What the Autumn Budget means for UK Residents

Chancellor Rachel Reeves announced tax increases that will affect investors, particularly through higher capital gains tax (CGT) and changes to inheritance tax (IHT). However, there are effective ways to manage these impacts on your savings and investments, primarily by using Individual Savings Accounts (ISAs) and pensions.

Key Changes from the Autumn Budget

Capital Gains Tax (CGT):

• Lower Rate: Increases from 10% to 18%.
• Higher Rate: Increases from 20% to 24%.
• Effective Date: Changes are effective immediately.
• Context: The new rates align CGT on shares with property sales (excluding your main home).
• CGT Allowance: Remains at £3,000 per tax year; any profits above this amount are subject to CGT.

Impact Example:

• A basic-rate taxpayer who realizes a £20,000 gain would pay £3,060 in CGT, which is an increase of £1,360 compared to previous rates.
• A higher-rate taxpayer would pay £4,080, reflecting an increase of £680.

Pensions:

• Tax-Free Cash: You can continue to withdraw 25% of your pension as tax-free cash, up to a lifetime cap of £268,275.
• Pensions Tax Relief: Remains unchanged; tax relief is available at rates of 20% for basic-rate taxpayers, 40% for higher-rate taxpayers, and 45% for additional-rate taxpayers.
• Inheritance Tax on Pensions: Starting April 2027, pensions will be included in your estate for IHT, meaning they could be taxed at 40% if your estate exceeds the IHT nil-rate band.

Inheritance Tax (IHT):

• Nil-Rate Band: The amount you can pass on to beneficiaries free from IHT is frozen at £325,000 until April 2030.
• Residence Nil-Rate Band: Also frozen at £175,000 until 2030; this applies to those passing on property to direct descendants.
• Combined Allowance: Married couples can combine these bands to potentially pass on £1 million without incurring IHT.
• Changes to Business Property Relief: From April 2026, shares on the Alternative Investment Market (AIM) will face a 20% IHT if their value exceeds £1 million.

Employer National Insurance:

• The rate of employer national insurance (NI) contributions will increase from 13.8% to 15% starting April 2025.
• The threshold for employer NI will drop from £9,100 to £5,000.
• Impact on Employees: Employers might respond by reducing salary increases or pension contributions due to increased NI costs.

Income Tax Thresholds:

• The income tax thresholds will begin to rise with inflation starting in 2028, ending a freeze that began in 2022.
• Implication: This means more individuals may be pushed into higher tax brackets, affecting take-home pay.

Strategies to Mitigate CGT Impact

Utilize ISAs and Pensions:

• Both ISAs and pensions provide a shield against CGT on any gains made.
• ISA Contribution Limit: You can contribute up to £20,000 per tax year to ISAs until 2030. This limit includes cash ISAs and stocks and shares ISAs.
• Junior ISA Limit: The limit for Junior ISAs will remain at £9,000 per year until 2030.

Bed and ISA/Pension:

• This strategy involves selling investments in a general account and repurchasing them in an ISA or pension to shield them from future CGT.
• Although you will incur CGT on profits realized during the transfer, all future gains within the ISA or pension will not be subject to CGT.
• Example: If you have a portfolio split between a general account and an ISA, you can gradually transfer portions into the ISA, potentially realizing significant tax savings over time.

Conclusion

In light of the recent tax changes, investors should carefully assess their financial situations and consider adopting tax-efficient strategies, such as maximizing contributions to ISAs and pensions. By focusing on sound investment principles—setting clear and appropriate goals, diversifying their portfolios, minimizing costs, and maintaining a long-term perspective—investors can effectively grow their wealth even amid a changing tax landscape.

Additional Considerations

• Review Your Investment Strategy: With the increase in CGT, now is an excellent time to review your overall investment strategy and consider the tax implications of your current holdings.
• Stay Informed: Keep abreast of future tax announcements and consider consulting with a financial advisor for tailored advice.
• Plan for the Future: Think about how these changes affect not just your current investments but also your long-term financial goals, especially regarding retirement and wealth transfer.