All shook up. This budget is no reason to lose hope for your finances

Judging by some of the backlash, Rachel Reeves’ first budget left some people pretty shaken up.

In the month that’s followed, there’s been some dire warnings about what this round of tax changes could mean – for pensions, tax bills, and the economy. It’s included farmers marching on Westminster protesting about inheritance tax, and business leaders claiming the government is treating them like a ‘cash cow’.

It’s not a great run into the festive season. But even if you’re worried about the headlines, it’s no reason to give up on your financial plans. Yes, there are some big and significant changes. But there’s also still time until some of the rule changes come in. With the right planning, there are plenty of positive options available.

A reminder of the biggest changes

Rachel Reeves says smaller businesses and lower-paid individuals shouldn’t be affected by a lot of this current action. She’s also said this is a one-off, so she won’t be coming back for a second bite of the cherry in April. Even so, the budget’s had a strong reaction. Here are three of the biggest points of note:

Inheritance tax (IHT): Since pension freedoms were introduced in 2015, they’ve become an important tool in estate planning. From 2027 though, this will have to change, if proposals go through as planned. To ensure pensions are primarily there to fund retirement income, they will no longer be exempt from IHT.

One big concern about this move is the potential for ‘double taxing.’ If the pension holder dies over the age of 75, their beneficiary could have to pay IHT on inheriting the pension, then, when they withdraw the funds, have to pay income tax at their marginal rate.

The government is also curtailing other IHT exemptions on farmland and some business assets. From 2026, you’ll only receive 100% Business Property Relief and Agricultural Property Relief on the first £1 million of qualifying assets. Above that level, the relief is cut to 50%.

Capital gains tax (CGT): The tax on profits from selling assets (excluding property) will rise to 18% for a basic rate taxpayer and 24% for the higher rate. CGT on property (which is already 18% or 24%) hasn’t changed.

National insurance: The government kept its promise not to put up VAT, income tax or personal NI contributions. However, from next April, employer’s contributions are rising to 15% on salaries above £5,000.

How it affects you

Let’s look at a couple of examples.

Daniel owns a small manufacturing company, employing around 50 people. In the short term, his biggest concern is the increase in NI contributions. With the earnings threshold falling from £9,100 to £5,000 and the contributions increasing to 15%, he could be paying £856 extra per year for an employee on £30,000 per year.

As a small-to-medium enterprise, Daniel could potentially benefit from the Employment Allowance which is now more than doubling. Should he qualify, this could limit how much NI he pays per employee.

In the longer term, the changes to IHT could impact whether he decides to pass the business down to his family. From 2026, only the first £1 million will get the full relief on the combined valued of qualifying agricultural and business property. Anything over that will be given relief at 50%, resulting in an effective rate of 20%.

Susan and Simon, meanwhile, are newly retired and drawing down from a private pension worth around £500,000, alongside other investments including an ISA. Susan also has a workplace pension that’s so far untouched. They’d planned to pass on this undrawn pension pot to their children (or grandchildren) as pensions were exempt from IHT. However, from 2027, these could be included as part of their estate. Anything over the £325,000 nil-rate band will be chargeable at 40%.

Three reasons to stay positive

It’s true that this budget has seen some of the biggest changes in several years. But, with careful planning, there are many positive options open to you.

1. Not everyone will feel the impact
Despite the £40 billion of tax rises, the government has said tried to emphasise the numbers of people who won’t be affected. In announcing her budget, Rachel Reeves said only 6% of estates would pay IHT this year (although latest figures show government receipts are set to reach a record level for the fourth year in a row, at around £8.5 billion).

On the other substantial changes, the government also says the UK pays less CGT compared with European and G7 nations. And it says 865,000 employers won’t pay any NI next year, while more than 1 million will pay the same or less than they have done in previous years.

2. There’s still time
Even if you are one of those who will have to pay, not every change is coming in immediately.

By far the biggest and most controversial change – related to IHT – isn’t intended for the next tax year. Changes to ABR and BPR won’t happen until 2026, and pensions won’t be brought in until 2027.

There’s a government consultation currently underway, running until 22 January 2025. In theory this means the plans could be modified (although it’s unlikely the government will go back on them completely). Most importantly, it means there’s time for you to make plans.

3. You’ve got options

With pensions less attractive for estate planning, many will decide to spend more from their pensions. After all, this is main reason the government has said it is making the change. You can still withdraw up to 25% of your pension as a tax-free lump sum.

If this means taking out more in income than you need, there are other routes available. We expect more people to consider gifting to children or grandchildren. As a reminder, under the current rules you can give away a total of £3,000 of gifts each year as part of your annual exemption. This can be split between several people or gifted to one person.

Also, remember, there’s no tax due on any gifts you give, as long as you live for seven years after making the gift (you can also make special gifts related to weddings of £5,000 to a child, £2,500 to a grandchild or great-grandchild or £1,000 to another person).

What this means

For those who aren’t quite at the retirement stage yet, the changes may mean they decide to work less, or even stop working. They may take the view that instead of increasing their future tax liability, they might start enjoying what they have instead.

So whatever you decided to do, we can help you adapt your strategy and explore any further levers there are to pull. This means, rather than feeling shaken up by the budget announcement, you can feel more relaxed about your future.

Want to speak about these changes in person? I’ve recently opened new premises for meetings with clients at 13 Arthur Street in Oswestry. It would be lovely to see you there.