Chancellor Rachel Reeves today delivered Labour’s first Budget in 14 years, announcing £40bn of tax rises to rebuild public services and restore the stability of public finances.
The bulk of the tax hikes will fall on the shoulders of businesses, with employer national insurance contributions rising by 1.2 percentage points to 15% by April 2025. National insurance contributions will be payable on salaries over £5,000 rather than the previous threshold of £9,100. However, the Employers Allowance for National Insurance has been increased to £10,500 a year, meaning that many small businesses will be exempt.
These measures should raise £25bn annually by the end of the forecast period, the chancellor said.
Capital gains tax hiked
Capital gains tax (CGT) will increase to 18% from 10% for basic rate taxpayers and to 24% from 20% for those on the higher rate. CGT rates on property sales will remain at 18% and 24%. The UK will still have the lowest CGT of any G7 economy, Reeves said.
CGT on business assets will rise from 10% this year to 14% in 2025-26 and then 18% in 2026-27. The lifetime limit for business asset disposal relief remains £1m.
IHT relief halved for AIM shares
Shares traded on AIM will be subject to a new 20% inheritance tax (IHT) rate.
Amisha Chohan, head of small cap strategy at Quilter Cheviot, said: “While it is disappointing that AIM shares will no longer be fully exempt from inheritance tax, we are pleased the government has seen sense to retain some sort of incentive to help drive the growth of this country’s smaller companies.
“With an effective tax rate of 20%, instead of IHT’s headline rate of 40%, AIM businesses, along with their growth potential, continue to give investors a compelling offer.”
Reeves also announced that the current IHT freeze, which was due to end in 2028, will be extended to 2030.
However, inherited pensions will become subject to inheritance tax from 2027 onwards.
Business and agricultural assets worth less than £1m will not be subject to IHT, enabling small family farms to be passed down to the next generation. Assets worth more than £1m will be granted 50% relief, leading to an effective IHT rate of 20%.
EIS and VCTs extended; ISA allowance frozen
Labour has extended the Enterprise Investment Scheme (EIS) and Venture Capital Trust Scheme to 2035, meaning that investors will continue to access tax relief, including income tax, capital gains tax and the exemption of EIS shares from inheritance tax.
There were no material changes to ISAs in this Budget although the ISA allowance has been frozen until 2030. Since the ISA allowance was last changed in 2017, it has effectively fallen by £6,000 in real terms, said Chris Rudden, head of UK investment consultants at digital wealth manager Moneyfarm.
Furthermore, Reeves has confirmed that the British ISA will not go ahead.
Good news for working people on income taxes and living wage
As part of Labour’s manifesto commitment not to increase taxes on working people, Reeves has not altered income tax, value added tax (VAT) or employees’ national insurance contributions. The current freeze on income tax and national insurance thresholds, which ends in 2028-29, will not be extended. As a result, personal tax thresholds will once be uprated in line with inflation.
The national living wage is set to rise to £12.21 an hour, an increase of roughly 6.7%. In line with this, the government will move towards the introduction of a single adult wage by raising the minimum wage for 18 to 20-year-olds by over 16% to £10 an hour.
Finally, state pensions are set to benefit from the triple lock. In line with updated figures on national wage growth, the new state and basic pensions will be uprated by 4.1%, bringing about £470 into pensioners' pockets next April.
Stability and investment rules introduced
The Budget confirmed plans to make “responsible reforms” to the government’s fiscal framework, to improve certainty, transparency and accountability, by implementing two rules.
The first is the ‘stability rule’, which aims to move the current budget into balance so day-to-day spending is met by revenues. This means the government will only borrow for investment.
Meanwhile, the ‘investment rule’ will reduce net financial debt as a proportion of GDP. This marks a technical change to the way debt is measured: it will take into account not just the debt that government owes but the financial assets that are expected to generate future returns.
The Budget said this rule “keeps debt on a sustainable path while allowing the step change needed in investment”.
Reeves said both of these rules will be met in 2027-28, two years ahead of the previous target of 2029-30.
Analysis by the Office for Budget Responsibility (OBR) predicts that the current deficit will fall from £55.5bn (or 2% of GDP) this year to a surplus of £10.9bn (0.3% of GDP) by 2027-28. It will then narrow to a slightly smaller surplus of £9.9bn in 2029-30.
In her speech, Reeves also listed the latest GDP forecasts from the OBR, which said real GDP growth will be 1.1% in 2024, 2.0% in 2025, 1.8% in 2026, 1.5% in 2027, 1.5% in 2028 and 1.6% in 2029.
The body also expects consumer prices inflation to average 2.5% in 2024 and 2.6% in the following year, then 2.3% in 2026, 2.1% in 2027, 2.1% in 2028 and 2% in 2029.