Key points
- Pension death benefits to be included in estates for inheritance tax purposes from April 2027.
- Immediate rise in capital gains tax rates for disposals of non-property assets.
- Business Relief to be reformed and subject to a monetary cap from April 2026.
- Employer’s National Insurance rate to be increased from 13.8% to 15.00% from April 2025.
Pensions
Tax Relief on Pension Contributions
Contrary to many pre-Budget guesses, tax relief on pension contributions will not change.
Taxes on Taking Pension Benefits
Prior to the Budget, there were numerous rumours relating to the amount of pension “tax-free cash” which can be taken.
Broadly speaking, the maximum amount of tax-free cash or – to use its proper name – Pension Commencement Lump Sum (“PCLS“) which can be taken from personal pension plans is limited to the lower of 25% of the value of pension benefits or the Lump Sum Allowance (“LSA“), which is set at £268,275.
There are different calculations for Defined Benefits plans, but the same LSA applies.
In the Budget, Reeves confirmed there will be no changes to the LSA, meaning there will be no changes to the amount of PCLS which can be taken.
Taxes on Death
The tax treatment of pension death benefits is complex. Broadly speaking, lump sum death benefits from a pension member who passed away before their 75th birthday are tax-free up to the deceased’s Lump Sum and Death Benefits Allowance (“LSDBA“), as long as they are paid within two years of death. For most people, the LSDBA is £1,073,100.
Otherwise, lump sum pension death benefits are subject to income tax. This is assessed on the recipient of the death benefit (not the deceased).
It is worth noting the LSDBA is not only tested on death. Pension lump sums taken during a pension member’s lifetime (e.g., “tax-free cash” on retirement) also use up the LSDBA.
In the Budget, Reeves announced the LSDBA will not change. However, from April 2027, pension lump sum death benefits will be assessed under Inheritance Tax rules.
Surprisingly, there will be no special rate or additional allowance. Instead, the value of pension benefits will simply be added to the estate of a deceased person.
This is a very controversial change.
Trust and tax rules allow payments made from a Trust to a beneficiary to be free from Inheritance Tax as long as any such payment is made at the sole discretion of the Trustees of the Trust. This is a longstanding and widely-accepted rule.
Pension benefits are (almost always) held on Trust, normally with the pension provider acting as a Trustee. The Trustee will always ask pension plan members to complete a “nomination form” to indicate who the pension member would like to be considered for pension death benefits.
Anyone who reads the fine print on these forms will see this is treated only as a suggestion to the Trustees. The eventual beneficiary/beneficiaries is always decided by the pension Trustees. In legal terminology, the death benefits are paid at the Trustee’s discretion.
We have seen this play out in practice – for example, someone passed away while he was still legally married to his estranged wife and where his estranged wife was nominated on his pension death benefits form (dated decades before he passed away). He had been in an interdependent financial relationship with his partner for the 10 years leading up to his death. The pension Trustee ignored the marital status of the deceased and ignored his nomination form, choosing to leave all the death benefits to his partner.
By incorporating pension death benefits into Inheritance Tax rules, Reeves has upended this longstanding set of principles and rules. This could ultimately be subject to legal challenges, which potentially means this change might be amended or rolled back.
To book a free initial meeting with one of our advisers to discuss changes to pension rules, please call 01642 477758 or visit our Contact page.
Savings and Investments
ISAs
Reeves confirmed the ISA allowance will remain at £20,000. On one hand, it is good the allowance has not been reduced.
On the other hand, the allowance has been frozen at £20,000 since April 2017. The cost of living has risen around 30% in that time, meaning the allowance should now be £25,000 just to keep pace in inflation terms.
There were some rumours about the tax-free status of ISAs being capped at £500,000 (or a different amount). This would have been unworkable in practice, given the fact stocks and shares ISA values change from day to day. As expected, no such changes were announced in the Budget.
Inheritance Tax
Gifts
The Inheritance Tax treatment of gifts is complex. Broadly speaking, the first £3,000 of gifts per tax year is exempt, as are any number of smaller gifts up to £250 per gift. Gifts made out of normal income (which do not affect the standard of living of the donor, and which are regularly made at the same amount) are normally exempt from Inheritance Tax.
Lifetime gifts to Trust are tax-free up to £325,000. Above this amount, the gift is liable to lifetime Inheritance Tax at a rate of 20%. These gifts also use up the donor’s Nil Rate Band (currently £325,000), potentially exposing the donor’s estate to more death tax for up to seven years.
Gifts to individuals are free from lifetime Inheritance Tax. However, they could become subject to Inheritance Tax on the death of the donor within seven years of the gift (or – in some cases – within up to 14 years of the date of the gift).
In some cases, “taper relief” can be applied. However, this is less common than many people think. This is because taper relief only applies to gifts above £325,000.
In the Budget, Reeves did not announce any changes to gifts for the purposes of Inheritance Tax planning.
Business Relief
Business Relief was introduced to allow certain business assets to be left either free of Inheritance Tax or at a reduced rate of Inheritance Tax. Without this relief, businesses could be severely disrupted by a tax bill on the death of the owner, potentially leading to less economic growth and job losses.
The wording of the Relief means it applies to qualifying shares in “unquoted companies”. This includes shares in limited liability companies and companies which are publicly traded on the Alternative Investment Market or “AIM”.
Critics of the Relief being extended to cover AIM shares argued there is no need to grant an Inheritance Tax benefit to shares listed on the AIM which is not available to similar companies which are listed on the FTSE.
Proponents argued this Relief incentivised investment in smaller UK companies which have the potential for significant growth, which otherwise could be “unloved” by investors.
Some investment managers made the most of these rules by offering investment into limited company shares where the limited company invests into companies which should qualify for Business Relief. The value of the limited company shares would then be exempt from Inheritance Tax.
In the Budget, Reeves announced several changes, all of which will take effect from April 2026:
- AIM shares (or similar) will now benefit from 50% relief instead of 100% relief.
- The first £1 million of Business Relief (combined with Agricultural Relief) from non-AIM (or similar) qualifying assets will continue to benefit from full relief from Inheritance Tax relief.
- Otherwise, claims above £1 million will attract 50% relief.
Reeves stated three-quarters of claims will be unaffected by these rules.
Nil Rate Bands
The amounts which can be left free of Inheritance Tax are:
- Up to the lower of £175,000 or the value of a home left to children or grandchildren (the Residence Nil Rate Band or “RNRB“), plus
- Up to £325,000 for all other assets (the Nil Rate Band or “NRB“)
Married spouses and Civil Partners can leave any unused RNRB and/or NRB to their surviving spouse/Partner.
The NRB can be used up by gifts made before death.
The Tories froze these sums until April 2028. In today’s Budget, Reeves extended this freeze until April 2030.
Pensions
As explained under the “Pensions” section of this blog post, lump sum death benefits from pension plans will become subject to Inheritance Tax.
To book a free initial meeting with one of our advisers to discuss Inheritance Tax, please call 01642 477758 or visit our Contact page.
Capital Gains Tax
Rates
The application of Capital Gains Tax rates is relatively complicated – first, a taxpayer must consider all their taxable income (e.g., wages, dividends, rental income, pensions), then consider how much of the taxable gain – if any – falls under the basic rate income tax threshold when added to their other income.
The basic rate income tax threshold is £37,700, so someone with a standard Personal Allowance of £12,570 can earn £50,270 before they start paying higher-rate tax.
Any amount of gain which falls under the basic rate income tax threshold is subject to the “Basic Rate” shown in the table below, otherwise the “Higher Rate” applies.
In a widely-anticipated change, Reeves confirmed the Capital Gains Tax rates will increase. This is set out below:
| Description | Previous Rate | New Rate |
|---|---|---|
| Residential Property - Basic Rate | 18% | 18% |
| Residential Property - Higher Rate | 24% | 24% |
| All Other Gains - Basic Rate | 10% | 18% |
| All Other Gains - Higher Rate | 20% | 24% |
As you can see from the table, different rates previously applied to residential property relative to other investments.
Effective immediately, this is no longer case.
This is a significant deviation from pre-Budget rumours, which expected rates to rise up to around 39%.
Allowance
The Capital Gains Tax allowance – properly known as the Annual Exempt Amount – will remain at £3,000 per person and £3,000 for Trustees.
Tax on Death
It was also confirmed capital gains tax will still not apply on death.
Income Tax
Allowances
The Tory government froze the Personal Allowance, basic rate income tax band, and higher rate income tax band at £12,570, £37,700, and £125,140 (respectively) until April 2028.
Going against many pre-Budget rumours, Reeves confirmed there will be no longer-term freezes in income tax allowances.
Instead, Reeves confirmed there will be increases to the above in April 2028, which she said will be in line with inflation.
This is a surprise move, because such “stealth taxes” are a often highly popular option for politicians – they have the potential to raise significant sums over time, but are not thought of as a tax increase by most people (such as an increase in tax rates or outright cuts in tax allowances).
Rates
Labour’s manifesto promised not to increase income tax rates. No changes were announced by Reeves, meaning the manifesto pledge has been honoured.
Employer’s National Insurance Contributions
Rate change
The rate employer’s pay will increase from 13.8% to 15.00% from April 2025. Also, this rate will apply to more of an employee’s earnings – previously it was only payable for earnings exceeding £758 per month (£9,100 per year), but it will now apply to earnings above £416 per month (£5,000 per year).
To protect smaller businesses, the employment allowance will increase from £5,000 to £10,500. Smaller businesses do not pay any employer National Insurance Contributions until their bill exceeds the employment allowance.
These changes have already been criticised for a number of reasons:
- Public sector entities (e.g., NHS trusts) will be reimbursed for the additional expense, meaning it will fall solely on the private sector – going against the premise of delivering economic growth.
- There was no mention of the voluntary sector being exempt from this change, meaning charities will face funding shortfalls.
- Some claim this breaches Labour’s manifesto pledge not to increase the rate of National Insurance Contributions. Reeves argues employees will not notice a difference, but this is unlikely to be the case when employer’s next consider pay packages for their employees.
Employer pension contributions
Contrary to many pre-Budget expectations, employer pension contributions will not be subject to employer National Insurance Contributions.
This includes contributions made on behalf of an employee by way of salary sacrifice (also known as salary exchange) and contributions made by limited companies on behalf of employed directors.
Owners of small businesses can request a free initial meeting with one of our advisers to discuss making tax-efficient company pension contributions. Call 01642 477758.
Summary
This was always likely to be a controversial Budget. The Tories rarely announced negative changes (although the negative changes it did announce were very harmful to our clients, including cuts to tax-free dividends, tax-free capital gains, and higher dividend tax rates).
Infamously, the previous Tory Chancellor even made two consecutive reductions in National Insurance Contributions rates, despite the economy still reeling from the economic impact of the pandemic.
So a large number of tax hikes was always going to prove unpopular. In Reeves’ case, this was amplified by the fact Labour’s campaign included repeated promises not to raise taxes, even though it promised more spending and investment.
In addition, Labour vowed not to increase the “big four” tax earners for the government: income tax, national insurance contributions, VAT, and corporation tax. This meant it has to raise a large amount of money from a small number of taxes.
Ultimately this has materialised as expected: a relatively small number of people will pay more in tax.
Proponents will argue those who can afford to pay more (those with “broader shoulders”, in the words of Keir Starmer) should pay more.
Critics will argue wealthier people already contribute a disproportionate share of tax revenue. They will also highlight the potential for wealthy people to legally reduce their future tax bills – possibly by moving their capital and their spending outside the UK. This will leave a greater tax burden to be picked up by those lower down the wealth scales.
This Budget has also highlighted Labour’s plans to expand the public sector. Several decades ago, the public sector made up around one-third of the economy; now it makes up nearly half.
This share is set to increase further, with the announcement of increased government infrastructure investment, more tax raising (including a tax hike on private sector companies which will not affect the public sector), and the application of VAT to private school fees (which will drive more children into state schools).
We offer free initial meetings for new clients, to let you find out more about your options at no cost.
To book a free initial meeting with one of our advisers, please call 01642 477758 or visit our Contact page.
