If all the hype were to be believed, this was billed as the Budget to end all Budgets. One thing is for sure, this has been the most hotly anticipated budget in over a decade.
So, what has been confirmed and how will it impact you as doctors and dentists?
Pensions: The Major Headliner
What’s new and what’s not?
The press has been buzzing with speculation about potential changes to the tax-free lump sum. This rumour often resurfaces around budget time, and with a new government in place, many were anxious that this was the year the predictions came true. Fortunately, this was not the case.
Discussions also focused on potentially moving to a flat rate tax for all contributions. This change could affect many in the medical profession, particularly those in higher tax brackets, by reducing their tax relief. Given the recent pay increases in the sector, giving with one hand and taking with the other would be contradictory. Thankfully, the current scheme remains intact.
Inherited Pensions and Inheritance Tax (IHT)
The big news is that inherited pensions will be subject to inheritance tax starting in April 2027. Currently, most private pensions payout to beneficiaries tax-free if the owner dies before age 75. After 75, beneficiaries are liable to tax at their marginal rate. For non or basic-rate taxpayers this has been more favourable than the IHT tax liability due at 40% on an estate over Nil Rate bands.
Most private pensions (defined contribution) are currently exempt from IHT and are not considered part of a person’s estate upon death. This exemption had made pensions a vehicle for inheritance tax planning, allowing capital sums to be passed to future generations. This often led to using other investments for income purposes before drawing on pensions due to their Inheritance tax efficiency.
Impact on Inheritance Tax Planning
The upcoming change is likely to alter the behaviours of those currently using pensions for inheritance tax planning. This may necessitate alternative solutions. Additionally, it could impact those with estates over £2,000,000, where tapering begins for IHT purposes. Currently, in addition to the standard nil rate band of £325,000 per person, there is an additional residential nil rate band of £175,000 where your primary residence is left to your children or grandchildren. This means an individual has combined nil rate bands of £500,000 and a couple has £1,000,000 between them. However, for every £2 your estate is worth over £2,000,000, the residence nil-rate band is reduced by £1. Including pensions as part of the estate could push many over the tapering threshold meaning they would lose the valuable additional residential nil rate band.
It is worth remembering that there is no IHT due between spouses, so your loved one should receive the benefits without IHT due.
Capital Gains Tax
The Chancellor’s changes to Capital Gains Tax (CGT) were more subtle than predicted. CGT applies to profits from the sale of non-residential assets, such as shares and certain investments.
While many anticipated a reduction in the CGT allowance, Rachel Reeves maintained the current threshold of £3,000 – the amount you can earn in a tax year before being subject to CGT. However, she did raise the tax rate on gains exceeding this threshold.
Capital Gain Rate Changes:
Previous Basic rate taxpayer
New basic rate
Previous higher rate taxpayer
New higher rate
Non-residential property assets
10%
18%
20%
24%
Example: If you sold an asset and made a £20,000 profit, after allowing for your £3,000 CGT allowance before the change you would have paid £1,700 in tax as a basic rate taxpayer and £3,400 as a higher rate taxpayer. After today’s budget, these would rise to £3,060 as a basic rate taxpayer and £4,080 at a higher rate.
Does this mean you shouldn’t be investing in CGT-liable investments?
No, but it does mean that caution is still necessary, just as before this budget. For example, if you’re accustomed to gradually transferring assets into tax-free wrappers like ISAs through ‘Bed and ISAs,’ you’ll need to carefully calculate how much can be moved into ISAs without triggering a CGT liability. Your financial adviser can assist with this.
For those with second properties, you may have got away lightly. The Chancellor was expected to increase rates on non-primary residences, but she chose to maintain rates at previous rates of 18% for basic and 24% for higher. So, it’s time to breathe a sigh of relief!
When is this coming into force?
The new rates are effective immediately.
Are there any reliefs available if you are selling a business?
The lifetime limit for Business Asset Disposal Relief will stay at £1m to encourage business owners to continue investing heavily in their own businesses. While this is positive news, it’s important to note that tax rates above this limit will increase from 10% to 14% in April 2025, and then to 18% in April 2026. This change will particularly affect many consultants who have established limited companies for their private medical practices. For those nearing retirement, it may prompt them to reconsider when to wind down their companies.
Stamp duty
Overall, there weren’t many changes to stamp duty, but there was an unwelcome increase for those looking to purchase second properties. Effective immediately, the additional stamp duty rate will rise from 2% to 5%.
Private schools
As anticipated, the VAT exemption previously granted to public schools will be removed in January 2025, following significant pre-budget discussions on this topic. This change may compel many families to rely on already strained state education, especially if private schools pass the full 20% loss in tax benefits directly onto parents through increased fees. Some schools may need to explore which services they provide are non-VATable to mitigate the impact of this tax change.
Summary
While this budget could have been tougher on hard-working medics and dentists, as Labour kept their manifesto promises regarding income tax and employee national insurance, there may still be significant changes to consider in your financial planning – not all of which have been detailed above.
For more information on how the budget may impact your financial planning, please reach out to your adviser.
Tax is dependent on your own circumstances and personal situation, and is subject to changes based on UK legislation and taxation regime. This article is based on our understanding of current legislation.