Labour’s first Budget: key details

Rumours have circulated since election day on what the new government might have in store for us this month. Finally we have something concrete to discuss!

Here are the key points from what Rachel Reeves had to say in today’s Budget:

Pensions

There were rumours the Chancellor might scrap pensions tax relief for higher-rate taxpayers or cut the size of cash lump sum people can take out. But this area of pensions was left untouched.

However, one significant change here is that pensions will be considered part of a person’s estate for inheritance tax (IHT) purposes from 2027.They're currently exempt, making them a useful tool for estate planning.

Rachel Reeves also confirmed the Triple Lock formula (earnings growth, price inflation or a minimum of 2.5%) stays in place for the state pension, which will rise by 4.1% next April.

It’s worth pointing out that, separate from the Budget, the government has already announced a major review of pension schemes, which could include reforms to defined contribution schemes.

National Insurance

Although Labour stuck to its promise of not raising National Insurance (NI) for employees, their employers will have to pay more. The NI rate they pay on workers’ salaries will rise to 15%. The earnings threshold for when they must start paying also drops too, from £9,100 per year to £5,000, meaning a higher proportion of salaries are affected.

A side note to this: Employment allowance is increasing to help some smaller business owners. This is rising from £5,000 to £10,500 and the Chancellor says 865,000 employers won’t pay any NI next year, while more than 1 million will pay the same or less than they have done in previous years.

Capital Gains Tax

As many expected, Capital Gains Tax (CGT) will go up. Charges on selling an asset rise from 10–18% for the lower rate taxpayers and from 20%–24% for the higher rate. Residential rates stay as they are. In previous years, the CGT tax-free allowance has already dropped dramatically, from £12,300 to £3,000. 

Despite these rises, Rachel Reeves said the UK still has the lowest level of capital gains tax in Europe or among G7 nations.

Inheritance Tax

A freeze on Inheritance Tax (IHT) thresholds will now stay in place until 2030, two years longer than previously planned. This means the first £325,000 of an estate can be inherited tax free (this rises to £500,000 if the residence is passed to direct descendants and £1 million when a tax-free allowance is passed to a surviving spouse of a civil partner).

As well as removing the IHT exemption for inheriting a pension, Rachel Reeves has also included business and agricultural assets under the scope of IHT. While combined assets worth under £1 million are still exempt, for those above the threshold, 50% IHT relief applies from April 2026.

The Chancellor highlighted that only 6% of estates would pay IHT this current tax year.

Income Tax

Income Tax won’t change for now. However, one notable move was choosing not to prolong a freeze on income tax thresholds. From the 2028/29 financial year, personal tax thresholds will go up in line with inflation.

The freeze had resulted in more people moving into a higher tax band as pay levels went up, but tax band thresholds didn’t.

Other changes

Effective from today, stamp duty is rising to 5% on second house purchases, which will affect landlords operating buy-to-let properties. The Chancellor said it will support more than 130,000 people buying their first home or moving home over the next five years.

Labour is scrapping the controversial non-dom status (a UK resident whose permanent home for tax purposes is outside the UK).

The government is pressing ahead with its plan to charge VAT on private school fees from January next year. It also plans to remove business rates relief from April 2025.

Please get in touch if you have any questions or would like to discuss this further.