Chancellor Rachel Reeves recently delivered Labour’s first Budget since 2010, after the party’s return to power in July’s general election. In this article, we break down updates to income tax, dividend tax, capital gains tax, inheritance tax, and non-domicile status in the UK. These changes can significantly impact your finances, whether you’re a resident or considering returning to the UK.
More importantly, we explore various planning opportunities to help you navigate these changes effectively. By simplifying the technical jargon and explaining key terms, we aim to provide a clear understanding of how these tax updates may affect you and your financial planning.
- INCOME TAX & ALLOWANCES
- CHANGES TO DIVIDEND TAX
- PROPERTY & CAPITAL GAINS TAX (CGT)
- INHERITANCE TAX (IHT)
- NON-DOMICILE (NON-DOM) STATUS
- PENSIONS
- NATIONAL INSURANCE CONTRIBUTIONS & OTHER CHANGES
INCOME TAX & ALLOWANCES
As of now, the personal allowance—the amount you can earn before paying income tax—and the Basic Rate Threshold are frozen until the tax year 2027/28. The Chancellor of the Exchequer has promised to raise these amounts starting in the tax year 2028/29.
However, for 2025/26, the rates will remain the same as they were in 2024/25:
- Personal Allowance: £12,570. This is the income level below which no income tax is charged.
- Basic Rate Threshold: £37,700. This is the income level where the basic tax rate (20%) begins.
- Higher Rate Threshold: £50,270. Income above this amount is taxed at 40%.
- Additional Rate: For income over £125,140, the tax rate increases to 45%.
Starting in April 2025, if your adjusted net income exceeds £100,000, your personal allowance will decrease by £1 for every £2 you earn over this limit. This means that if you earn more than £125,140, you will lose your personal allowance entirely, which effectively creates a high tax rate of 60% on income between £100,000 and £125,140.
CHANGES TO DIVIDEND TAX
The Dividend Allowance—the amount of dividend income you can receive tax-free—has been reduced to £500 for the 2024/25 tax year and will stay the same for 2025/26. Dividends above this amount are taxed as follows:
- Basic Rate Taxpayers: 8.75%
- Higher Rate Taxpayers: 33.75%
- Additional Rate Taxpayers: 39.35%
Planning Opportunities
For those living abroad but considering a return to the UK, it’s important to keep a close eye on your income levels due to the high tax rates in certain brackets. If you earn dividends from investments outside the UK, it may be wise to reassess your investment strategy to maximize your tax efficiency. Options like offshore bonds can help defer taxes for clients planning to return to the UK.
PROPERTY & CAPITAL GAINS TAX (CGT)
The annual exemption for CGT, which is the amount of profit you can make from selling assets before paying tax, is frozen at £3,000 for individuals and £1,500 for trusts until 2025/26. Starting from October 30, 2024, the CGT rates will increase:
- Non and Basic Rate Taxpayers: From 10% to 18%
- Higher and Additional Rate Taxpayers: From 20% to 24%
These rates apply to profits from selling residential properties, except for those that qualify for private residence relief (a tax exemption for your main home).
Planning Opportunities
Returning residents should consider their residency position before re-basing their assets to minimize future CGT liabilities.
INHERITANCE TAX (IHT)
The Nil Rate Band (NRB), which is the amount you can leave to heirs without incurring IHT, remains at £325,000 until 2029/30. The Residence Nil Rate Band (RNRB), an additional allowance for passing on a home, stays at £175,000 for the same period.
Significant changes include a new residence-based system for IHT that affects individuals who have lived in the UK for at least 10 out of the last 20 years. If you leave the UK, the duration of your IHT liability will depend on how long you lived there:
- 10 to 13 Years: 3-year IHT tail
- 14 Years: 4-year IHT tail
- 15 Years: 5-year IHT tail
- 20 Years: 10-year IHT tail
Planning Opportunities
Clients returning to the UK should take steps to limit their IHT exposure. Reviewing existing trusts can help ensure tax efficiency and protection against IHT. Business and agricultural property reliefs are vital for residents and non-residents alike, so a thorough review of current arrangements is necessary.
NON-DOMICILE (NON-DOM) STATUS
The existing non-dom tax regime will be replaced by a new “4-Year Relief” for individuals moving to the UK. This allows new residents to enjoy 100% relief on foreign income and gains for the first four years, provided they haven’t been UK tax residents in the past decade.
Planning Opportunities
While the new regime simplifies some processes, it also removes many previous tax benefits. Existing trusts should be reviewed as the new rules could affect their tax advantages.
PENSIONS
The Lifetime Allowance Charge was abolished in April 2023, replaced by a new limit of £1,073,100 for lump sums and death benefits starting in 2025/26. The Annual Allowance remains at £60,000, with reduced contributions kicking in for those with an income above £260,000.
Planning Opportunities
Expatriates nearing retirement should evaluate when to drawdown a UK pension. Structuring pension assets to manage currency risk and ensure accessibility is key for those planning to retire abroad.
NATIONAL INSURANCE CONTRIBUTIONS & OTHER CHANGES
Starting in April 2026, carried interest (a share of profits earned by investment managers) will be fully taxed as income. National Insurance Contribution thresholds are frozen until 2028, and CGT rates for business asset reliefs will rise to 14% in April 2025. Additionally, Stamp Duty surcharges on additional homes increased by 5% from October 31, 2024.
CONCLUSION
With these significant tax changes on the horizon, staying informed and considering how they may affect your financial situation is essential. Whether you’re a UK resident, an expat, or someone planning to move back, understanding these updates will help you make better financial decisions. Our team has years of experience navigating these situations with expats. We provide personalized strategies tailored to your unique circumstances to help make your move as seamless as possible.
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