Autumn Budget 2024 - what it means for you and your money

Rachel Reeves’ Budget debut was road-tested in advance, as they are these days. There were no surprises in her well-flagged higher tax, higher spend, higher borrowing speech. The closest to a white rabbit was the welcome news that income tax thresholds will start to rise in line with inflation from 2028.

Broadly speaking the Chancellor has achieved what she set out to do - patching up the public finances and setting out a roadmap to what she hopes will be higher growth, and all without spooking the markets. The pound and gilts barely moved while she was on her feet. The domestically focused FTSE 250 rose strongly as she set out the details of how she proposes to invest the money she will raise from a £32bn net takeaway Budget.

The challenge she faces is that many of the measures she has announced might, in the short run at least, lead to slower not faster growth. Raising the costs of running a business via a significant hike in employer National Insurance is not an obvious recipe for a bigger and healthier economy.

She is right to identify better public services and investment in productivity as the keys to future growth. It is the best route to improving the UK’s prosperity. And the Office for Budget Responsibility (OBR) agrees that she was dealt a weak opening hand by the previous government. The UK’s fiscal situation has resulted in some difficult long-term choices.

So, what did she announce today, will it lead to the growth and investment she seeks, has she kept the markets onside, and what does it mean for our personal finances and investments?

Changing the fiscal rules

The boldest and riskiest measure was pre-announced. Reframing the fiscal rules that keep government spending in check, gives the Chancellor potentially £50bn of extra borrowing, while still keeping redefined debt on a downward path over a newly curtailed three-year time horizon. She achieved this by adopting a broader measure of government debt - public sector net financial liabilities - that offsets borrowings with assets such as student loans.

The Chancellor will not use all of this extra firepower. She knows that doing so would unsettle the bond market. There will be new guardrails to ensure that the government spends the money well. Although bond yields have edged higher over the past few weeks, she appears to have retained the goodwill of investors for now.

As Reeves presented her Budget, 10-year gilt yields were more or less unchanged at 4.25%, the FTSE 100 was broadly flat at 8,191 and the pound flatlined at just under $1.30. Job done from a market reassurance point of view.

Is growth more or less likely now?

The UK economy has grown faster than expected this year and the IMF now expects 1.5% growth next year. The OBR predicts a similar rate of growth throughout the five-year forecasting horizon.

Many of the measures announced in today’s Budget will make even this quite modest growth trajectory harder to achieve. The well-trailed hike in employer National Insurance (NI) adheres only to the letter, not the spirit, of the manifesto promise not to raise NI. It too will trickle down into lower wages or fewer jobs and so to slower growth.

What was announced (and what wasn’t)

1. National Insurance
   
   The biggest revenue raiser in today’s Budget was, as expected, an increase from 13.8% to 15% in the rate at which employers pay NI on their staff’s wages. The levy kicks in at £5,000 rather than £9,100 too, helping the measure raise a chunky £25bn, around three quarters of the total raised by the Budget.
   
   This does not immediately impact employees’ take-home pay, but they will bear the brunt of their employers’ reduced profitability in due course. It was probably the most politically expedient way for Reeves to plug the ‘black hole’ she claims to have found in the public finances, but it may make her growth ambitions less achievable.
   
   The government stepped back from requiring employers to pay NI on the pension contributions they make for workers, which is to be welcomed. It would have seen employers scale back pension contributions and made salary sacrifice schemes less viable.
2. Pensions
   
   With tax relief on pension contributions costing the Treasury around £44bn a year, this might have been an obvious target for a revenue-hungry Chancellor. Fortunately, Ms Reeves avoided the ideologically attractive temptation to abolish higher-rate tax relief. Introducing a flat rate of relief could have been positioned as a more equitable redistribution while coincidentally also saving the government significant sums. High earners in the private sector can probably thank their counterparts in the public sector, including senior teachers, doctors and consultants, for this reprieve.
   
   Also taken off the table was the mooted cut in the pension commencement lump sum, aka tax-free cash. With the average pension pot for a 55-64-year-old amounting to just £107,300, only a minority of people benefit from the full £268,275 tax-free allowance. But many have contributed to their pension on the basis that they would be able to access this portion of their pot tax-free - maybe to pay off a mortgage - and cutting it would have been an unfairly retrospective change.
   
   Unwelcome, but largely expected as it is something of an anomaly, is the end of the inheritance tax exemption for pension pots. This will prompt some rethinking of retirees’ decumulation strategies because it is no longer quite so obvious that they should draw down their ISA savings before tapping into their pensions. It could make annuities relatively more attractive for some.
   
   As emerging retirees become fully reliant on defined contribution (DC) pensions in retirement, we know that pension pots are unlikely to be sufficient. The government should use the second phase of its Pensions Review to agree a plan for increasing contributions. Even 1% more over a working lifetime can make a significant difference to retirement savings.
3. Other IHT measures
   
   The Chancellor said she had taken a balanced approach to reforming inheritance tax. She has frozen the thresholds until 2030 which will draw more people into paying this unloved tax. Currently just 6% of people do.
   
   The exemptions for farmland and AIM shares have been significantly reduced which is bad news for the junior market, which has already underperformed badly this year. There will be relief, however, that speculation around the rules on gift giving seem to have come to nothing.
4. Capital Gains Tax
   
   As expected, the Chancellor viewed the tax treatment of capital gains as low-hanging fruit. The CGT threshold has already been reduced significantly in recent years and it was left alone in today’s Budget. But as expected, a complex system of different rates was simplified to the government’s advantage. Higher rate taxpayers will now pay the same 24% rate of CGT on gains whether they are made from shares, the sale of a business or property. Basic rate taxpayers will see their rate rise from 10% to 18% for all assets.
   
   One of the continued challenges we face is how to evolve a cash savings culture into one in which people have the confidence to invest for their longer-term needs. Today’s move on CGT will prompt people to maximise their use of tax-efficient products such as ISAs. In light of that the government should look to further simplify the ISA regime, perhaps by combining stocks and shares and cash ISAs and improving the ease of transfers.
5. Income tax thresholds
   
   The main rates of income tax were left unchanged, as they had to be given Labour’s manifesto pledges. And there was further positive news on the thresholds at which workers start to pay higher rates of tax. These had already been frozen until 2028 but there was speculation that this would be extended for another two years until 2030. The Chancellor said she had considered this but stepped back from yet more ‘fiscal drag’.  This is a good thing. It is an effective way of raising extra revenue but stealthy and pulls more and more people on relatively modest means into a tax rate that used to be reserved for the wealthiest.
6. Stamp Duty
   
   With property prices starting to rise again, it was perhaps inevitable that the Chancellor would take a look at Stamp Duty Land Tax. In keeping with Labour’s assertion that those with the broadest shoulders should bear the greatest burden, the additional rate applied to second home purchases has been increased from 3% to 5%.
7. ISAs
   
   It was a relief to see that the Chancellor chose to leave untouched the generous £20,000 ISA annual allowance. Relatively few people use the full allowance, but it is a powerful incentive to save and ensures that most people can make provision for the future (in tandem with a pension) without ever having to worry about tax.
   
   It would have been tempting for Reeves to impose a cap on the amount that savers can accrue in an ISA, but this would have penalised growth in these funds and would run counter to the recent abolition of the similar lifetime allowance for pensions. 

Conclusion

The Chancellor had a simple but not easy task today. She had to stabilise the public finances, to raise a significant sum via taxation and to put in place a framework that will enable borrowing for long-term productivity-enhancing investment. She needed to do all of this while retaining the goodwill of the financial markets.

Targeting businesses rather than individuals is generally the path of least resistance when raising money. It allows the goose to be plucked with the least amount of hissing. So, it is not surprising that this is the route she took. She sensibly kept nothing up her sleeve. And she was rewarded by the markets for surprising no-one.