Budget Reaction: Trick or Treat?

On this Halloween, the streets are filled with tricksters as a bright orange pumpkin adorns every doorstep - but enough about Donald Trump's election campaigning - let's turn our attention to yesterday's Budget.

Was Rachel Reeves the Good Witch, offering treats? Or was she the Wicked Witch of Leeds West, delivering unwelcome tricks upon our finances?

It's time to see how my crystal ball fared. [Budget Predictions; The Silence Of The Plans]

No Changes to Tax-Free Cash or Pension Contributions

The much-feared axe didn't fall on tax-free cash or pension contributions.

Despite the media's relentless doomsday prophecies, the 25% tax-free pension withdrawal remains untouched.

Also, there were no announcements regarding restrictions to pension contributions.

Employer's National Insurance Hike

The easily predictable increase in Employer's National Insurance contributions.

Starting from April 2025, employers will face a 1.2% hike, taking the rate to 15%.

While this move is being spun as a tax on businesses, let's not kid ourselves - it's a stealth tax on working people, especially as they have reduced the starting level to £5,000 from £9,100.

Companies aren't charities; increased costs will trickle down to employees through wage stagnation or reduced benefits.

Pension Death Benefits Now Subject to Inheritance Tax

From 2027, the Chancellor announced that unspent pension pots will be subject to Inheritance Tax (IHT).

Now, I did say that changing pension death benefits was a no-brainer. However, I also mentioned they wouldn't be subject to IHT since pensions are trusts, with individuals as the beneficial owners. They can't form part of an estate without severely rewriting trust law.

So, using the term "IHT" here might just be semantics. A quick search through HMRC's Budget documentation reveals... absolutely no detail.

Currently, pensions are a tax-efficient way to pass on wealth, often escaping IHT entirely. This change aims to close what the government calls a "loophole," ensuring pensions are used for their intended purpose - funding retirement, not estate planning.

Will this apply only to lump-sum inheritances, or will it affect income drawn by beneficiaries as well? What if you leave your pension to your spouse? And how will defined benefit schemes be treated?

My feeling is this one's headed for a lengthy consultation. They know what they want to do; they just don't know how to do it - hence the 2027 starting point.

Inheritance Tax

No changes to the Nil Rate Band or Residence Nil Rate Band, plus they remain frozen until 2030.

The Government did make one significant adjustment to IHT that I had considered but dismissed.

They've capped Agricultural and Business Property Relief at £1 million per estate. This includes shares held on AIM

Anything above that will now be taxed at 20%.

While this targets IHT death bed planning schemes it will also have ripple effects on family businesses and farms that are asset-rich but cash-poor.

The Chancellor said this protected sub £1m farms. I’m not sure how may of those exist, so passing on the family farm just got a lot more complicated. RIP British farming?

Capital Gains Tax Changes

Capital Gains Tax (CGT) as predicted got minor tweaks. The higher rate for non-residential assets will rise from 20% to 24%, and the lower rate from 10% to 18%.

Not the drastic overhaul some feared however I expect the CGT uplift on death to be done away with at a future Budget.

What Else?

In addition to the above, several other noteworthy changes were announced:

Stamp Duty Increase for Second Homes: The stamp duty surcharge for second homes will rise from 3% to 5% effective immediately. This move is intended to support first-time buyers and those moving home by giving them an advantage over second-home purchasers and landlords. However, it might also discourage investment in the rental market, potentially impacting housing availability.

Abolition of the Non-Dom Regime: The government confirmed the abolition of the non-domiciled taxpayer regime, replacing it with a residence-based system starting from April 2025. Individuals who become UK residents will be taxed on their worldwide income after four years of residence, aiming to close loopholes and ensure fairness.

ISA Thresholds Frozen: ISA allowances have been frozen until 2030, with the standard ISA limit remaining at £20,000, the Lifetime ISA at £4,000, and the Junior ISA and Child Trust Funds at £9,000. Plans for a new British ISA have thankfully been scrapped.

Carried Interest Tax Reform: From April 2026, carried interest will be taxed under the income tax framework with certain adjustments, increasing the tax burden on private equity and hedge fund managers. This is a technical change that won't grab headlines but could raise significant revenue.

And Finally, My Favourite Prediction

Perhaps the prediction I'm most pleased with is one I made somewhat tongue-in-cheek: the taxation of vaping products.

Lo and behold, the government has announced a flat-rate excise duty on all vaping liquids, set at £2.20 per 10ml from 1 October 2026.

I think I’ll celebrate this guess with a well- deserved draft beer; that’s now 1p cheaper!

Final Thoughts

While it's satisfying to see my predictions hit the mark, overall, there were not too many surprises that affect personal finances - unless you happen to fly a private jet.

This Budget feels deliberately soft, perhaps hampered by their own manifesto pledges.

But let's not get too comfortable; I suspect this is just the opening act in a longer play. They've mentioned a 10-year plan, and I wouldn't be surprised if more substantial changes are rolled out over the coming years.