In Labour’s first Budget since coming to government, the Chancellor Rachel Reeves said difficult decisions had to be made to prioritise investment in public services and fix the NHS.
These decisions include raising taxes by £40 billion - the most significant tax rise announced by a Chancellor in recent history. The bulk of the £40 billion will come from:
- National Insurance (NI) increases for employers;
- changes to capital gains tax (CGT);
- changes to Inheritance Tax (IHT); and
- adding VAT to private school fees.
What does all this mean for you and your money? Keep reading to find out how Labour’s first Autumn Budget could impact your savings, pensions and investments.
National Insurance (NI) increase for employers
Around £25 billion will be raised by increasing employer NI contributions from 13.8% to 15% of an employee’s earnings from April 2025. NI will also be payable once an employee starts earning more than £5,000 a year (2025/26), compared with £9,100 (2024/25).
While this could mean a significant rise in a company’s NI bill, there’s some relief for the UK’s smallest businesses. Employment Allowance - the discount given to employers with annual NI bills of less than £100,000 - will increase from £5,000 to £10,500 from April 2025. This means 865,000 employers won’t pay any NI at all next year.
What could this increase in employer NI liabilities mean for you and your pension? It may make pension schemes operated through salary sacrifice more tempting to employers. With salary sacrifice, your pay is effectively reduced with the difference paid directly into a pension or other benefit. Because your pay is lower, it’ll decrease your employer’s NI bill.
Inheritance Tax (IHT) and pension changes
Prior to the announcement on 30 October 2024, there had been much speculation about the potential for Labour to increase or change IHT.
The IHT rate is 40% on amounts above £325,000 - or £500,000 (2024/25) if you’re passing on a property to a child or grandchild. This rate remains frozen until 2030. There’s an exemption on IHT being paid when assets pass between spouses. This means that you could have an allowance of up to £1 million before any IHT is due if you have received the full allowance from your spouse, and your estate includes your home. It’s worth noting that only 6% of people in the UK pay IHT.
It’s currently the case that money held in a pension is counted as being outside your estate for IHT. However, Rachel Reeves announced in the Budget that pensions will be liable for IHT from 2027 if the total amount you leave to beneficiaries is above the existing thresholds. This is expected to bring in £1.46 billion for the Treasury in 2029/30.
Director (VP) Public Affairs at PensionBee; Becky O’Connor says: “This will be hugely disappointing to those who see this as a key benefit of pensions, knowing that any money they don’t use themselves can go to their beneficiaries tax-free. It’s likely to mean that wealthier pension savers look for other places to invest.”
Whilst it means pensions will soon no longer come with generous IHT exemptions, pensions are still a tax-efficient way to save and pass on money. Most UK taxpayers get tax relief on payments made into a pension in line with your income tax bracket. Usually basic rate taxpayers get a 25% tax top up and higher and additional rate taxpayers can claim a further 25% and 31% respectively through their Self-Assessment tax returns.
The money in a pension can also grow tax-free, meaning it has the potential to grow further over time. There are also tax benefits when you withdraw money from your pension. From age 55 (rising to 57 from 2028) the first 25% you withdraw is tax-free, the rest is taxable as income.
Higher National Minimum Wage and National Living Wage
From April 2025, the National Minimum Wage for 18-20 year olds will increase by 16.3% to £10.00 per hour, meaning an increase of annual earnings of over £2,500 (based on 35 hours a week) for nearly 200,000 young people across the UK.
The National Living Wage for workers aged 21 or older will rise by 6.7% from £11.44 an hour to £12.21 from April 2025. This means a pay rise for more than three million people. Someone working full-time, or 35 hours a week, would see their pay rise by £1,400 from £20,820.80 (2024/25) to £22,222 (2025/26).
Alongside getting more money in your pocket, your pension will also get a boost if you’re on the National Living Wage. If you qualify for Auto-Enrolment and your employer makes contributions on your qualifying earnings, you’ll have £1,278.56 going into your pension from April 2025, up from £1,166.40 (2024/25). This could give a welcome boost to your retirement funds, especially if compounded over time.
Increase in capital gains tax (CGT)
CGT is to rise from 10% to 18% for those paying the lower rate, and the higher rate will rise from 20% to 24% with immediate effect.
Remember, investments held in an ISA or pension aren’t subject to CGT. The tax only applies to property or other investments held outside a tax-efficient account.
You also have an annual allowance of £3,000 profit on the sale of an asset before CGT is owed.
Inheritance Tax and AIM-listed shares
It’s currently the case that investments into AIM-listed companies that qualify for business relief are exempt from IHT – if held for at least two years and at the point of death.
The Chancellor has said this may soon no longer be the case. Investments in AIM-listed companies and other investments that qualify for business relief may now be liable for IHT at an effective rate of 20% from April 2026.
VAT on private schools
As expected, the government has confirmed that VAT will be added to private school fees from 1 January 2025, aiming to raise £9 billion. The VAT rate is 20%. With average private school fees at around £15,600 a year, the addition of VAT could increase fees by around £3,000 a year.
Summary
Labour’s 2024 Autumn Budget announced significant tax rises to meet the needs of public spending, but most of these higher taxes will be paid by businesses. However, as regards NI increases, this will likely negatively impact the health and competitiveness of the UK labour market and therefore employees, as future wage increases and hiring in the UK are put at risk, especially for those employed by smaller and medium-sized businesses
Individuals that may be most affected are those with a high level of savings and assets that may be subject to CGT or that may make your estate liable for IHT or other taxes.
Elizabeth Anderson is a Personal Finance Journalist and Editor (Times Money, Metro and i paper).
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
