Budget 2025: Foreword

Is there good news in the Budget? 

Let’s start with the good news – which, as it turns out, is what the Chancellor did not include this time:

• It did not include a tax rise on companies – rates and reliefs stayed the same with a little extra for businesses that invest into certain qualifying assets
• It did not include an exit tax – expats and anyone thinking of moving to sunnier shores can rest easier
• It did not include a tax on members of partnerships akin to employers’ National Insurance – partners of professional service firms can likewise relax
• It did not include a tax based on the value of your home when selling it – great news for homeowners who were fearful that they would not be able to move as their capital would be eroded by the tax
• It did not include an increase to income tax, National Insurance or VAT – except that it did; just not the rates
• Finally, it didn’t include a wealth tax – except, of course, it did

Now, what are the nasties?

Freezing tax thresholds

The freezing of Income Tax and National Insurance thresholds will get the headlines. These measures will reportedly raise £67 billion by the end of the decade.

Threshold freezes work by dragging more workers into higher rates of tax as time goes on and wages grow.  The Chancellor stated repeatedly that this was a budget to help tackle the cost of living; it is hard to see how this measure helps.

Other thresholds were frozen as well. The nil rate band for Inheritance Tax (IHT), below which an estate does not attract IHT, has been frozen. This is not surprising given that it last changed almost 20 years ago.

Finally, the VAT threshold above which a business must register was also frozen having been widely expected to drop. This threshold acts as a cliff edge and may discourage businesses from growing their turnover above it for fear of losing their hard-earned customers.

Pension and income taxes

Private sector employees will face further taxes on pension contributions that they make via salary sacrifice. Contributions that are currently exempt from National Insurance will now attract it above an annual £2,000 threshold. Curiously, these measures do not come into effect until April 2029, which is around about when the next general election is tabled.

The real nasty for savers and investors is income tax increases. Rates are going up by 2% on income from savings, rental properties and dividends (except for additional rate taxpayers in receipt of dividends for reasons passing understanding). Perhaps not an unreasonable ask as none of these so called ‘passive’ incomes attract National Insurance – but without cuts to costs elsewhere to help balance the books, it has gone down very badly.

For landlords, already struggling under increased regulation, it is another unwelcome cost.  It seems likely that these changes will encourage more savers and investors to consider Family Investment Companies where tax rules may be more attractive.

The “Mansion Tax”

In the middle of it all, the Chancellor confirmed that from April 2028 those that live in a house worth more than £2 million will be liable for an additional annual in tax. This starts at £2,500 and rises to £7,500 for homes worth more than £5million.  It is estimated more than 140,000 homes will be affected by this by the time it comes in.  Apparently, someone in a £5million home can easily afford the extra tax.  We are not sure if that is the answer to the right question.

Electric vehicles

If you drive an electric or hybrid car, you will need to pay an extra 3p or 1.5p per mile from April 2028. This is to fill the hole left by motorists paying less fuel duty. Conceptually, it makes sense for all road users to contribute evenly. A simpler solution might be to slightly increase annual road tax for such vehicles. Yes, this would produce winners and losers, as there is now. But the cost and complication of enforcing a mileage-based scheme is sure to be high.

Employee Ownership Trusts

And let’s end with an unwelcome surprise; effective immediately, those selling their businesses to an Employee Ownership Trust now receive only half the relief they did previously, taking the tax rate from 0% to 12% in the swish of a pen. One wonders how that impacts those mid- transaction?

Is this Budget a damp squib?

We are always asked what we think about Budgets once they have been and gone. And our reaction is that this one is a bit of a damp squib, with many of the changes not coming into effect for years, perhaps even after the next election.

But we cannot avoid the fact that this Budget significantly increases the welfare bill, continues to protect the civil service and their pension schemes, and asks those in the private sector and the ‘wealthy’ to contribute more to the Government’s spending plans.

The Chancellor maintains that Labour has kept their manifesto pledge not to raise income tax or National Insurance for working people. But with the combined effect of freezing thresholds, National Insurance on pension contributions and taxes on investment income, the reality is that employees and investors will pay more tax. We will let you decide whether the Chancellor’s claims are valid.

At Gravita, we remain available to our clients and any business owners or individuals who would like our support interpreting what the Budget means for them and what actions they might take next to minimise the impacts.