A contractor’s Autumn Budget financial review

This final quarter of 2024 saw the first Labour budget in 14 years, and the first-ever budget delivered by a female chancellor, writes IFA Angela James of financial planning advisory Yolo Wealth.

Autumn Budget 2024: Unpopular, tough, but now clear

Rachel Reeves didn’t shy away from some unpopular and tough decisions on October 30th 2024 and gave a clear message that the aim is to deliver economic stability.

But what do the key measures and announcements of Autumn Budget 2024 mean for you, your contractor limited company, and the future of your finances?

Three ‘good’ measures from the chancellor’s October 30th statement

Let’s start with a few Autumn Budget positives, of sorts:

• Reeves remained committed to not raising taxes on the “working people” -- there will be no increase in VAT, employee’s national insurance contributions or the current income tax rates (of 20%, 40% & 45%). 
• The chancellor will not extend the freeze to income tax and national insurance thresholds beyond the current freeze date of April 2028. Positively, Reeves pledged to go back to increasing the tax-free personal allowance and tax thresholds by inflation from April 2028, onwards.
• The government confirmed that rates of corporation tax will be capped at the current rate of 25% for the duration of parliament. The confirmation provides some stability for contractors working via their own limited company (‘LTD’), also known as a personal service company (‘PSC’).

But where is Autumn Budget 2024 more likely to sting?

Five taxing announcements from the Labour government

1. Increase in employer National Insurance Contributions

The announced rise in Employer NICs is going to hit you as a contractor, regardless of whether you are a LTD/PSC director or an umbrella company employee.

And in both instances, it’s going to hit the bottom line -- your take-home pay.

The government is increasing employer NICs by 1.2% to 15%

But not only is the rate being increased (from April 6th 2025) but the threshold for when this levy is applied is reducing from £9,100 p/a to £5,000 p/a (also effective from the new tax year of 2025-26).

The reduction in this so-called secondary threshold is going to cost you an extra £615 p/a.

And again, it won’t matter whether you are brolly or ‘Ltd.’

Limited company director considerations of rising employer NICs

If you are a limited company director, then you will likely be taking a salary of either £9,100 p/a which is the current NI threshold, or you may be taking the full personal allowance level of £12,570.

The only way you would negate this additional cost would be to reduce your director’s salary to less than £5,000 p/a, but this could have an impact on your future entitlement to the state pension.

So individual circumstances will need to be considered with your financial adviser and accountant to establish the best way forward.

Autumn Budget 2024 announced an increase to the Employment Allowance.

While helpful for some SMEs, it won’t have any positive impact on you if your limited company has one director on the payroll. You remain ineligible.

2. Changes to capital gains tax, and Business Asset Disposal Relief

The October 30th budget stated that, with immediate effect, capital gains tax rates (CGT) increased from 10% to 18% for basic rate taxpayers and 20% to 24% for higher rate taxpayers.

In this context, CGT is a tax paid on any assets realised/sold on the investment gains made. This includes investments such as shares or second properties and investment properties.

CGT has come under fire in previous budgets, notably when the annual exemption allowance was reduced from £12,300 in 2022/2023 and then reduced further, to just £3,000 for 2023/24.

If you are among the many who are in the throes of selling let investment properties at this time (or have been thinking about doing so), then you will want to consider this significant change to CGT in your planning.

What did Autumn Budget 2024 say about ISAs?

Fortunately, Individual Savings Accounts (ISAs) are unaffected.

In other words, an ISA can still offer you an annual allowance of £20,000.

So ISAs continue to remain exempt from CGT and are still as generous as before the chancellor got to her feet.

Bad news on BADR (but it could have been worse)

Autumn Budget 20024 made changes to Business Asset Disposal Relief (BADR), too.

While I had expected BADR to be targeted by the chancellor, I feared the worst – that BADR (formerly Entrepreneurs’ Relief) would be scrapped altogether.

Positively, then, the chancellor made clear that BADR is staying untouched and exactly as it is for the current tax year.

Reeves also reinforced the commitment to keep the £1million lifetime allowance available to business owners and entrepreneurs.

However, the government says in the budget that BADR will rise to 14% from April 6th 2025 (tax year 2025/26) and then rise again to 18% (to match CGT) from April 6th 2026 (tax year 2026/27). The staggered increase helpfully provides some planning time for business owners.

3. Autumn Budget 2024 impact on second homes and investment property

Another adverse change announced at Autumn Budget with immediate effect was that the stamp duty surcharge of 3% on the purchase of any home that is not your main residence increases to 5%.

Remember, this is in addition to the standard rates.

And it affects any second homes, buy-to-lets or limited companies purchasing residential property.

Unfortunately, this SDLT surcharge represents a substantial increase and additional cost.

If you are in the throes of any such purchase or have been thinking about doing so, now is the time to review the implications.

4. Inheritance Tax (IHT)

Many contractors and commentators have hoped for years to see an increase to the current individual threshold of £325,000, or £500,000 if this includes a main residence being left to direct descendants (e.g. children).

However, the only key IHT announcement at Autumn Budget 2024 was the continued freeze to this threshold, which will now be extended out until 2030.

Transfers between spouses will continue to be exempt from IHT, permitting the allowance to be utilised upon a second death.

But the key inheritance tax change is that pensions (specifically ‘unspent pensions’), will now be considered within a deceased estate and considered within IHT.

There was mention that some share investments such as shares held on the Alternative Investment Market (AIM) may provide some relief or reduction to the level of inheritance tax, potentially reducing the tax to 20%.

However, at the time of writing, details of this remain unclear. Nonetheless, this reduction could change the landscape potential for some investment planning within portfolios in the future.

5. Pensions

Many changes to pensions had been speculated upon in the months running up to the Autumn Budget.

But first, I will confirm the four areas of pensions that remain intact as they weren’t change by Rahcel Reeves:

• No changes to the annual allowance -- it remains at £60,000;
• No changes to the removal of the lifetime allowance;
• No changes to the tax relief system (this represents very good news for contractors);
• No changes to the current tax-free cash system

Where Autumn Budget 2024 affects pensions

From April 6th 2027, most unused pension funds and death benefits will be included within the value of an individual’s estate for inheritance tax purposes.

The government says a consultation will be launched to seek the process required to implement these changes and new rules.

The consultation will run until January 22nd 2025.

As to the rationale, the chancellor said most people do not pay inheritance tax and in the coming years, the official expectation is that fewer than 10% of estates will be liable to IHT.

‘Death tax’ reform (continued)

Reeves also says that for the majority of estates that are liable to this “death tax,” IHT is a fair tax applied consistently across assets.

My take is that the government wants to maintain tax reliefs on pension savings to continue to incentivise people to save towards retirement, but tax relief is also one of the most expensive reliefs in the UK tax system.

Therefore, they want to ensure that the relief applied is being used for its intended purpose, supporting pensioners throughout their retirement, and not as a vehicle to mitigate or negate inheritance tax.

A lot hinges on the IHT-pensions consultation small print

Now, I would caveat here that we don’t have all the details, and the practicalities and considerations will likely become clear following the consultation.

Given that transfers between spouses continue to be exempt, this change shouldn’t create too much (if any) difficulty when it comes to planning retirement and considering your husband/wife.

Where things may get trickier is for those unmarried or single people, and how they should now go onto plan effectively when it comes to mitigating inheritance tax as much as possible.

Pensions changes: don’t be deterred, but do act if you like tax-free

But do not let this uncertainty put you off pensions.

Pensions remain a great vehicle for saving for retirement or making the most of the tax breaks they offer and will continue to offer.

Although it’s not always ideal-sounding, don’t forget the aim of a pension -- to provide for us in retirement, and ideally spend the pension enjoying yourself!

Given the changes to employer NICs that we know will negatively impact all contractors, pensions will remain a consistent, tax-savvy planning consideration for contractors, assuming you want to continue to reduce your tax and NI burden!

Contractor financial review? Go for full and tailored...

If you are still worried or concerned about any of Autumn Budget 2024’s tax changes, measures or announcements, then consider undertaking a full and tailored financial review. A health check on your finances and monetary position to make sure that all the above is factored in will ensure you can move forward confidently, pending of course those pesky and still evasive consultation details.

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