The recent UK budget, unveiled by Chancellor Rachel Reeves, introduces significant changes that will impact taxpayers, homeowners, and investors.
With £40 billion in tax hikes, cuts in allowances, and shifts in public spending, this budget aims to stabilize finances but raises concerns over its effect on wages and disposable income.
Here’s a breakdown of the latest updates and practical steps to manage your money better.
Higher taxes on businesses and what it means for workers
One of the most significant changes in the budget is the increase in employer National Insurance Contributions (NICs). It is now raised from 13.8% to 15%, while the threshold at which employers start paying NICs drops from £9,100 to £5,000.
This increase is expected to generate £40 billion, but comes with possible side effects.
Economists warn that the additional tax burden on employers will likely result in fewer wage increases, and possibly even job cuts, especially in low-wage sectors.
The Office for Budget Responsibility (OBR) estimates that around 76% of the NICs increase will impact workers indirectly, through slower wage growth and potential inflation.
The Resolution Foundation projects that real weekly wages will grow by only a minimal amount by 2028 due to higher public spending demands and an aging population.
Additionally, the Institute for Fiscal Studies (IFS) highlights that larger firms hiring lower-wage workers may struggle with the increased NICs, leading to fewer minimum wage jobs in the market.
Despite these warnings, Chancellor Reeves defends the budget as necessary to stabilize the economy and fund public services, although critics argue the plan may hinder growth without a robust strategy to expand the economy.
Opposition leaders label the NICs rise a “tax on jobs,” which could limit disposable income for households and strain businesses trying to maintain profitability in a slower-growth environment.
A repeat of the 2022 crisis?
Following the budget, UK borrowing costs have risen, with the 10-year gilt yield climbing to over 4.4%.
This increase comes as the budget introduces £70 billion in additional public spending, a move aimed at balancing daily expenses and funding projects in the NHS, education, and infrastructure.
Although the current bond market conditions differ from the 2022 “mini-budget” crisis, which destabilized pension funds, the higher borrowing costs signal concerns about the budget’s potential inflationary effects.
The OBR’s forecast for economic growth is modest, projecting only 1.1% growth this year and 2% in 2025.
Short-term growth looks hopeful, but analysts believe the budget’s large spending increases could raise inflation and slow down interest rate cuts from the Bank of England.
Global factors, such as the upcoming U.S. election, also weigh heavily on market expectations.
Investors remain wary of the government’s ability to generate the necessary tax revenue to support its spending plan, especially as global risks add to market volatility.
Make use of your ISA allowance to offset capital gains tax hikes
With the rise in capital gains tax (CGT) on shares, it’s highly encouraged to use tax-efficient savings options like the ISA. T
The budget left the annual ISA allowance at £20,000, providing an opportunity for investors to shield their returns from tax.
For higher-rate taxpayers, CGT went up from 20% to 24%, and for basic-rate taxpayers, it moved from 10% to 18%.
Holding investments in an ISA can protect these gains from tax, making it a valuable option for anyone investing in stocks and other taxable assets.
If you already own stocks outside an ISA, consider a “bed and ISA” strategy.
This process involves selling shares, paying any immediate taxes if applicable, and then buying them again within an ISA.
This approach shields future gains from CGT, though you might face some upfront costs, such as stamp duty.
Financial advisers recommend using any losses in your portfolio to offset gains, which can help reduce your overall CGT bill.
Thinking about buying a home? Act before stamp duty changes
The UK budget’s changes to stamp duty could mean significant extra costs for homebuyers, especially those purchasing properties in high-priced areas.
Starting in April 2025, the stamp duty threshold will revert to £125,000 from its current level of £250,000.
First-time buyers will see their exemption threshold drop from £425,000 to £300,000, potentially adding thousands to the overall cost of buying a home.
For instance, a first-time buyer purchasing a property at the average London price of £524,000 would pay an additional £11,250 in stamp duty under the new rules.
Buyers in the UK’s wider housing market, where the average price is around £266,000, could face an additional £2,500 in stamp duty once the changes take effect.
If you’re currently in the home-buying process, try to complete the purchase before April 2025 to avoid these higher tax costs.
Avoiding interest rate volatility
Mortgage rates remain uncertain due to potential interest rate changes following the budget.
With the Bank of England expected to slightly reduce rates from 5% to 4.75%, mortgage brokers advise borrowers to lock in fixed-rate mortgages while rates are still relatively stable.
Many lenders allow customers to lock in rates up to six months in advance, providing some flexibility if rates drop further or rise unexpectedly.
Currently, five-year fixed-rate mortgages are available around 3.7%, while two-year fixes are closer to 4%.
Fixed rates offer a stable monthly payment, which can be reassuring in an environment of fluctuating interest rates.
Securing a fixed-rate mortgage now can protect you against rate increases.
If rates drop further, you can always explore better deals before finalizing the mortgage.
Inheritance tax changes impact pension plans
A critical change in the budget affects pension inheritance planning. From April 2027, unspent defined contribution pensions will be included in inheritance tax (IHT) calculations, except when left to a spouse or civil partner.
This shift means that anyone planning to pass on pension savings to children or grandchildren should reconsider their strategy.
One way to reduce IHT liability is to withdraw pension funds earlier and gift them directly to beneficiaries.
Under “potentially exempt transfer” rules, these gifts are exempt from IHT if made at least seven years before death.
This approach requires careful planning, and consulting with a financial advisor may help ensure you avoid unintended tax consequences.
Additionally, those with life insurance policies aimed at covering IHT may need to review their arrangements to account for the potential increase in IHT liability tied to pensions.
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