the Employment Allowance for up to the four previous tax years. In a group of connected companies, only one company can make the claim, and they can choose which company will do so.
Employee’s and self-employed national insurance
From 5 April 2025, the Lower Earnings Limit, above which employees pay Class 1 national insurance, will increase from £6,396 pa to £6,500 pa, from £123 pw to £125 pw.
From 5 April 2025, the self-employed Small Profits Threshold will increase from £6,725 pa to £6,845 pa.
For those voluntarily paying national insurance, Class 2 will increase from £3.45 pw to £3.50 pw and Class 3 will increase from £17.45 pw to £17.75 pw.
The rate of Class 4 national insurance will remain at 6% on profits between £12,570 and £50,270 and 2% above £50,270.
Corporation tax
Corporation tax, paid by limited companies, will continue to be paid at 19% on profits up to £50,000 and 26.5% on profits between £50,000 and £250,000. When profits reach £250,000 the average of the 19% and 26.5% rates will equate to the main 25% corporation tax rate.
The main rate of corporation tax on profits over £250,000, will continue at 25% until the next election.
Minimum wage
The new rates are effective from 1 April 2025.
The National Living Wage, for employees aged 21 and over, will rise from £11.44 to £12.21 per hour from 1 April 2025. For a full-time employee earning the National Living Wage this will result in an extra £1,400 of gross pay.
The National Minimum Wage for those aged 18 to 20 will increase from £8.60 to £10 per hour. This is part of a long-term plan to increase the rate for all adults to a ‘single adult rate.’
The National Minimum Wage for those aged 16 to 17 (and apprentices aged under 19 in their first year) will see the largest increase in their minimum hourly wage, increasing from £6.40 to £7.55.
Pensions
Tax relief on pension contributions costs the government around £44bn pa. Before the Budget, there was talk of possibly abolishing higher-rate 40% tax relief on pension contributions and possibly introducing a flat rate of relief. Fortunately, no changes were made on tax relief.
Another mooted change was a possible cut in the maximum pension commencement lump sum of £268,275, aka the 25% tax-free cash on the £1,073,100 lump sum and death benefit allowance.
Inheritance tax
Rates and bands
Inheritance tax is paid at 40% on personal assets, like property, bank balances, investments, when somebody dies. Inheritance tax is only paid on the value of an estate above the £325,000 (nil-rate band) / £500,000 (with the £175,000 residence nil-rate band if there is a residential property in the estate passed to a direct descendant). Only around 4% of people pay inheritance tax on their estates, though this could increase to around 7% by 2032.
The inheritance tax threshold of £325,000, frozen since 2009, will be kept the same until 2030. The residence nil rate band, now worth £175,000, has been available since 2017.
No inheritance tax is paid by anyone leaving their estate to a husband, wife or civil partner or on the part given to certain charities.
Tax free lump sums on private pension
Most individuals aged 55 or over (or 57 from 2028), can take 25% of their pension fund as a tax-free lump sum up to a maximum of £268,275. Alternatively, any part of the 25% tax-free amount can be taken as a tax-free pension income over many years.
There was speculation that the current 25% tax-free lump sum drawn from a private pension may be reduced or subject to income tax to raise more in tax for the government. Neither of these were changed.
Pensions funds on death
However, private pension funds undrawn when an individual dies will be subject to inheritance tax from April 2027. Currently, any remaining pension fund does not count for inheritance tax purposes when an individual’s dies.
Inheritance tax is paid if an individual’s estate is valued at more than £325,000, or £500,000 if the family home is included and passed down to a direct descendant. These limits double, to £1m of tax-free allowances, if the estate includes all the assets previously owned and passed down from their late spouse or civil partner.
Currently, if you die before the age of 75, your private pension fund can generally by passed to your beneficiaries as a tax-free lump sum or as income. For those who die after age 75, their pension fund can be passed to their beneficiaries, but treated as taxable income and subject to income tax in the hands of the beneficiaries.
However, from April 2027, any remaining pension funds on an individual’s death will form part of their general estate for inheritance tax purposes, potentially bringing more individuals’ estates into the 40% inheritance tax.
Business property relief
Currently, individuals who die owning a significant interest in a business or shares in a business where they were an employee / director are exempt from paying inheritance tax on the value of the business on their death.
Under new rules from April 2026, the first £1m of business assets in an individual’s estate on death will be free of inheritance tax with any value over £1m subject to 20% tax, i.e. 50% of the normal full 40% rate of inheritance tax.
Capital allowances
The government will maintain the following key features of the capital allowances system.
Full expensing
The 100% first-year allowance for companies on qualifying plant and machinery.
Annual investment allowance
The 100% first-year relief for plant and machinery on purchases of up to £1m per year, for all businesses, including unincorporated businesses and most partnerships.
Writing down allowances
Flexibility within the capital allowances system will continue, allowing businesses to choose which writing down allowances to claim for main rate (18%) and special rate (6%) plant and machinery.
Making Tax Digital (MTD) to be expanded to those with gross income over £20,000
Not announced, but buried away in the depths the ‘Red Book’, is a government commitment to delivering MTD for Income Tax. This is expanded to state that the rollout of MTD will include those with incomes over £20,000 by the end of this Parliament, with precise timing to be set out in a future fiscal event.
The first taxpayers to join MTD for Income Tax, from April 2026, will be those with gross aggregate incomes from self-employment and/or property rents of over £50,000. Those with income between £30,000 and £50,000 will start a year later, from April 2027.
This announcement means a third block of traders / landlords, with income between £20,000 and £30,000 will join sometime after April 2027.
State pension
The basic and new ‘flat rate’ state pension will increase by up by 4.1% from April 2025 because of the ‘triple lock.’ It means the state pension will increase from £221.20 pw, or £11,502 pa, to £230.30 pw, or £11,975 pa.
Stamp duty on second homes
The stamp duty surcharge paid by those buying a second home or buy-to-let residential properties will increase from 3% to 5% from 31 October 2024.
Individual Savings Accounts (ISAs)
The main ISA annual subscription limits will remain at £20,000, £4,000 for Lifetime ISAs and £9,000 for Junior ISAs and Child Trust Funds until 5 April 2030.
Freezing the Starting Rate for Savings
The Starting Rate for savings will be retained at £5,000 for 2025-26. This will allow individuals with less than £17,570 in employment / pensions income to continue to receive up to £5,000 of savings (interest) income tax-free.
Reporting of benefits in kind
From April 2026, in phases, businesses that provide benefits in kind to their employees will be mandated to use payroll software to report benefits in kind to HMRC. Employers will also have to deduct income tax from employees’ pay on the benefits and together with Class 1A national insurance pay these taxes to HMRC each month, or quarter for smaller employers.
This will largely bring the end-of-year P11D process to an end. It will mean that 4m employees will pay income tax on the benefits in kind each pay period. For HMRC, it will also avoid the need for them to process 4m end-of-year P11D returns.
The reporting process of benefits will be through the Full Payment Submission each pay period. This is the same process employers currently use to report salary and other employee details to HMRC.
Employers will have to divide the cash equivalent of the benefits provided across the annual payroll periods for each employee. The resulting amount can then be reported and taxed with the employee’s main earnings each pay period.
Employers must report taxable benefits as accurately as possible each pay period. Any corrections required should be adjusted over the remainder of the tax year.
An end-of-year update process will be introduced to amend taxable benefits in kind after the end of the tax years if the in-year reported benefits differ from the final annual benefits in kind.
Double cab pick-up vehicles
Following a Court of Appeal judgement, from April 2025, HMRC will treat double cab pick-up vehicles with a payload of over one tonne as cars for most tax purposes, include capital allowances, benefits in kind, and deductions from business profits.
The existing capital allowances treatment will apply to purchases before April 2025. Transitional benefit in kind arrangements will apply to employers that purchased, leased, or ordered these types of vehicles before 6 April 2025. They will be able to use the previous treatment, until the earlier of disposal, lease expiry, or 5 April 2029.
Amended guidance of the changes can be found for:
Van benefit charge and the car and van fuel benefit charges for 2025-26
The following new rates will come into effect from 6 April 2025:
the van benefit charge will be £4,020
the van fuel benefit charge will be £769
the car fuel benefit charge multiplier will be £28,200
Other matters
The cap on bus fares in many parts of England, outside London and Greater Manchester, will increase from £2 to £3 in January 2025.
The 75% discount on business rates will stop in April 2025, but be replaced by a 40% discount for from April 2025.
VAT will be introduced on private school fees from January 2025 and business rates relief for private schools is also to be removed from April 2025.
Main rates and thresholds of tax
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