Autumn Budget 2024: How will it affect you?

The Labour government’s first Budget since 2010 introduced a package of tax increases to the tune of £40 billion, but which fiscal measures are most likely to impact you and your family?

When Rachel Reeves stepped up to the despatch box on 30 October she knew she was making history as the first female chancellor to deliver a Budget. Yet as the largest tax-raising Budget in over three decades, the contents of her red box are likely to live longer in people’s memories.

The headline money-maker for the Treasury was, on the surface at least, a raid on businesses by way of a 1.2% hike in employer national insurance (NI) and a reduction in the 'secondary threshold', the level at which employers start paying NI on each employee's salary, from £9,100 to £5,000. The employment allowance rises from £5,000 to £10,500 to protect small companies.

Decisions to leave employee NI, income tax and VAT rates unchanged, maintain the triple lock (meaning the state pension will rise by 4.1% in 2025), continue the freeze on fuel duty and increase the National Living Wage by 6.7% might leave many individuals feeling quite relieved.

However, for those who have invested diligently for retirement, and their descendants, changes to capital gains tax (CGT) and inheritance tax (IHT) reliefs could have significant consequences.

Unexpected tax bills coming?

Effective from 30 October 2024, the main rates of CGT have increased from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher and additional rate taxpayers. These changes have brought the main rates of CGT into parity with the rates for residential property.

Given there was speculation that CGT rates could rise even higher, aligning them with rates of income tax, some people might be feeling this particular news could have been worse. But when combined with other changes in recent years, it now only takes a relatively modest-sized GIA (general investment account) portfolio to trigger taxable gains and taxable dividend income.

That’s because of reductions in the dividend allowance, from £5,000 in the 2016/17 tax year to just £500 in this tax year, and the drop in the capital gains annual exemption from £12,300 in the 2022/23 tax year to £3,000 in this tax year. A lot of people might not realise the CGT hikes in the Budget impact them, but even moving money from a GIA to an ISA could trigger a taxable gain.

“One group I’m greatly concerned for is pensioners, or really anyone who relies on investment income outside of tax-free wrappers, as many of them won’t be aware their investment income and gains have become taxable,” says Gill Philpott, Tax and Trust Manager at Ascot Lloyd.

“It was clear in the Budget that they are investing heavily to deal with compliance, 5,000 new staff in HMRC, and they're looking at obtaining data from third-party sources. A few years ago, the Office of Tax Simplification recommended that all providers give HMRC details of income and gains on investment portfolios. So, I expect, at some point, to see HMRC writing to anyone with a GIA who has exceeded the CGT and dividend allowances and asking them to correct their tax position.

“Some pensioners in the next three or four years could be in for a little bit of a tax surprise. Many people might be feeling the Budget doesn’t affect them very much, but advisors need to be focused on helping pensioners understand their tax position before HMRC comes calling.”

Protecting your legacy

If you or somebody whose estate you are likely to inherit have a sizable amount of pension savings, the most consequential announcement in the Autumn Budget will undoubtedly be the decision to no longer exclude pension pots and death benefits from estates for IHT purposes.

While the primary aim of saving into a pension is to fund retirement, the protection from IHT has also made pensions a popular tool for legacy planning over the years. From April 2027, that protection will end meaning the value of pension pots will be added to the value of your other assets when you die and if the total exceeds your IHT threshold or is not otherwise covered by and exemption,  an IHT charge will be payable.

Reeves revealed IHT thresholds will remain frozen until 2030. The nil rate band has been fixed at £325,000 since 2009-10, while the residential nil rate band (RNRB) has given people who pass their home to lineal descendants an extra £175,000 since 2020-21. If your estate is passed fully to your spouse or civil partner, they also inherit your allowances, giving a total nil rate band of up to £1 million. However, RNRB is withdrawn by £1 for every £2 on estates over £2 million.

While there will be various consultations before pensions are brought into estates for IHT purposes in 2027, as it stands the government intends to still require that beneficiaries pay income tax on inherited pensions if you die over 75. This means that with IHT and income tax combined, a beneficiary could face an effective tax rate of up to 67% on an inherited pension (if the beneficiary is an additional rate taxpayer). 

“There are a lot of people who went into the Autumn Budget with little or no prospect of their beneficiaries facing a tax bill when they die but are now facing a very real prospect of potentially quite a significant tax bill,” says Mark Rodgers, Independent Financial Adviser at Ascot Lloyd.

“For a relatively sophisticated retail client, the primary aim to fund a pension was for retirement. However, they also knew as a byproduct that it was IHT friendly. Very few people funded pensions entirely to avoid IHT – they funded pensions to support them in retirement – but there's no doubt the protection from IHT impacted how much many people put into pensions, especially once the lifetime allowance was abolished." 

The value of advice

Elsewhere in the Budget, buy-to-let investing as a retirement strategy experienced another blow, as the Stamp Duty Land Tax surcharge applied to purchases of additional residential dwellings has risen from 3% to 5%. VAT will be payable on private school fees at 20% from 1 January 2025 and the non-dom tax regime will be replaced in April 2025 with a new residence-based scheme. The government has also committed to ending the use of offshore trusts to avoid IHT.

However, it’s the changes to CGT and IHT reliefs, the latter in particular, which are likely to have the most enduring effects on retirement and estate planning in the UK.

Additional changes include no longer fully exempting AIM-listed shares from IHT, which will be applied at 20% from 6 April 2026 if they’re held for two years. This will mean AIM portfolios will need to be reviewed as the anticipated IHT savings will be reduced by half.  The significant reduction in agricultural property relief and business property relief will affect not only investors in IHT product that invest in unquoted trading companies but will have a big impact for cash-strapped farms and family-owned businesses and could prevent them from being passed onto the next generation. The 100% IHT relief will be limited to the first £1,000,000 of agricultural or business property value and any value above this limit will be subject to IHT at 20%.

As people seek to navigate this new landscape, a more multi-layered approach to retirement planning, including tax and estate planning, could be required. Preparing a robust financial plan that ensures the most successful retirement possible, while protecting your legacy, could become more complex, making the value of advice even more crucial.

“I think it could open up a more diverse approach to retirement planning which intricately balances exposure to ISAs, EIS, VCTs, equities, bonds, AIM portfolios,” says Rodgers, “Will people edge slightly away from pensions and slightly closer to ISAs? Will people need to change their drawdown strategies? Will they need to look at gifting strategies and trusts? Will annuities become more attractive to clients wanting to guarantee they don’t run out of money during their lifetime?  

“These are the conversations we're going to be having with clients, sooner rather than later, and I think our recommendations are going to be more diverse, tailored and multi-layered moving forward. I've got so many clients I've never spoken to about IHT before. Yes, they're wealthy, but they're pension asset wealthy, and many just won’t know what's coming. It's a hell of an opportunity for us to really demonstrate the value of advice and what we can do.”

Speak to your financial adviser about how any of the announcements in the Autumn Budget will impact you, and how to build the right plan to meet your retirement and legacy goals. Alternatively, you can also request a call back.