Budget 2024: what it means for your money

The wait is finally over. Rachel Reeves has delivered her first Budget as chancellor, and for savers, investors and borrowers it couldn’t have come soon enough.

Frenzied speculation around “painful” tax hikes made this year’s Autumn Statement the most eagerly awaited major fiscal event in recent times, as the new government laid out its plans to shore up Britain’s ailing economic foundations.

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“The only way to drive economic growth is to invest, invest, invest. There are no shortcuts. We must restore economics, stability and turn the page,” said the chancellor, before unleashing a £40 billion package of tax rises.

The speculation can now be put to bed; for now, at least. And while some will be relieved that the rumour mill proved off target in crucial areas of the tax system, many people's well-laid financial plans will have been derailed by today's reforms.

The definitions of “broadest shoulders” and “working people” threw up plenty of debate in the lead up to Labour’s first Budget in 14 years, and the discourse here will undoubtedly continue for some time yet. The government must also parry accusations about breaking a manifesto promise.

So, without further ado, let’s round up the good, the bad and the ugly and explain how it might impact you.

Employer national insurance hike

Reports late last week indicated that Reeves was planning to increase employer national insurance (NI) and these turned out to true.

In a blow to businesses, the main rate of employer NI will rise from 13.8% to 15%, and the secondary threshold, the level which employers start paying NI, will fall from £9,100 to £5,000 – a move that will raise £25 billion a year. These will take effect from 6 April 2025.

Businesses have fallen on the wrong side of tax changes in recent years. In April 2023, corporation tax was given a new top rate, rising from 19% to 25%, and the cuts to NI at the previous two major fiscal events benefitted employees and the self-employed – employers were left out.

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This decision has fired up debate around whether Labour has broken its manifesto promise not to raise taxes on working people. Higher employer NI rates will hurt the profit margins of incorporated businesses of all shapes and sizes, even those with either a small number of staff, or freelancers and contractors who draw a salary of more than £5,000.

If you operate as a sole trader or in partnership with one or more others, the hike won’t impact you.

Capital gains tax on shares to rise

Increases to capital gains tax (CGT) have dominated the rumour mill in the past two months, and Reeves has switched things up here.

The rates payable on sales of shares have been hiked from 10% to 18% on anything (when added to income for the year) that falls below £50,270, and from 20% to 24% at the higher rate. Importantly, the changes will take effect from midnight.

This means the CGT regime has been equalised across all assets, as sales of residential properties are already taxed at 18% and 24%.

While this will jack up the tax bills of those who sell investments outside tax wrappers, such as individual savings accounts (ISA) and pensions, there is a sense it could’ve been a lot more painful.

Early reports suggested rates could be raised in line with income tax, and this would’ve been the nuclear option, but fortunately for investors, the government opted for something tamer.

There was also reform for business asset disposal relief, which will remain at 10% for this year, but hike to 14% April 2025, and to 18% in 2026-27. 

Big changes to inheritance tax

Another tax that hogged pre-Budget speculation was inheritance tax (IHT), and Reeves announced several big changes here.

The biggest was the move to scrap the IHT exemption on pension savings, which will take effect in April 2027.

I’m yet to check the finer details, but presumably this means that your pension pot will form part of your estate on death and anything above your tax-free allowances, that isn't left to a spouse or civil partner, will be taxed at 40%. This will be a painful blow to many savers who have beefed up their pension pots to harness the IHT benefits and will remove the allure of using the tax wrapper for estate planning purposes.

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Elsewhere, there were significant changes to business relief and agricultural relief.

These will remain 100% tax free for the first £1 million of any assets passed down, but only 50% relief will be available for anything above. The chancellor said that three-quarters of claims will be unaffected by the changes.

But for those who are impacted, it may prompt a rethink to their succession planning strategies, as beneficiaries may now be hit with a large tax bill from HMRC, which may eat into profitability. Businesses and farms have until April 2026 to work things out, but it’s best to start the planning process as soon as possible so that they can protect themselves from the chancellor’s tax raid.

Reeves also revealed that the tax-free lifetime thresholds, the nil rate band and the residence nil rate band, will be frozen at £325,000 and £175,000, respectively, until 2030.

Finally, as many had predicted and indeed feared, the IHT perks on AIM shares were also targeted. You will now only get 50% relief on eligible shares held for two years, instead of 100%. The government reckons this will affect around 0.3% of estates each year.

Other parts of pension framework left alone

Other than the decision to scrap the IHT-exemption, Reeves left everything else within the pension framework untouched, despite pre-Budget rumours which pointed towards heavy reform. Speculation here had become so feverish that savers were hooking out their tax-free cash in fear that the maximum would be axed or heavily reduced.

However, the maximum amount you can draw tax free from your pension remains at £268,275 (or 25% if lower), and you can still claim upfront tax relief at your marginal rate.

Pain of frozen tax thresholds to end in 2029

Labour’s claim that it will not increase taxes on working people is only partly true. That’s because the party pledged to keep income tax thresholds frozen until 2028. This rather stealthy way of raising tax revenues, means more people will either trip into the tax net or be pulled into higher bands as their incomes rise.

There were concerns the government may prolong the freeze for two more years until 2030. But in a surprise move, Reeves said that from the 2028-29 tax year, income tax bands will increase in-line with inflation, bringing fiscal drag to an end.

State pension rise rubber stamped

Retirees were given something to cheer after Reeves confirmed that the state pension will rise an inflation-beating 4.1% from April, as expected. This will increase the full state pension to £11,975 a year, while the annual basic state pension will tick up to £8,821.

What we didn’t get was any clarity on the state pension’s future, namely whether the current schedule to increase the claiming age to 68 will be accelerated.

VAT on private school fees confirmed

This was one of the big policy announcements during the early weeks of Labour’s return to power.

Reeves used this Budget to confirm the government will be pressing ahead with its promise to charge VAT on private school fees.

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A report published in late July outlined: “As of 1 January 2025, all education services and vocational training supplied by a private school, or a ‘connected person’, for a charge will be subject to VAT at the standard rate of 20%. Boarding services closely related to such a supply will also be subject to VAT at 20%.”

The report added: “Any fees paid from 29 July 2024 pertaining to the term starting in January 2025 onwards will be subject to VAT.”

National living wage to increase

Yesterday it was revealed the national living wage will rise to £12.21 an hour from April, a hefty 6.7% jump, with more than three million low-paid workers set to benefit. The baseline amount for workers aged 18 to 20 will go up a massive 16% from £8.60 to £10.

British ISA officially scrapped

In the red pages, the government confirmed it will not proceed with the British ISA due to mixed responses to the consultation launched in March 2024.