The Chancellor gives with one hand and takes with the other
By David Prosser
It might be described as a balanced budget – for savers and investors at least. Rachel Reeves’ first budget as the new Labour Chancellor of the Exchequer included tax rises worth £40bn in aggregate, but much of the burden fell on employers and the very wealthy.
Most savers and investors will see some downside impacts, but also some gains. And Reeves’ decision not to extend the freeze on income tax thresholds beyond 2028, one rumoured budget announcement, will be a big relief for many taxpayers.
It was the worst of times…
First the bad news: capital gains tax (CGT) and inheritance tax (IHT) bills are set to increase.
On CGT, the main rate for basic-rate taxpayers increases with immediate effect from 10% to 18%, with higher-rate taxpayers now paying 24%, up from 20%.
The main rate is what you pay on gains on most investments, though you do get a capital gains allowance each year giving you a certain amount of tax-free profit – £3,000 in the 2024-25 tax year. There is a separate CGT rate covering gains on property sales (excluding your main home); this remains unchanged at 24%.
On IHT, one negative is that an existing freeze on the current thresholds is now being extended until at least 2030. That means IHT will continue to be payable on estates worth more than £325,000, or £500,000 including residential property (these thresholds double for married couples), despite rising house prices.
The Chancellor is also cutting back on some IHT tax reliefs. Agricultural property – farms, for example – and business assets currently qualify for relief that effectively mean they fall outside of your estate for IHT purposes. From 6 April 2026, this will no longer be the case. IHT will become payable on the value of these assets above £1m, though at 20% rather than the normal 40%. Business assets include shares listed on the Alternative Investment Market.
The other big IHT change relates to pensions, where your unused savings at the time of your death can currently be left to your heirs with no liability to IHT. From April 2027, this will no longer be the case – pension cash passed on to your heirs will count towards the IHT calculation.
Both sets of changes require some smart financial planning. With CGT, it is now even more important to make good use of your annual allowance, and to consider vehicles such as individual savings accounts (ISAs), inside which there is no tax of any kind to pay on investments.
On IHT, you may need to take specialist advice if you have agricultural or business assets. More broadly, plenty of exemptions remain – you can reduce the value of your estate through gifts, for example. Another possibility is to take out life insurance to cover the cost of an IHT bill.
Savers in retirement – or coming up to retirement – should also think about the implications of the new rules for pensions. Currently, financial advisers often suggest that people use any other savings they have in retirement before starting to spend their pension funds. This may no longer be the best approach if unused pension cash can’t be passed on to heirs tax-free.
Property taxes are also increasing. The Chancellor didn’t mention stamp duty thresholds, which means temporary tax breaks introduced in 2022 will expire in April 2025. Stamp duty will then become payable on transactions worth more than £125,000, compared to £250,000 today. First-time buyers will pay stamp duty on property purchases above £300,000 rather than £425,000. In addition, the extra stamp duty payable on buy-to-let and second homes will increase by 2 percentage points to 5 per cent.
…It was the best of times…
In happier news, there was no extension of the freezes on income tax thresholds, despite rumours that the Chancellor intended to announce these. When the income levels at which you start paying each rate of tax don’t increase, more people get dragged into the net as their earnings increase. The current freezes, announced by the previous government, run until 2028.
Elsewhere, savers should also be pleased with the announcement that all the current Isa allowances will be available until at least 2030. Isas enable you to save or invest up to £20,000 each year with no income tax or CGT to pay on your returns. They are especially valuable given higher CGT rates.
Venture capital trusts (VCTs) and the Enterprise Investment Scheme (EIS) are also being extended; these provide additional tax planning opportunities for savers and investors, though you should take professional financial advice before committing your money.
On other taxes, fuel duty is being frozen again, despite speculation to the contrary, though vehicle excise duty – often described as car tax – is going up, especially for more polluting vehicles. Taxes on alcohol are generally increasing only in line with inflation, and the Chancellor announced a small reduction in the tax on draught beer, which reduces the cost of an average pint by a penny.
Finally, some economists believe the budget may deliver one extra benefit for savers. The Office of Budget Responsibility says the budget will have an inflationary impact – that may see the Bank of England cut interest rates less sharply than previously expected over the next 12 months, to the benefit of savers with cash in bank and building society accounts.
…It was the times we expected
Other budget measures were as trailed. The Chancellor confirmed increases in state pensions and benefits – she insists the value of the former will wipe out the lost winter fuel allowance that has irked many pensioners. She also unveiled more detail of plans to charge VAT on private school fees.
As for the widely expected increase in national insurance contribution rates for employers, analysts are split on its impact. In the short term, this will mean no change to your take-home pay, as Labour promised. But employers will now find it harder to fund wage increases, which will have an impact on people’s disposable incomes.
Although this article may contain helpful information and tips, it is not personal advice. You may wish to seek advice from a financial advisor if you are unsure what’s best for your own personal circumstances.