The Autumn Budget | Black hole Wednesday

Dan McKissock, one of our Chartered Financial Planners, shares his thoughts on this week’s Autumn Budget.

To say that the first Labour Budget in 14 years was hotly anticipated would be an understatement as large as the £22bn “black hole” that Chancellor Rachel Reeves was seeking to fill through the results of Wednesday’s announcements. In recent weeks my fellow financial planning colleagues and I have fielded an unprecedented number of enquiries from those hoping to protect their current position, fuelled by speculation regarding potential tax rises.

When the last Labour Chancellor, Alistair Darling, presented his budget in March 2010, the government was under scrutiny for its handling of the economy in the aftermath of the global financial crisis, and public trust in politicians was low following the 2009 MPs’ expenses scandal. As Chris Wyllie, Connor Broadley’s Chief Investment Officer, is fond of saying “history doesn’t repeat itself, but it often rhymes”, and we find ourselves with a 2024 Labour government already attracting criticism for some early policy decisions (such as the winter fuel allowance debacle) but still needing to administer an unpleasant dose of medicine to the taxpaying public. It’s therefore unsurprising that a significant proportion of the budget speech was devoted to laying the blame for some £43 billion of tax rises squarely at the feet of the outgoing Conservative administration.

In recent years we have grown used to many of the main Budget measures being leaked in advance, either through official or unofficial channels. Although this year was no exception, a general expectation of bad news to come has fanned the flames of speculation. It was therefore reassuring to note that the Budget speech did not bring any major surprises.

As ever, we will focus our attention on those measures which will directly affect the world of personal finance.

ISAs

Many areas of key interest to personal investors remain, thankfully, unchanged, such as the annual ISA subscription allowance which will remain at its existing level of £20,000. There was no move to introduce any kind of lifetime cap, which had been feared. The £20k allowance has now been in force since April 2017, and would have been closer to £26,000 today had this kept place with consumer prices index (CPI) inflation.

Income tax allowances

On a related note, we have previously commented on the effects of “fiscal drag” – where a freezing of tax thresholds in monetary terms results in higher amounts of tax being paid as people’s earnings increase over time. There was therefore welcome news that the personal tax thresholds will, once again, start to be updated in line with inflation, but not until April 2028.

The income tax allowance has not seen a meaningful increase since 2019, with the £12,500 allowance introduced in that year being equivalent to c.£15,000 in 2024, and there will inevitably be further slippage over the next three years before this starts to increase again.

Pensions and Inheritance Tax

Pensions have also remained relatively unscathed – with one major exception, elaborated on below. Consistency in pension rules is a cornerstone of long-term planning, and it was encouraging to see that there will be no changes to either the annual allowance, which governs how much someone can pay into their pension each year, or the new lump sum allowance provisions which took over from the old “lifetime allowance” in April of this year.

A recurring theme in the enquiries received by Connor Broadley in the run-up to the Budget was speculation that the right to access 25% of your pension fund as a tax-free lump sum would either be removed completely, or severely restricted. Such a move would likely have decimated long term public confidence in the pensions system, and we were therefore pleased to learn that no such measure has been introduced. The maximum lump sum available remains governed by the lump sum allowance (LSA), which is currently £268,275 as standard, or potentially more if you had previously protected a higher lifetime allowance.

The biggest change to pensions relates to the tax treatment of death benefits payable from someone’s pension fund. From 6^th April 2027, these death benefits will form part of the deceased person’s estate for inheritance tax (IHT) purposes.

At the moment, most pension benefits can be passed on to someone’s beneficiaries after their death without any IHT charge applying. When we look at planning for someone’s retirement income, the current rules encourage investors to draw down on other assets which are subject to IHT first (for example, ISAs), thus preserving the value in the “IHT-free” pension fund. It will therefore be vital to review any existing withdrawal strategy to ensure that this remains suitable, once this rule change takes effect.

For reassurance, passing on pension funds to a legal spouse after death will remain exempt from IHT, under the existing spousal exemption rules, as well as any pension funds left to a registered charity. Any plans to pass on pension wealth to the next generation, will, however, need to be reviewed, in the context of the wider pension death benefit tax rules.

Guidance released immediately after the budget indicates that any potential IHT bill would effectively be split between the pension fund and the wider estate, in proportion to the value each part represents of the overall estate. We understand that the part of any IHT bill relating to the pension fund should be able to be paid directly from the fund, and that such a payment would not be considered a taxable withdrawal.

As ever, the devil will be in the detail, and it is likely to take some time for the longer term implications of this change to make themselves known. This will also bring with it practical challenges for executors, and we note that HMRC have opened a technical consultation regarding the processes which will be needed for pension providers to report and pay IHT from a deceased person’s pension funds. It is therefore possible that these new rules might be subject to change, and we will maintain a watching brief.

Other IHT changes

This pension change comes in tandem with broader reforms to the IHT system. The current IHT exemptions which apply to both agricultural property and to business property (such as shares in privately-held companies) will now be subject to a combined limit of £1 million, with only 50% relief (giving an effective IHT rate of 20%) applying to anything above that value.

This is potentially very significant as, by nature, these kinds of assets tend to have low levels of liquidity, or to put it another way, they are “asset rich but cash poor”. It is therefore very possible that underlying businesses or farmland, which may well remain viable as a going concern, would need to split up and sold to meet an IHT bill on death of the owner.

IHT relief on AIM-listed shares, which had previously formed part of the “business property” exemption noted above, has also been halved, with an effective IHT rate of 20% now applying to these holdings. It had been suggested that IHT relief on AIM shares might be removed completely, and in that context a reduction of “only” 50% in the available relief is welcome news, but this will naturally make investing in this market less attractive.

With these changes to agricultural and business IHT relief, and AIM shares, not taking effect until April 2026, anyone holding such assets will therefore have time to consider whether these will be retaining, or to plan towards providing the required liquidity when the time comes.

Capital Gains Tax

Next on the agenda was Capital Gains Tax (CGT), with potential increases broadly expected prior to the budget. Fears that CGT rates would be aligned with income tax were unfounded, instead an 8% increase in the standard rate of CGT (from 10% to 18%) and a 4% increase in the higher rate (from 20% to 24%) will come into immediate effect, as of 30^th October. The rates of CGT applicable to residential property will remain unchanged, as will the current annual exemption of £3,000.

Those who had taken steps to bring forward gains prior to the budget will therefore feel vindicated. Looking forward, these changes will further weaken the attractiveness of the CGT regime for investment compared to other vehicles, such as investment bonds, but as ever the suitability of any new or existing investment will need to be assessed on a case-by-case basis.

Business Asset Disposal Relief

There are also changes in the pipeline for Business Asset Disposal Relief (BADR), formerly known as “Entrepreneur’s Relief”, which will primarily affect business owners. The current lifetime limit on gains (£1m) will remain in force, but the discounted rate of CGT will rise from 10% currently to 14% from April 2025, before aligning with the standard CGT rates from April 2026.

Against a backdrop where a complete withdrawal of BADR was a strong possibility, this should be viewed as good news, and we fully expect to see a push for any pending sales to be completed prior to the applicable CGT rates increasing. Whether changes to tax rates result in any behavioural changes from business owners remains to be seen, but The Treasury seems to be banking on the principle that owners will sell when the time is right for them, rather than allowing the tax “tail” to wag the dog.

National Insurance

Finally, we should touch on the single biggest revenue earning measure in this budget – an increase in the rate of employer National Insurance Contributions from 13.8% to 15% from 6^th April 2025, in tandem with a reduction in the threshold at which these contributions need to be paid from £9,100 to £5,000.

This increase in employer’s NI has been introduced in tandem with an increase in the both the amount and scope of the Employment Allowance, which will help to soften the blow for smaller employers.

We would expect this increase in NI to have an immediate impact on short term profits of affected firms. In the longer term, the effects on jobs, growth, and wage increases will be harder to predict. We can expect business owners to review their remuneration strategies – salary sacrifice, for example, will become more beneficial, and we could see employers beginning to incentivise this more by passing on part of the resulting employer’s NI saving.

Summary

This Budget represents a significant turning point, marked by a balancing act between policy stability in some areas, such as ISAs and pension contributions, and strategic adjustments in others, like inheritance and business tax reforms. While many feared harsher measures, the announcements have mostly avoided drastic changes to core areas of personal finance, with the main impact being a revised approach to inheritance and capital gains taxes which invites proactive planning.

As always, the finer details of these changes may evolve, and we will continue monitoring the implications to support informed, strategic decision-making for our clients.