Article

UK Autumn Budget: What does it mean for investors?

UK Autumn Budget: What does it mean for investors?
Key takeaways
1

No change to tax relief on pension contributions or the tax treatment of employer pension contributions.

2

The CGT rate for higher-rate taxpayers was raised from 20% to 24%, and the basic rate increased to 18% from 10%.

3

The plans for a UK ISA will not be taken forward due to “mixed responses” in the last government’s consultation.

The first Budget of any new government is always a big deal, and Chancellor Rachel Reeves certainly didn’t disappoint. 

Despite the fact that many of the key announcements had been trailed in advance, the numbers were striking: £30 billion a year more borrowing, £40 billion in tax rises, and an average of £70 billion a year in higher spending over the next five years.

With taxes set to reach their highest ever share of GDP in the UK, it might seem odd that many savers and investors’ first reactions to the Budget will have been a sense of relief.  But thanks to widespread speculation before the Budget about changes to pensions taxation or the equalisation of Capital Gains Tax (CGT) with income tax rates, relief may well have been the primary reaction for many.

Nonetheless, the Budget did introduce some important changes which will likely lead to an uptick in queries by clients to their financial advisers.

Pensions

Whenever a Chancellor needs to raise significant additional revenues, Treasury officials will point to the roughly £50 billion1 in net tax relief on pension contributions as an area with potential for reform.  The run-up to this Budget was no different. 

And speculation was fuelled by examination of Rachel Reeves’ 2018 pamphlet, The Everyday Economy, in which she argued that restricting tax relief on pension contributions for higher earners could help combat inequality while yielding £20 billion in additional revenues.

However, possibly recognising the complexity of reforms and the challenge of applying them uniformly across both the public and private sectors, the Chancellor opted for the status quo.  As such, there is no change to:

  • tax relief on pension contributions;
  • the tax treatment of employer pension contributions;
  • the value of the pension commencement lump sum (tax-free lump sum); or to
  • the annual allowance or the prior abolition of the lifetime allowance.

Capital Gains Tax

Pre-Budget speculation was also rife about increases to CGT (reform of which also featured in the 2018 pamphlet) – but this time with more cause.  For investments held outside a tax wrapper, the increase in the main rate may be one of the principal impacts of the Budget. While the last government progressively reduced the annual tax-free allowance to £3,000, this Chancellor chose to:

  • retain the annual allowance at £3,000;
  • increase the main rate of CGT for higher-rate taxpayers from 20% to 24%, aligning with the rate for residential property gains; and
  • increase the rate of CGT for basic rate taxpayers from 10% to 18%.

Combined with an increase in the rates for Business Asset Disposal Relief and Investors’ Relief to 14% from April 2025 and 18% from April 2026, the Treasury expects the CGT reforms to raise an additional £2.5 billion a year by 2030.

Individual Savings Accounts (ISAs)

The last government sought to make changes to the ISA regime, including through the introduction of a new UK ISA – up to an additional £5,000 to invest in UK stocks and shares.  However, in opposition, the Labour Party didn’t ever formally commit to backing the proposal and in the Budget, Rachel Reeves announced:

  • plans for a UK ISA will not be taken forward due to “mixed responses” to the last government’s consultation; and
  • subscription levels for adult and junior ISAs and Child Trust Funds will be frozen at their current levels from 6 April 2025 to 5 April 2030 – a move expected to raise £600 million a year for the Treasury by the end of the decade.

Inheritance Tax (IHT)

A degree of reform to Inheritance Tax was widely expected in the Budget.  Speculation about changes to the seven-year gifting rule proved to be unfounded but there were nonetheless three important announcements for investors:

  • unused pension funds and death benefits will be brought in scope of a person’s estate for inheritance tax purposes from April 2027;
  • from 6 April 2026, the rate of relief on AIM shares held for two years or more will be halved from 100% to 50%;
  • the current freeze on the inheritance tax nil-rate bands will be extended for a further two years until April 2030;

Given that currently, inherited Direct Contribution pensions usually fall outside someone’s estate for inheritance tax purposes, the forthcoming change in April 2027 will likely necessitate changes to legacy planning for some.

The outlook

In addition to the individual tax measures, Rachel Reeves’ first Budget was also important because it revealed her preferences.  Faced with spending pressures, she has chosen to tax and borrow more to fund them. 

Yet despite the extra spending, the Office for Budget Responsibility reports that the impact on the UK’s future economic growth will be limited: a marginal increase to GDP growth this year and next year, but marginally lower growth towards the end of the decade.  As such, annual growth is forecast to be 1.5% - 1.6%: not negligible, but certainly not remarkable.

Surprisingly, the Chancellor has left herself relatively little headroom against her new fiscal rules, with the OBR calculating the chances of the rules being met at just over 50%.  The result is that if revenues turn out to be weaker than forecast, or if higher debt costs, external shocks or even statistical revisions to estimate of government debt erode the limited headroom, the Chancellor will be forced to take action to ensure her rules aren’t broken.

In this eventuality her preference, it seems, will be higher taxes rather than public sector belt tightening.  Which means that the tax changes considered and then discarded for this Budget could well be put back on the table for future Budgets. 

  • Footnotes

    HMRC, Private Pension Statistics, Table 6

    Investment risks

    The value of investments and any income will fluctuate. This may partly be the result of exchange rate fluctuations. Investors may not get back the full amount invested.

    Important information

    All information is provided as 30th Oct 2024, sourced from Invesco unless otherwise stated.

    This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change.

    EMEA3994651