Rachel Vahey: Dramatic tax changes will fuel demand for practical solutions

Sir Keir Starmer and Rachel Reeves promised us a ‘painful’ budget and they sure delivered.

After boxing themselves into a manifesto promise of no tax rises for ‘working people’ on income tax, national insurance, corporate tax, or VAT, the Government had to look elsewhere for the £40bn taxes needed to fill their public finances black hole.

From April, not only will employers see their national insurance (NI) contributions rate from 13.8% to 15%, but the lowering of the secondary threshold – the salary when employers start paying towards an employee’s NI – to £5,000 will supercharge this rise to an even higher level. And although an increase the National Living wage will be welcomed by millions of lower-paid employees, the combination of both hikes to the wage bill will place many employers under increasing strain.

Employers of all sizes will have to find ways to accommodate these costs perhaps by reducing future wage increases, reigning in expansion plans, or considering ways to better harness technology like AI to keep bills down.

Rachel Reeves confirmed the rate of capital gains tax (CGT) will increase from 10% to 18% for basic-rate taxpayers and from 20% to 24% for higher-rate taxpayers, narrowing the gap between income and investment gains. This is an immediate change – taking effect from today – and may catch some investors on the hop. Financial advisers will have a valuable role to play helping clients cope with these increased rates, by moving more assets into tax-wrappers as well as transfers between spouses.

The Chancellor estimates this will raise £2.5bn by the end of the forecast. However, the jury is still out on whether CGT rises will be the cash cow many think it will be and instead may encourage some to hold onto assets for longer than first anticipated.

The inheritance tax nil rate band threshold was frozen at £325,000 from April 2021, and it was no surprise that it, together with the residence nil rate band, will now remain frozen for the remainder of this Parliament, to April 2030.

There were other changes to IHT. From April 2026, the first £1m of combined business and agricultural assets will continue to not attract IHT, but for assets over this threshold there will be a 50% relief, meaning an effective rate of 20%. The rules for share holdings on the alternative investment market (AIM) also reduced to a 50% relief.

Employers of all sizes will have to find ways to accommodate these costs

The Government also intends to bring inherited pensions into IHT as well. On paper this sounds a simple change, but I fear this will be a complicated process to put into practice.

Together, these changes are expected to raise a useful £2bn for the Treasury. However, with house prices still on the rise, it’s becoming increasingly likely that this ‘most-hated’ tax will start to spread its net, and more ‘ordinary’ households will be forced to pay.

Finally, let me finish with two changes that didn’t happen.

First, the previous government froze tax-rate thresholds in April 2021, resulting in an eye-watering tax grab for the Treasury over the past few years. The Chancellor has chosen to thaw these thresholds from April 2028 onwards. However, as that is not for another three years, some clients will still be keen to get help to reduce their taxable income to avoid slipping into the next tax bracket up, through tactics such as pension contributions and gift aid.

Second, in a throwaway line, the Government confirmed it would not go ahead with the British ISA due to a ‘mixed response’ to the recent consultation.

This has been a tough Budget for investors and small business owners. Faced with such a dramatic change to personal finances many will be calling on their financial adviser for practical solutions to help them weather the upcoming storm.

Rachel Vahey, head of public policy, AJ Bell