Halloween Budget delivers ghoulish measures

Myron Jobson, Senior Personal Finance Analyst at interactive investor, says: “There has been a palpable sense of fear in the long run-up to the Halloween Budget amid ominous rhetoric from the government that drastic actions would need to be taken to address the multi-billion-pound black hole in public finances. As expected, a host of tax rises were announced as part of efforts to get public finances back on an even keel.

• Invest with ii: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

“This will all taste particularly sour to employers, who will seemingly do the majority of the heavy lifting, with measures like the increase in employers’ National Insurance set to shift the dial for the government the most. The reduction in the threshold at which NI is paid to £5,000 was another somewhat unexpected blow for businesses. The measures are a bitter pill to swallow for businesses and come a year and a half after corporation tax rose from 19% to 25%.

“Investors will also bear some of the burden, with changes to the capital gains tax regime set to result in a higher tax bill on gains made from investments held outside a tax wrapper like ISAs and SIPPs, above the £3,000 tax-free allowance. The inheritance tax relief on AIM shares will also be less generous. People set to receive an inheritance could be worse off as pensions, typically an individual’s biggest assets along with property, will be included in IHT calculations as of April 2027.

“In a Budget full of gloomy announcements, there were some rays of light. Fiscal drag won’t be extended beyond 2028, the national living wage will indeed increase—with the youngest adults set to benefit from a significant increase—and the Employment Allowance will increase, allowing businesses to offset some of the heightened NI tax burden.

“Ultimately, the Budget couldn’t come soon enough for savers and investors, many of whom have adjusted their assets based on the litany of speculation in the long run-up to the Budget. Fears of a less generous investment taxation regime have provided extra impetus for investors to do what they should already be doing: making the most of the tax-efficient ISA wrapper, which shields gains and income generated from investments from tax.

Government to bring pensions into inheritance tax 

“Pensions being shielded from IHT has been a cornerstone of retirement planning. Removing this benefit is set to lead to substantial tax liabilities for heirs and alter the calculus of intergenerational wealth transfer.

“In this new paradigm, pensioners might be more inclined to draw down their pension pots during their lifetime, rather than preserving them for inheritance purposes. This could lead to a shift in focus towards other tax-efficient savings vehicles, such as ISAs. 

“The ISA versus pension debate, therefore, could gain fresh momentum. ISAs offer the advantage of tax-free growth and withdrawals. Pensions, on the other hand, still provide upfront tax relief on contributions and potential for employer contributions, but their appeal may be blunted somewhat by the new inheritance tax considerations.”

ISA allowance to remain frozen until 2030

“The deep freeze in ISA allowances until 2030 will hit the minority of investors who are able to make full use of them. A frozen ISA allowance amounts to a cut in real terms because it doesn’t keep up with inflation. Inflation reduces the purchasing power of money over time, meaning that a fixed ISA allowance allows you to save less in real terms each year if you are maxing out the allowance. As prices for goods and services increase, the value of the unchanged allowance diminishes, limiting the amount you can invest tax-free.

“Essentially, without adjusting for inflation, the frozen allowance leads to a de facto reduction in its value.”

National Insurance hike for employers

“A lot of the discussion leading up to the Budget centred around what constitutes ‘working people.’ Regardless of your definition, the budget announcements are likely to impact every type of worker. In particular, the increase in NI for employers could also have a knock-on effect on wages offered by businesses and inflate the cost of the goods and services they offer to mitigate the heightened cost burden.

“This move could encourage employers to lean on the existing salary sacrifice regime, which is a win-win benefit that allows workers to lower their taxable income enough to avoid being ensnared by tax traps like the High-Income Child Benefit Charge and personal allowance withdrawal between £100,000 and £125,140. It also allows employers to reduce their National Insurance tax burden.

“The measure could also have a significant impact on a different yet equally important group of working people: freelancers and contractors who operate through an umbrella company to act as an intermediary between them and their clients.

“In most cases, the umbrella company employs a freelancer/contractor and pays their wages through PAYE. As such, the increase in NI for employers threatens to reduce the take-home pay for hundreds of thousands of freelancers. While any tax hikes may be passed down to the end client, this might not always be an option for freelancers in competitive sectors.

“On the flip side, the employer NI exemption on salary sacrifice pension contributions has remained unchanged. This is welcome news for many umbrella contractors as this saving is passed directly on to them.”