Yesterday, the Chancellor of the Exchequer, Rachel Reeves, unveiled this year’s Autumn Budget. Announcing a package of reforms aiming to raise £40bn in tax revenues, the Chancellor stated that the Autumn Budget “marks the end of short-termism”. This blog post sets out a high-level summary of the key measures from an employment, pensions and incentives perspective.
Employment changes
The Budget has brought with it an increase to employer national insurance contributions (NICs) by 1.2%, from 13.8% to 15% from April 2025. In addition, the threshold at which businesses start paying NICs has been reduced from £9,100 per year to £5,000; collectively, these changes are estimated to raise £25bn in tax revenues.
From April 2025 the National Living Wage will increase by 6.7% to £12.21 an hour for eligible employees, with similar increases being made to the National Minimum Wage for 18-20 year olds, under 18s and apprentices.
As trailed prior to the Budget, these changes collectively will impose additional financial burdens on employers. Employers will need to decide how to deal with this. Employers may wish to use this opportunity to consider if there are ways in which they can manage their employer NICs liabilities – for example, using tax-favoured share plans (SIPs, CSOPs, SAYE and EMIs) to incentivise employees could help manage the increased tax liabilities as NICs are generally not payable under those plans.
The press has reported that there could be an indirect cost to employees in that employees could be paid less as a way to manage these additional liabilities. In most cases it is not possible for an employer to unilaterally reduce an employee’s pay without their consent, but employers could for example look at using casual workers less or could need to implement redundancies.
The most significant change for employers is arguably not from the Budget, but rather from the upgrade to workers’ rights set out in the Employment Rights Bill (on which, see here).
Carried interest
The Budget included reforms to the tax treatment of carried interest as trailed during the election. Carried interest is typically structured to be taxed at the lower capital gains tax rate. Capital gains tax is itself being increased, but the rate on carried interest will specifically be increased from 28% to 32% from April 2025. The accompanying policy papers go further and broadly states that carried interest will, from 2026, be subject to an effective tax rate of around 34%. Further changes will also be consulted on including minimum co-investment and holding requirements.
In addition, a response was published today on the call for evidence on the tax treatment of carried interest launched at the July 2024 Statement.
These proposals are discussed in further detail in a podcast by our London Tax team.
Employee trusts
A policy paper was also published today proposing some changes on the tax rules on disposing of shares from an employee ownership trust and contributions to employee benefit trusts. Whilst employee ownership trusts are not particularly common for large companies, lots of companies do use employee benefit trusts. The policy paper looks to tighten up the scenarios in which inheritance tax relief is available on assets in these types of trust.
Inheritance tax and pensions
The only change of note for pensions is to the inheritance tax (IHT) treatment of pension funds on death. Unused pension funds and death benefits are to be included in the member’s estate for IHT purposes from 6 April 2027. Notably, we understand that this now means death in service lump sums will fall within the member's estate for IHT purposes – though the wording in the technical consultation is unclear on this point. Regardless, these changes have the potential to significantly increase the amount of IHT payable by the member's estate.
There is a consultation on the processes for payment of the tax if due. This will add a considerable layer of complication to the administration of pension schemes since the trustees or administrators will have to liaise with the personal representatives of the deceased member to identify if there is an IHT liability. It also seems that the income tax treatment of the pension funds will not be affected and so there is potential for a double taxation burden where a beneficiary has to pay income tax on payments from a pension entitlement which has already been subject to IHT.
In practice this won’t affect employers materially. There could be an impact on tax planning for senior executive remuneration packages, but given the existing constraints on contributions to pension schemes this is unlikely to lead to much change.
Other pensions changes
A 25% tax charge is being introduced on certain transfers from UK pension schemes to Qualifying Recognised Overseas Pension Schemes (QROPS) established in the European Economic Area (EEA) or Gibraltar. This merely removes an exemption and brings the treatment into line with transfers to QROPS in other jurisdictions.
Certain measures rumoured to be in contemplation before the Budget, such as capping of the 25% tax-free lump sum, or levying national insurance contributions (NICs) on pension contributions, have not been adopted.
Many commentators predicted that today’s Budget announcements would be more extensive than they have proved in reality, but many of the measures will have important consequences for businesses, individuals and pension schemes across the UK.
For more information on these measures, please speak to the authors of this blog post or your usual Freshfields contact.
