With the Budget now behind us, it’s clear there are broad fiscal changes in hand. In this blog we review the more specific ‘pinch points’ that are likely to have an impact on aspects of your financial plan.
Changes for business owners
There are several changes in legislation that are likely to impact business owners moving forwards. These include:
National Insurance Contributions
For business owners, the increase in employer’s National Insurance contributions from 13.8% to 15% (and reduction in the initial threshold for payment of it) represents an 8.7% increase in their NI costs. We expect salary sacrifice pension arrangements to become more popular as these save national insurance for both the employer and employee.
This has been assessed by the Institute for Fiscal Studies as being likely to result in lower wage growth in future, and increases the total cost for employers of retaining staff.
Whilst this will not affect individuals who are retired or self-employed, the cumulative impact of additional employment taxes will be felt in the months after April 2025 when this measure comes in.
Business Asset Disposal Relief (formerly Entrepreneurs’ relief)
For business owners and entrepreneurs, it is notable that the rate of Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief) will be increasing from 10% now, to 14% from April 2025, and 18% from April 2026. This could materially increase the tax cost of disposing of a business, which might have been built up over a lifetime of work.
Regarding business relief, AIM shares from April 2026 only attract a 50% reduction in IHT. Business property relief still receives 100% relief up to £1,000,000 (combined value with any agricultural relief) and 50% after this. So, the risk reward of maintaining AIM shares and business relief products above £1,000,000 will need to be assessed.
Little relief for farmers
For farmers, the capping of their specific relief from IHT at £1 million, and then making all estate values above this subject to IHT at 20% is a controversial matter and has resulted in a strong response from National Farmers Union President Tom Bradshaw, who has warned that it will impact UK food security.
The £1,000,000 cap applies across Business Relief and Agricultural Relief.
Capital Gains Tax rises
For investors, the immediate increase in the rate of Capital Gains Tax (CGT) from 10% to 18% in the basic rate, and 20% to 24% at the higher and additional rates, was arguably less than was feared beforehand. Whilst it does increase the tax burden on asset disposals, this change is not enormous.
The already reduced allowance of £3,000 brought the use of onshore and offshore bonds (rather than general investment accounts) into higher consideration, depending on a client’s tax and greater circumstances.
The rise in CGT rates further impacts this as gains on bonds are tax deferred and subject to Income Tax as opposed to CGT. Even so, it should be noted that capital gains are still rebased at death without incurring CGT.
The £3,000 allowance, whilst modest, is more valuable to use now that capital gains rates have increased. Use of bed and ISA and bed and pensions earlier in the tax year will often make sense.
Pensions death benefits and Estate Planning
Another and most notable change surrounding IHT is the inclusion of unused pension assets into the scope of IHT with effect from April 2027. The spousal exemption for IHT still applies and so revisiting expression of wishes may be necessary. Consolidation of pensions should also be considered to reduce complicated administration on probate.
Most people own a house, and most people have a pension, so the consideration of pensions within IHT will result in a higher proportion of the overall population paying this tax. As prices rise but the IHT exemptions remain frozen, more people are likely to be drawn into paying IHT via the dual effects of fiscal drag, and the inclusion of pensions within scope.
Whilst pensions are still an excellent retirement planning tool, they will no longer be an estate planning vehicle. However, lump sum payments will still be income tax free in the hands of beneficiaries if death occurs before the age of 75, up to the lump sum death benefits allowance. Alternatively, beneficiaries can continue to take death benefits as part of a drawdown arrangement without paying income tax, again provided death occurs before age 75.
After age 75, there will be more argument to withdrawing and gifting tax-free cash (directly or via a trust), which would become subject to income tax in the hands of beneficiaries, as well as IHT on the estate. By making use of the regular expenditure out of income exemption, the possibility exists to potentially sidestep the usual 7-year clock by taking regular habitual withdrawals and gifting them away. Another planning point might be to withdraw pension income within the basic rate band to fund life cover to pay the IHT.
For more information on the relationship between trusts and IHT you can read our blog here.
How we can help you
Overall, though the public was well aware that taxes were being increased, it is suspected on balance that this Budget is being tolerated rather than welcomed.
If you are concerned with the above potential financial impacts, we are here to help. Whether you require assistance managing your estate, planning your wealth tax efficiently or need guidance with your business, our extensive team of professional advisers can help you prepare for the future with these legislative changes in mind. Please don’t hesitate to contact us.
Important Note
The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
This article is distributed for educational purposes only and should not be considered financial advice.
If you are unsure about the suitability or otherwise of any product or service, we recommend that you seek professional advice.
The opinions stated in this document are those of the author and do not necessarily represent the view of Progeny and should not be relied upon to make a financial decision.
Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
If you are unsure about the suitability or otherwise of any product or service, we recommend that you seek professional advice.
Tax treatment depends upon individual circumstances and is based on current UK tax legislation, that is subject to change at any time.
The Financial Conduct Authority does not regulate will writing and some forms of estate planning.
