A deep dive into fine details of the Budget now dust begins to settle

The Budget | Getty Images

It is unsurprising there were few surprises in Rachel Reeves’ statement, given how much was speculated in advance, such as cuts to the cash individual savings account (ISA) tax-free limit.

The accidental publication by the Office of Budget Responsibility (OBR) of its analysis more than half an hour before the Chancellor delivered her speech certainly removed some of her thunder.

Scotsman Money has undertaken a deep dive into the fine detail of the Budget, with the help of a range of expert commentators, to explain changes in such areas as savings, investments, and pensions.

Retirement planning and pensions

Changes were announced to salary sacrifice arrangements that will make them less attractive. Salary sacrifice pension contributions above £2,000 will face National Insurance (NI) from April 2029.Under a pension salary sacrifice arrangement, in return for an employee giving up a portion of their salary, the employer pays an equivalent amount into their pension. The amount of salary sacrificed and the corresponding employer pension contributions are currently exempt from both IncomeTax and NI.

The Budget statement said the costs of salary sacrifice relief were set to treble to£8 billion by 2030-31 without reform. It added that “the use of these arrangements has disproportionately benefitted higher earners”.

Michael Angus, financial planning director at Atomos Wealth, says that this move will require both employers and employees to consider how best to fund pensions.

David Piltz, chief executive of Gallagher Benefit Services, comments: “The Chancellor’s decision to leave the annual allowance and tax-free lump sum unchanged is welcome, however, the annual threshold on saving for retirement through salary sacrifice is disappointing.

“This is not just a change that will affect the wealthy, £2,000 is approximately 5 per cent of average UK earnings so this will make retirement savings more expensive for millions of workers, at a time when it is estimated that 40 per cent of UK adults are not saving enough for a comfortable retirement.

“For employers, this will add significant cost; about a quarter of Gallagher clients reinvest salary sacrifice savings directly into their employees’ pensions, so the cap will inevitably result in lower levels of retirement saving. Whilst the deferred introduction until 2029 is welcome, this initiative will introduce another layer of complication to an already complex pension landscape.”

According to Andrew Tully, technical services director at Nucleus, the change to salary sacrifice may reduce take home pay for individuals or, more likely, mean people will save less for their retirement.

He explains: “‘This change sends the wrong message to savers, likely reducing the pension savings many millions will make for their retirement, and particularly hitting those earning around £40,000 to £50,000.“While government will benefit through increased tax and NI receipts, the knock-on impact on savers will be significant. Pension savings will fall and changes like this also increase the likelihood of a wider impact.”

On pensions tax relief remaining unchanged in the Budget, Mark Pemberthy, benefits consulting leader at Gallagher, says: “The Chancellor’s decision to leave rates unchanged is a clear signal that encouraging long-term saving and strengthening private pensions are still, sensibly, high on the Treasury’s agenda. Coupled with the recent commitment to protect the tax-free lump sum, this gives savers and investors confidence that pension protections are still firmly embedded in the UK’s long-term growth plans.”

ISAs, savings and investing

As predicted, the tax-free Cash ISA limit will be cut from £20,000 to £12,000. While £20,000 can still be paid into an ISA each year, £8,000 will be designated for investment – stocks and shares – not cash savings. Only those over 65 will keep the full cash allowance of £20,000. The aim of the cut to the cash ISA limit – effective from April 2027 – is to encourage retail investment.

The Chancellor said that banks will be “able to guide savers to better choices for their hard-earned money”. This is as a result of“targeted support” being introduced from next April to allow financial providers to offer personalised guidance to those who do not have an adviser.

But many are questioning whether the cut to the Cash ISA limit will achieve the aim of encouraging more people to invest.

Jason Hollands, managing director of Bestinvest, says: “The move to limit cash ISAs isn’t ideal as it reduces flexibility, and it is unlikely to drive more people to become investors, but frankly it could have been worse.

“But as the dust settles on this news, there remain some important unanswered questions about how this will work in practice.”

New analysis from InvestEngine reveals that millions of savers could face higher tax bills under the new Cash ISA allowance of £12,000.Its research, based on the latest HMRC data, shows there are around 13.3 million Cash ISA holders in the UK. Of the 7.1 million who paid into their accounts in 2022/23 (the latest available data), more than a quarter – two million people – saved more than £12,000.

Now that the Chancellor has confirmed the cut in the Cash ISA allowance from £20,000 to £12,000, about15 per cent of Cash ISA holders could soon face tax on their interest if they exceed the Personal Savings Allowance, as any interest-earning additional savings would need to be placed in taxable accounts.

Taxation changes

While some tax measures vary between Scotland and the rest of the UK, others –such as Inheritance Tax (IHT) and Capital Gains Tax – apply across the board.

It was announced that the government is restricting Employee Ownership Trust (EOT) CGT relief from100 per cent to 50 per cent. This is because this scheme is on course to cost £2 billion.

This change is a “significant shift” for succession planning for business owners, according to Peter Turk, a specialist legal adviser on EOTs at regional legal and professional services business Knights.

Turk says: “EOTs were introduced to promote diversity and engagement in the UK economy, so curbing measures that support employee ownership may seem counterintuitive. That said, instances of abuse have occurred, and so reform is not entirely unanticipated.

“EOTs have become an increasingly popular succession route for owner-managed businesses, offering stability for businesses and rewarding employees. While there is no doubt this change will affect their attractiveness, even at50 per cent the relief is still substantial compared to other exit strategies.

“Our advice has always been that EOTs only work when driven by a genuine belief in employee ownership as a platform for growth – not simply tax savings. We therefore expect EOTs will continue to be an attractive option for many sellers.”

The Budget also confirmed a freeze on IHT thresholds and tax-free allowances for a further year to 2030-31.

Rachael Griffin, tax and financial planning expert at Quilter, says the extension of the freeze means the government will rake in a “whopping” £14.5bn per year from “grieving families” by 2030-31.

She explains: “Inheritance tax is one of the UK’s most hated taxes. What was once a tax on only the wealthiest families will increasingly impact those with even relatively modest estates, who after a decade of frozen thresholds alongside rising house prices, will be snagged by the tax.

“Add to that the significant changes coming in April 2027, when pensions will be drawn into taxable estates, and the government looks set to cash in on an ever-expanding pool of taxpayers.”

She adds: “Alongside the freeze on thresholds, inheritance tax-free allowances have also been frozen until 2030-31. While they won’t be getting any more generous, maximising every available allowance will be vital for families looking to ensure they pass on as much of their wealth as possible, while leaving as little as possible in the hands of the taxman.

“Inheritance tax can be complex, so understanding how to manage your money in the most tax-efficient way possible will be key. Families must take action now to get ahead of the changes, and seeking professional financial advice wherever possible will be vital.”

The government also confirmed previously announced measures, including the move to bring unspent pension pots into the scope of IHT.

And while the reform of agricultural property relief and business property relief will go ahead, it was announced that the £1 million allowance will be transferable between spouses and civil partners.

Ian Dyall, head of estate planning at wealth management firm Evelyn Partners, comments: “The Chancellor has addressed one of the unfairest elements of the Inheritance Tax reforms announced at the 2024 Budget.”

He added that allowing any unused £1m allowance at the first death to be transferred to the surviving spouse on death, makes financial planning for such businesses a lot less complicated.