The Labour Party manifesto set out two ‘non-negotiable’ UK fiscal rules: (1) a ‘stability’ rule where the current government budget must move into balance, so that day-to-day spending is met by revenues; and (2) an ‘investment’ rule where government debt must be falling as a share of GDP initially five years ahead. It is useful to look at the budget announcements through these rules.
Overall, it was a budget broadly in-line with market expectations – higher current spending mostly financed by higher taxes; a change in the debt rule and higher debt to support higher capital investment over the long term but not risking fiscal stability.
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Higher current spending by the government, relative to the previous government’s Spring Budget plans, is being primarily funded through higher taxation. This is needed to leave enough room to meet its deficit target, which requires that the current budget must move into balance. The Office for Budget Responsibility (OBR) estimates the budget will move into balance by the third year (2027/28). This represents a significant fiscal consolidation over the next few years, with fiscal policy likely to have a small negative impact on UK demand growth over this period.
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The definition of debt matters for the second fiscal rule. The previous government’s debt target was defined as public sector net debt excluding the Bank of England. The new government has announced it will use public sector net financial liabilities (PSNFL) as its new debt metric – this measure includes a wider range of government assets and liabilities and, as such, offers a more complete picture of the government’s finances. There are four important points to this:
The government has formally confirmed that the new UK ISA (also referred to as the British ISA), announced by the previous government in Spring Budget 2024, is not proceeding. The new vehicle was intended to encourage people to invest in the UK, while supporting UK companies. A consultation on its design and implementation ended on 6 June 2024 and the Budget documents state that the government will not proceed because responses were “mixed”. The documents also confirm that the annual subscription limits of £20,000 for ISAs, £4,000 for Lifetime ISAs and £9,000 for Junior ISAs will remain unchanged until 5 April 2030.
With the Government no longer proposing to divert ISA investors’ resources into UK investments, it might be (even) more inclined to try to push pension investments in this direction – the documents refer several times to the pensions review’s aim to “unlock greater investment in UK growth assets.” The Chancellor’s Mansion House speech on 14 November might announce some decisions in this area.
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The Budget confirmed that, as expected, the Basic State Pension and New State Pension will rise by 4.1% from 6 April 2025.
These increases reflect the earnings growth number used in the Triple Lock, which delivers an uplift equivalent to the highest of earnings growth, CPI inflation (1.7% in the relevant period) and 2.5%.
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The Budget announced that the National Living Wage will rise from £11.44/hour to £12.21 from 1 April 2025.
The automatic enrolment earnings trigger for 2025/26 has not yet been confirmed, but it has been frozen at £10,000 since 2014. If that continues, an employee paid the minimum wage would need to work just under 16 hours per week to be eligible for automatic enrolment. That compares with just under 17 hours now and a little over 30 hours in 2014. We discussed this trend in an article earlier this year.
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The government announced that most death benefits paid from pension schemes will be brought within scope of IHT, where death occurs on or after 6 April 2027. HMRC has published a technical consultation on the framework, which runs until 22 January 2025.
Currently death benefits are outside the scope of IHT, other than where the member has given a binding instruction as to the recipient of any death benefit (some public sector schemes operate such an approach). From April 2027, with the exception of dependant’s scheme pensions and charity lump sum death benefits, this will no longer be the case. At a very high level, the new process is intended to be:
It appears to be envisaged that IHT will be settled before benefits are settled, with any income tax due being assessed on the net value when paid to the beneficiaries. It might be possible for schemes to make an initial payment to beneficiaries, with-holding 40% tax (the maximum IHT that could be due) and to then make an adjustment payment once any IHT due has been determined.
There are very many questions that arise from the consultation, but what is already beyond doubt is that there will be significant additional administrative complexity around death benefit payments. The value of death benefits may reduce by up to 40% and the need for guidance and advice around IHT planning will increase. Drawdown will no longer be as tax-effective as an intergenerational wealth transfer vehicle (this was part of the government’s rationale for the change), which may also reduce the attractiveness of drawdown at the margins. Life cover provided through excepted group life schemes would appear to remain outside the scope of IHT, potentially increasing its attractiveness.
The government expects the measure to raise close to £1.34bn in 2028/29 and £1.46bn in 2029/30.
WTW will be meeting with HMRC during the consultation period to understand the proposals and inform our response to it.
The government also announced that the current freeze on IHT thresholds (£325,000 plus £175,000 residence nil rate band if applicable) will be extended for two years. They will not now increase until 6 April 2030.
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The rate of National Insurance paid by employers is to rise from 13.8% to 15.0% with effect from 6 April 2025. The secondary threshold has also been reduced, so that employer NI will apply to incomes above £5,000 per year, rather than the current level of £9,100.
As now, employer pension contributions will not be subject to employer (or employee) NICs – until a few days ago, there had been speculation that this would change.
Accordingly, pensions will become relatively more NI-favoured as a way of paying people. Currently, an employer can pay £1,000 into an employee’s pension or, at equivalent cost, provide a gross non-pensionable salary supplement of £878.73. Following the change, the cost-neutral cash alternative to a £1,000 pension contribution falls to £869.57. This strengthens the NI advantages of employers paying all pension contributions rather than members contributing out of their salary.
Where part of the employer National Insurance saving that results from an employee’s salary sacrifice election is used to top up pension contributions, the value of these top-ups will rise automatically. Similarly, where employers offer cost-neutral cash alternatives to employer pension contributions, the value of these payments would automatically fall.
In 2022, WTW surveys found that 43% of employers using salary sacrifice directed at least part of their NI saving to the employee’s pension and that 74% of employers offering cash alternatives to pensions for higher earners adjusted these payments to reflect NI costs.
The Office for Budget Responsibility assumes that three quarters of the cost of higher employer National Insurance will feed through to wages (primarily) or prices. This might push proposed automatic enrolment changes even further into the future, as higher employee contributions would affect disposable incomes directly and higher employer contributions may also suppress pay rises.
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Within hours of the previous government’s announcement (in the March 2023 Budget) that the lifetime allowance (LTA) would be abolished, Labour pledged to “reverse this move”. However, its manifesto for the 2024 General Election was silent on the issue – they were neither promising to bring it back nor committing to not doing so. The Autumn 2024 Budget did not reintroduce the LTA, but instead used the abolition of the LTA as a partial justification to tighten the tax treatment of inherited pension. No announcement was made of any changes in the levels (or operation) of the annual allowance, the tapered annual allowance for high earners or the money purchase annual allowance that applies once money purchase benefits have been accessed flexibly. The standard annual allowance continues at £60,000. For more background on this see our Looking Ahead article Lifetime allowance/Annual allowance.
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Fears that the cap on tax-free lump sums might be slashed did not materialise. The cap takes the form of a “lump sum allowance” (LSA) and the standard LSA is being maintained at £268,275 (higher for individuals with certain protections). There is no legislative default uprating of the LSA and so, over time, its real value will erode. For more background on this see our Looking Ahead article Limiting tax-free cash from UK pensions.
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Along with cutting back the maximum tax-free lump sum, considerable pre-Budget speculation focused on the ending of marginal rate tax relief on pension contributions. Despite the Chancellor previously advocating ending marginal-rate relief and despite the purported £15 billion prize of restricting relief to basic-rate only, no change is being made and marginal rate relief will remain available. Credible reports (pre-Budget) suggested that the idea may have stumbled on concerns about how public sector workers would be affected. For more background on this see our Looking Ahead article Ending marginal rate tax relief on UK pension contributions.
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Following previous rounds of
Specific measures include:
Wider measures to strengthen the regulatory framework for tax advice remain undecided, with the Government promising to “continue to work closely with the sector to consider options to strengthen the regulatory framework of the tax advice market”.
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The Government is tackling three inconsistencies in pensions legislation which arose from the necessity of meeting European Union freedom of movement principles:
(*) HMRC's Newsletter 164 — October 2024 highlighted that the exclusion could still be applied where a member requested a transfer to a QROPS in the EEA or Gibraltar before 30 October 2024 and the transfer is completed before 30 April 2025.
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The government has announced changes to the tax treatment of carried interest. This will impact private equity (PE) compensation as carried interest plans are a common performance-based incentive for fund managers.
Labour’s election manifesto had committed that they would “close the loophole” on carried interest arrangements. The increased rate is still notably lower than the Higher (40%) and Additional (45%) rates of income tax so carried interest plans will continue to be an attractive arrangement for private equity fund managers. The government's more moderate increase signals a balancing act, acknowledging the potential impact on private equity firms' compensation structures with the need to maintain the UK's competitiveness against countries which have more favourable carried interest tax regimes.
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It had been widely predicted that the government would extend the freeze on the personal allowance and the higher rate thresholds for income tax for a further two years, until April 2030. Had it done so, the levels of income at which people start to pay income tax (£12,570) or higher-rate income tax (£50,270) would have remained unchanged for nine years, since April 2021. The Chancellor did not extend the freeze, stating that it “would hurt working people” and “take more money out of their payslips”.
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