As is the case in the build up to all Budget statements, speculation regarding what this Autumn Budget would contain was rife. Indeed, the anticipation was perhaps even greater with this being a Labour Government’s first Budget in 14 years.
The biggest questions concerned what measures the latest Chancellor, Rachel Reeves, would introduce around tax, with Labour making clear that there was a £22bn “black hole in the public finances” which needed filling.
“Restoring economic stability” was another of her key messages and, besides increasing employers’ contributions to National Insurance, there were also announcements regarding inheritance tax (IHT), capital gains tax (CGT) and AIM share listings.
This was undoubtedly a blockbuster budget with £36bn in tax increases in total which may affect each member of the general public in different ways.
Let’s break down what the Chancellor announced.
Inheritance Tax (IHT)
Following weeks of media speculation, changes to inheritance tax were widely expected to help plug the hole in the public finances. In the end, the Chancellor announced measures which will raise £2bn per year.
IHT is currently charged at 40% on the property, possessions and money of someone who has passed away, above a threshold of £325,000, and it is only charged on the part of the estate above the threshold. There are a number of IHT exceptions, as well as allowances for passing a home on to children and grandchildren.
The Chancellor also announced that the IHT threshold, which was due to be amended in 2028, will now be frozen until 2030. From April 2026, the first £1m of combined business and agricultural assets won’t be subject to inheritance tax. For assets over £1m, however, IHT will apply with 50% relief at an effective rate of 20%.
Currently, pensions don’t count towards the IHT threshold but, from April 2027, inherited pensions will be included. This is likely to mean that more estates will be subject to IHT from the fiscal year 2027-28.
Capital Gains Tax (CGT)
Elsewhere in her statement, the Chancellor revealed that capital gains tax will rise. Charged on profits from the sale of assets including second homes, investments and shares, the lower rate of CGT will rise from 10% to 18%. The higher rate, meanwhile, will increase from 20% to 24%.
Additionally, the CGT rates on carried interest will rise to 32% from April 2025, with further reforms scheduled from April 2026.
This may increase the importance of suitable financial planning, with those looking to sell any assets advised to consult with a financial planner.
The UK CGT rate is still one of the lowest in Europe and, as Rachel Reeves said in her statement, is still the lowest of any European G7 country.
National Insurance
Changes to National Insurance were widely predicted and discussion around potential increases began a number of weeks ago. However, Prime Minister Sir Keir Starmer promised not to increase the taxes of working people.
Instead, the Chancellor increased the National Insurance contributions to be made by employers, rather than employees.
From April 2025, employer contributions to National Insurance will rise from 13.8% to 15% on a worker’s earnings over £175 a week. The threshold at which employers begin paying NI will also fall from £9,100 to £5,000.
There is concern that by taxing businesses in this way, they may be more reluctant to increase wages or employ new staff, and that costs may be passed to consumers.
Investment and Growth
In its five-year forecast to 2029-30, the Office for Budget Responsibility (OBR) noted that economic growth is expected to be fairly flat over the coming years. “Having stagnated last year, the economy is expected to grow by just over 1% this year, rising to 2% in 2025, before falling to around 1.5%, slightly below its estimated potential growth rate of 1.66%, over the remainder of the forecast.”
The policies announced in the budget mean that inflation is expected to rise to a forecast period high of 2.6% in 2025, before falling gradually back to the Bank of England’s target of 2%.
The OBR states that Government spending will increase by almost £70bn a year over the next five years, equating to a little over 2% of GDP. Half of the increase in spending will be funded by tax increases, mainly on employer payrolls, assets, and through greater tax compliance. In total, these policies will raise £36bn and increase the tax burden to a record high of 38% of GDP by the end of 2029-30.
As the Chancellor repeated throughout her speech, much of these funds will be spent in improving the public sector. Day-to-day spending in the NHS will increase by 4.7% in real terms this year, before a smaller rise next year, defence spending will rise by £2.9bn in 2025, and there will be a further £1.3bn of funding for local councils in 2025.
Pensions
Aside from the change to pension counting towards the inheritance tax threshold from April 2027, the Chancellor also announced that the state pension will increase in line with average earnings, rising by 4.1% in April 2025.
This means that the full, new flat rate state pension (for those who reached state pension age after April 2016), is expected to rise to £230.25 a week. That’s an increase of £472 a year compared with now.
The full, old basic state pension, for those who reached state pension age before April 2016, is anticipated to rise to £176.45 each week, an increase of £363 a year. The caveat, though, is that the Government previously announced that millions of pensioners will lose the winter fuel payment due to Government cuts.
Alastair Power, Investment Research Manager, Redmayne Bentley
The initial reaction to the Budget was muted, gilt yields moved slightly lower and UK smaller companies indices gained. Having paused and digested the potential for further gilt issuance given the new net-debt fiscal rules, UK 10-year gilt yields rose towards 4.50%, causing a broad negative share price reaction, especially for the more interest rate sensitive sectors of real estate and alternative asset focused investment companies.
Significant increases in debt issuance and spending caused financial market participants to adjust their expectations for interest rate cuts, cementing the potential for a more gradual approach to reducing interest rates from the Bank of England.
Several policies announced in the Budget were important for UK retail investors. No changes were made to ISA subscription allowances and pensions were unchanged aside from their inheritance tax treatment. Capital gains tax rates moved higher, as anticipated, with some individual investors taking capital gains in the lead-up to lock-in the lower rate.
The main announcement affecting UK equities came in the form of a cut to the level of inheritance tax relief for qualifying companies listed on the Alternative Investment Market (AIM). The sector has struggled in recent years and shows negative returns over three-and-five-year periods.
Overall, there are likely to be some areas of concern for financial markets in the form of increased gilt issuance, inflationary pressures at the hands of large spending increases, and a lack of incentive for small business investment. On the positive side, the air of uncertainty has been lifted and with the Government’s policies now known so both businesses and investors are operating with increased clarity.
As investors, remembering that opportunity generally coincides with volatility can serve you well.
At a Glance: Autumn Budget Guide
- Income tax band thresholds to rise in line with inflation after 2028.
- Minimum wage: to rise to £12.21 per hour for over-21s and £10 for 18-20-year-olds.
- Fuel duty: 5p cut in fuel duty on petrol and diesel, previously due to end in April 2025, to be maintained for further year.
- Bus fares: £2 cap on single bus fares in England to rise to £3 from January, excluding Greater Manchester and London.
- HS2: Government commits to fund tunnelling work to take line to Euston station in central London.
- Alcohol: tax on draught drinks to be cut by 1.7%.
- Childcare: Rates for providers were announced for the promised 30 hours of free childcare for all 9-month-year-olds.
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