Budget 2025: Growth, Growth and More Growth?

What’s Happened?

Well, the Budget dropped early. On the OBR’s own website, no less. Responsible by name, apparently not by nature. We’ve never seen anything quite like it.

When Rachel Reeves finally ‘revealed’ what we already knew, it included a mansion tax, an attack on salary sacrifice, and more money from income tax.

But she also emphasised investments in the economy, infrastructure, defence and the NHS. She struck at inflation, chipped away at borrowing, and sought to help families and children in poverty.

Let’s first go through what happened, from your perspective. Then we’ll assess your options.

Income Tax

Many speculated they would dial up income tax. Rachel Reeves did it by extending the freeze in tax thresholds, until April 2031. That’s a year more than anyone expected. It all means that, as your pay rises, you’ll pay more income tax.

This isn’t new. Governments have been doing it for years. Experts call it ‘fiscal drag’. Before the Budget, the Government itself confirmed there are now 50% more higher rate taxpayers and twice as many additional rate taxpayers than in 2021/22. That’s just four years ago!

Sobering stuff. If you pull the camera back at this stage, this is partly why the tax-to-GDP ratio is expected to hit an all-time high of 38% of GDP in 2030-31.

IHT and Legacy

There were no changes to inheritance tax (IHT) – and we’ll explain what you do with it later – but there is a notable change to capital gains tax (CGT) impacting business owners.

Up until now, a sale of shares to an Employee Ownership Trust (EOT) – a common route for exit – was free of CGT. That relief is being halved to 50%. EOT’s may still be seen as attractive, but it will be interesting to see the impact, and deals in progress may now run into difficulty.

Property

Labour have long coveted a mansion tax. For years it was a paper tiger. In the Budget, it roared. From April 2028, there’ll be a £2,500 High Value Council Tax Surcharge on properties worth more than £2m, and a £7,500 one for those valued at £5m and over. It’ll be collected alongside your council tax.

Moreover, the higher and additional rates of tax on dividends, property and savings income will rise by two percentage points.

Pensions and Salary Sacrifice

You’ll now have to pay National Insurance on salary-sacrificed pension contributions, above £2,000 a year from April 2029. Beyond that you’ll have to pay the same amount of NI as you will on regular pension contributions. OBR says this should raise £4.7bn in 2029-30.

Your Options

Let’s turn to the likely impact on you – and what you can do about it.

And let’s start with the big three types of tax: income tax, capital gains tax and national insurance contributions. These make up 57% of tax take – and, given everything we saw, I wouldn’t be surprised if that goes up.

Income Tax

The best way to get your income tax bill down is to contribute more to your pension.

It doesn’t matter if you’re employed or self-employed, because money you place into your pension

can lower your taxable income. For example, if you’re contributing to a personal pension or self-invested personal pension, the government adds 20% (this is basic rate tax relief, claimed by the pension provider from the Government). So, if you add in £8,000, the Government tops it up with £2,000 so you get £10,000 in total.

The higher your tax band, the bigger the relief. For higher and additional rate taxpayers, you can reclaim an additional 20% or 25% respectively.

You can also use an ISA to chip away at your income tax.

That’s because any income your ISA generates is exempt from income tax. So, you could place income generating assets in your ISA, which also insulates you from CGT and dividend tax, and top up your income that way.

The ISA allowance remains £20,000 a year. From 2027, £8,000 of it must be in investments (rather than cash). There are, of course, ways to place a larger sum of money aside if you have a partner and children.

National Insurance Contributions

Changes to National Insurance and salary sacrifice will impact employers and employees alike.

Despite the changes to salary sacrifice, it is still a sensible answer to addressing your NIC bill. As you might know, employees can exchange (or ‘sacrifice’) some of their salary for non-cash benefits. These include pensions, private healthcare, even cycle to work schemes. This lowers the taxable salary you pay these employees, and it automatically lowers your NI liability.

But there’s something else you can use to mitigate your NIC bill. And that’s the employment allowance.

It’s a measure to support small businesses. It enables eligible employers to avoid paying the first £10,500 of employer NICs. They dialled this number up in recent years, also removing a financial cap on eligibility, and so it’s a handy tactic to have up your sleeve. Make sure you use it. You can check if you’re eligible here.

CGT

Capital gains tax is a lucrative income stream for the Government. Let’s set aside the changes for a moment.

First, it’s important to use your CGT exemption. This means you can make tax-free gains of up to £3,000 in a tax year. You can’t take gains into a subsequent tax year. Beyond this £3,000, you’re liable for:

• 18% on gains from most assets, including residential property, if you’re a basic-rate taxpayer.
• 24% on the same gains if you’re a higher-rate taxpayer.

There are some lower rates: you might pay a lower rate if you’re selling a business or shares in an unlisted company. Get in touch if you think one of these more complex rules might apply to you.

Then, see if there are any CGT losses you can use to get your liability down.

What you do is aggregate your gains and losses in the same tax year and pay tax on the net result. And, while you can’t take your allowance into a different tax year, you can take an unused loss from the previous four years.

A further tactic is to transfer assets to your spouse or civil partner.

These do not attract CGT so you can use each other’s allowance. Simple arithmetic will tell you this doubles the CGT exemption for those of you who are married or in a civil partnership. Needless to say, you must make it an outright, genuine gift.

There’s a further, lesser-known way to gift and that’s gift hold over relief.

Say you give away certain business assets gratis, or you or sell them for less than they are worth as a favour to someone. There’s no CGT leviable on you. This is gift hold over relief. Of course, there the recipient or purchaser might be liable for the tax so it’s best that you both take professional advice. Our details are below.

As we’ve said before – and we’ll probably say it again – your pensions and ISAs can help immensely.

Any assets in an ISA are shielded from CGT. It’s as simple as that. Now, there are plenty of things, such as residential property, that aren’t ISAble. But that’s where professional advice comes in, to help you arrange your assets and wealth so that everything sits in the most efficient place.

Pensions help you in a slightly different way. As we’ve seen, they help you get your income tax down – and, given it’s all about ducking under a tax threshold, your pension can instantly become a CGT mitigator.

For example, say you put £10,000 into your pension (including all the tax relief that comes with it). This sum raises the point at which you pay higher-rate tax, by £10,000. All of a sudden, CGT would be payable at the basic rate of 18% and not the higher rate 24%.

Last of all, there are enterprise investment schemes.

We are confirmed fans and talk about them a lot. Given the Chancellor increased the time period you can support companies in an EIS, we like them even more.

An EIS places your money in small, exciting, fast growing and – let’s be honest – high risk British companies. That risk ranges from the difficulty of selling to total loss. But, in return for supporting such innovation and growth, your gains are free from CGT if you hold them for a certain period.

Inheritance Tax

The government makes just 0.3% of its tax receipts from IHT. But as Neil Armstrong might have said: It’s a small step for them – a giant leap for you. That’s because the average payment of IHT is almost £7,000.

That’s no small sum. So, there’s every reason to get your bill down. The easiest way is with gifting money.

In a given tax year, you have an annual gifting exemption of £3,000 plus a small gifts exemption of £250 per person. There are lots of terms and conditions to avoid abuses.

But that’s not all. If there’s a family wedding in the offing, you can gift £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anybody else.

You need to live for seven years after the gift though. If not, and if the gift is above your available IHT exemption of £325,000, you might have to pay tax. This tax isn’t a set rate: it tapers off after three years, ranging from 40% to 0%.

The rule of thumb is to give early and offer yourself the best chance of living through the seven-year rule. Oh, and the other rule is to keep a record of these gifts because, like your old maths teacher, the Government will want to see your workings.

Secondly, and I’m sure I don’t need to tell you this, you must make a will.

A will ensures your money goes to exactly the people you want, in the way you want. Dying without one – what’s called ‘intestate’ (which comes from the Latin testatus, or testify) – can mean a court decides who gets what.

Even better, take out a life insurance policy and place it in trust (and therefore outside of your estate). Your family can use the payout to cover any IHT bill – which means more of your money goes into the right hands, not government coffers.

There’s a lot going on. If you’re unsure about anything whatsoever, get in touch. We’ve seen it all before and can definitely help, on 020 7467 2700 or at hello@firstwealth.co.uk.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.