How the Budget will affect financial planning

The first Labour Budget for 14-years was preceded by a flurry of conjecture, rumour, and good old fashioned crystal ball gazing. In the end, what was delivered by Rachel Reeves could certainly have been ‘worse’ when compared to pre-Budget speculation, but it was no means short on immediate and long-term implications for our clients’ planning.

The UK faces a number of challenges and choices that can sometimes seem contradictory in their solution.

We have an aging population with increasing need for health and social care systems to support them as they get older, a declining birth-rate (which leads to a lower working age population to pay taxes which support those state systems), and a persistent issue around ensuring economy growth.

Aiming to raise an additional £40bn of tax revenues while ruling out amending the taxes that generate 75 per cent of annual tax inflows, meant that money had to come from left field.

Whatever your personal views as to the merits, or not, of how the Chancellor has sought to address these challenges, it has led to a number of changes around personal and corporate taxation which will affect how we work with clients to help them meet their lifestyle planning needs.

Here, our intention is to consider the headline changes from the Budget and look at what may need to change as part of your financial plans, and the questions that you and your Financial Planner will need to address in the coming months.

Inheritance tax

Changes

The main Inheritance Tax (IHT) nil-rate band and residence nil-rate band were both frozen at their current levels until 2030. This will mean that the main nil-rate band will not have increased since the 2009/10 tax year. 21 years of a fixed allowance, in a world where increasing asset values have meant an increasing number of estates need to grapple with this part of the tax system.

While the total number of estates that are expected to not have an IHT liability still holds fairly static at around 95% according to the latest figures, this will be little comfort to those who are affected by the tax. And with other changes announced during the Budget (spoiler warning) then more estates are likely to be pulled into this tax in future years.

Business and Agricultural Reliefs

It was announced that from April 2026, rather than 100% relief (so 0% IHT effectively) on assets that qualify for either of these two reliefs, the first £1m would retain the 100% relief, and then assets above this would receive 50% relief – or be taxed at 20%.

However, a slight sting in the tail was saved for assets such as AIM shares, where they will only receive the 50% relief for all values. This will greatly reduce the IHT benefit of such investments.

How will this factor into your plan?

In general we would always advise clients to consider whether gifting assets now is feasible and in line with their wishes. This is not always possible, and other options exist, but being able to see the positive outcomes of a gift is certainly something to not be underestimated.

For those affected by the changes to business and agricultural reliefs, then we can explore simple options such as taking out insurance to cover the liability on business assets to ensure there is not a forced sale to pay an IHT bill.

For married couples, the full relief (applying to the first £1 million per individual of Business Relief or Agricultural Relief assets) cannot be transferred to the survivor on death. Couples could consider the use of a Business Relief Trust to retain the £1 million relief on first death, allowing the potential for the full £2 million of relief to be utilised.

If you have already invested in Business Relief schemes to help mitigate IHT, then your adviser will be discussing this with you as part of your next planning meeting to ensure that you are fully aware of what these changes mean to your situation, and explore what options or changes may be needed, if any.

Pensions

Changes

One of the biggest impacts from Budget day was the announcement that from April 2027, unused pensions would be considered as part of an estate for Inheritance Tax purposes. This will include most pension types and benefits that would be payable on death, other than spouse/partner benefits.

This is intended to address what was always an anomaly of the Pensions Freedom changes in 2015. Since those changes, for a large number of people, their pension has become the chief means by which to plan, and mitigate, for Inheritance Tax. As such we have seen a shift away from “pensions being for retirement income”, towards a situation where pension plans were the last plan to be used.

How will this factor into your plan?

These changes could result in a change in how we recommend you draw income from your portfolio in retirement.
For all clients, the ‘special’ treatment of pensions for IHT will go, and so ensuing that you continue to have a mix of plan types in your portfolio will give you the most flexibility in tax efficiency, both during and after your life.
In a similar manner as we have mentioned under IHT, gifting from regular pension income returns to being a prudent step that we would encourage clients to consider where it doesn’t affect their own lifestyle.

Capital Gains Tax

Changes

We saw Capital Gains Tax (CGT) rates increase immediately post the Budget, with all disposals over any remaining available exemption now subject to rates of 18% for a basic rate taxpayer and 24% for higher and additional rate taxpayers. These are up from 10% and 20% respectively.

How will this factor into your plan?

Prior to the Budget, there had been plenty of speculation that these would be increased so they were in line with Income Tax rates. That was proven to be just that, speculation; but it does mean that ensuring the use of your ISA and Pension allowances retains importance, as well as ensuring that investment portfolios are reviewed regularly to ensure the use of your annual exempt amount for CGT, where appropriate.

It won’t save much in way of tax – the equivalent of £540 at the lower rate – but this is certainly one where ‘every penny counts’.

For those affected by the BADR changes, this may mean you wish to bring forward any plans to sell your business if that is possible, or make additional allowances for the increased tax as this relief in brought in line with the lower rate of CGT.

Business Asset Disposal Relief

For those clients who have built and run their own business, and may be looking to sell as part of their planning, then changes to Business Asset Disposal Relief (BADR) may require changes to your forecasts.

Currently, you will pay 10% tax on gains of qualifying assets. From April 2025 this rate will increase to 14%, and then increase again to 18% from April 2026.

Employers’ National Insurance Contributions

Changes

From April 2025, the Employer National Insurance Contribution (NIC) rate will increase from 13.8% to 15%.
What’s more, the lower earnings limit (LEL) has been cut to £5,000, which means even more employees will be caught by the increase in NIC rate. Tesco, the UK’s largest private employer, expects to pay £1bn extra in the next four years as a result of the changes.

How will this factor into your plan?

Employees making use of salary exchange arrangements, such as cycle to work, childcare vouchers, pension payments and ultra-low emission cars will continue to benefit themselves from income tax and NI savings, and their employers will benefit more than previously.

As a result, these arrangements have become more attractive for companies who may wish to promote the benefits to their workforces.

If you are an employer and not making using of salary exchange within your business, then revisiting this choice could well be a win-win for you and your employees. We have a number of specialist workplace financial planners who specialise in all aspects of corporate financial planning, pensions, and other benefits.

The content of this page is for information only which should not be taken as advice or a recommendation and is based on our current understanding of HMRC tax regulations in the UK.

Tax treatment depends on your individual circumstances which could change in the future. We do not offer tax advice, and you should seek independent tax advice where it is felt necessary.