Income Tax and NICs

Income tax rates and allowances

The basic rate of income tax will remain at 20%. Other rates will also remain unchanged as the Labour Party manifesto committed a Labour government to not increasing the basic, higher, or additional rates of income tax.

The personal allowance and higher rate threshold are fixed at their current levels until April 2028. The income tax additional rate threshold was lowered from £150,000 to £125,140 from 6 April 2023.

The dividend allowance was reduced to £500 from April 2024. The ordinary rate of income tax on dividends will continue to be 8.75%, the upper rate 33.75% and the additional rate 39.35%.

For a table of the main tax rates and allowances, see here.

National insurance contributions

Few taxes have suffered as many rate changes as NICs in the last few years. From the heady highs (or lows depending on your perspective) of the increase to 13.25% in anticipation of the introduction of a Health and Social Care Levy to the scrapping of that increase by Kwasi Kwarteng and then a double 2% reduction in employee NICs. The so-called "tax on jobs" has been something of a political football!

The Labour Party manifesto contained a pledge not to increase NICs and, accordingly, the main rate of employee National Insurance (Class 1 NICs) will remain at 8%. The 2% rate of NICs for higher earners also remains unaffected as will other rates.

However, employer Class 1 NICs are set to rise. The government will increase the main rate of employer Class 1 National Insurance contributions from 13.8% to 15%. The Class 1A and Class 1B employer rates will also increase in line with this.

In addition, the government will reduce the Class 1 National Insurance contributions secondary threshold, from £9,100 to £5,000 per annum. This will take effect from 6 April 2025 until 5 April 2028. Thereafter, the secondary Class 1 National Insurance contributions threshold will be increased in line with the Consumer Price Index (CPI).

The government will also increase the Employment Allowance from £5,000 to £10,500 and remove the restriction that currently applies to the Employment Allowance, where only employers who have incurred a secondary Class 1 National Insurance contributions liability of less than £100,000 in the tax year prior are able to claim. This will take effect from April 2025 and will mean eligible employers will be able to reduce their National Insurance contributions liabilities by up to £10,500 per year.

Taxation of non-doms

Reforming the UK non-dom taxation regime to address perceived unfairnesses has been a topic of political debate for some time. Both the previous Conservative government and the current Labour government had committed to abolishing the current regime and replacing it with a regime based on tax residence rather than domicile. The Autumn 2024 Budget saw confirmation of the details of the new regime which will apply from April 2025.

The government claims that the new regime will ensure that everyone who is long term resident in the UK will pay their taxes in the UK. The government believes that the new residence based regime is internationally competitive and focussed on attracting the best talent and investment to the UK.

Current regime

Under the current rules, UK resident non-domiciled individuals can elect to be taxed on the remittance basis. UK resident non-domiciled individuals who elect to be taxed on the remittance basis are taxed on their UK income and gains as they arise but are only taxed on their foreign income and gains to the extent they remit those foreign income and gains to the UK.

Non-domiciled individuals are currently subject to inheritance tax only on their UK assets.

New residence based foreign income and gains (FIG) regime

The current non-dom regime will be replaced by a new residence based regime from 6 April 2025. The new regime will provide individuals who move to the UK with 100% tax relief on their foreign income and gains arising during their first four years of UK tax residence, provided they have not been UK tax resident in the previous ten tax years.

From 6 April 2025, former remittance basis users who are not eligible for the new regime will be taxed on their worldwide income and gains which arise from 6 April 2025 as they arise in line with the current treatment of UK resident domiciled individuals. Former remittance basis users will only pay UK tax on their foreign income and gains which arose prior to 6 April 2025 to the extent those foreign income and gains are remitted to the UK.

From 6 April 2025, the protection from UK tax on foreign income and gains arising within settlor-interested trust structures will no longer be available to individuals who do not qualify for the new residence based regime.

Overseas workday relief

Overseas workday relief will continue to apply to individuals who qualify for the new residence based regime. The period for which the relief is available will increase from three tax years to four tax years to align with the new regime. Where overseas workday relief applies, an individual is not subject to UK tax on their earnings attributable to their non-UK duties. Going forwards, given the removal of the remittance basis rules, earnings to which the relief applies will not be subject to UK tax even if they are remitted to the UK.

From 6 April 2025, overseas workday relief will be subject to a financial limit on the amount of relief that can be claimed. This limit will be the lower of £300,000 or 30% of an individual’s total employment income.

Currently, employers need to receive approval from HMRC (in the form of a section 690 direction) in order to be able to apply PAYE only to an individual’s earnings attributable to that individual’s UK duties where that individual qualifies for overseas workday relief. From 6 April 2025, employers will not need to wait for HMRC to approve an application to apply PAYE on this basis. Instead, employers will need to notify HMRC of their intention to operate PAYE on this basis and can operate PAYE on that basis once they have received an auto-acknowledgment of their notification from HMRC. This is a welcome administrative simplification.

Rebasing of assets to April 2017

For capital gains tax purposes, current and former remittance basis users will be able to rebase their foreign assets held on 5 April 2017 to their value at 5 April 2017 in certain circumstances. The previous government’s proposals had involved rebasing of relevant assets to April 2019, so this is a less attractive proposal.

Temporary repatriation facility

A new temporary repatriation facility (TRF) will be introduced for individuals who have been subject to tax on the remittance basis. Individuals who have previously claimed the remittance basis and have untaxed foreign income and gains will be able to make an election to designate amounts derived from previously untaxed and unremitted foreign income and gains that arose prior to 6 April 2025. Such individuals will be able to make such an election for any of the three tax years from 6 April 2025 provided they are UK resident in the relevant tax year.

Amounts which are designated in tax years 2025/2026 and 2026/2027 will be charged to tax at a rate of 12%. Amounts which are designated in tax year 2027/2028 will be charged to tax at a rate of 15%. Any designated amounts which are remitted to the UK will not be subject to any further UK tax.

Individuals who make a designation under the TRF and have paid the TRF tax charge can choose the tax year in which they remit the designated amounts to the UK. This can be after the tax year 2027/2028.

No exit charge

There were suggestions in the media that many individuals would leave the UK before April 2025 in order to escape the effects of these changes. In light of this, there was speculation that the government would introduce an exit charge which would deem individuals leaving the UK to have disposed of their assets for capital gains tax purposes when they ceased UK residence. Despite this, the government has not introduced an exit charge at this time.

For details of the new residence based IHT regime, see the Inheritance Tax section below.

Employee Ownership Trusts and Employee Benefit Trusts

The UK government has announced significant reforms to the taxation of Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs), following a consultation period from 18 July 2023 to 25 September 2023. These changes, set to be implemented in the Finance Bill 2024 and effective from 30 October 2024, aim to enhance the effectiveness of these trusts in promoting employee ownership and engagement, while preventing their misuse for unintended tax advantages.

For EOTs, key reforms include tightening the conditions for CGT relief on the disposal of shares, to prevent former owners from retaining control after sale, and mandating UK residency for EOT trustees. Additionally, the government will ensure that the purchase price of shares sold to EOTs does not exceed their market value and introduce a requirement for individuals to provide more detailed information when claiming relief. A specific relief will also clarify the tax treatment of contributions made to EOTs for repaying former owners for their shares, and adjustments will be made to the conditions for income tax relief on annual bonuses to employees, allowing for the exclusion of directors from these bonuses.

For EBTs, the reforms are designed to ensure that the trusts benefit a wide range of employees and include conditions to qualify for IHT exemption. These conditions include applying lifetime restrictions on connected persons benefiting from an EBT, limiting the IHT exemption to shares held for two years prior to settlement into an EBT, and ensuring that no more than 25% of employees receiving income payments are connected to the company's participators.

These measures are not expected to have a significant economic impact or affect the Exchequer's finances but are projected to improve the experience for individuals and businesses dealing with HMRC. The reforms will be monitored through tax return information and stakeholder feedback, ensuring they remain focused on their intended goals of encouraging employee ownership and engagement and that they are not being exploited for tax advantages.

Simplifying the taxation of offshore interest

The government has launched a consultation on simplifying the taxation of offshore interest. This consultation aims to address the complexities arising from the current method of taxing investment income from non-UK sources, particularly focusing on the administrative challenges caused by the mismatch between the UK tax year and the calendar year reporting system used internationally. This mismatch complicates tax reporting for both HMRC and taxpayers, especially with anticipated increases in individuals required to report non-UK investment income due to reforms affecting non-domiciles and the removal of the remittance basis in the UK tax system.

The consultation is open for 12 weeks, from 30 October 2024 to 22 January 2025, giving stakeholders the opportunity to email their responses to the consultation questions directly to HMRC.

ISAs

The Spring Budget included a proposal to introduce a new British ISA with its own additional allowance of £5,000 a year, accompanied by a consultation which ran until 6 June 2024. The Autumn Budget has confirmed that the new Labour government will not be taking forward this proposal.

There were no further announcements on changes to other subscription limits and so the adult ISA annual subscription limit for 2024/2025 will remain unchanged at £20,000 and the annual subscription limits for Child Trust Funds and for Junior ISAs for 2024/2025 will remain unchanged at £9,000, and these will remain fixed until 5 April 2030.

Reporting of benefits in kind via payroll software

The government confirms that the use of payroll software to report and pay tax on benefits in kind will become mandatory, in phases, from April 2026. This will apply to income tax and Class 1A National Insurance contributions.

Loan charge review

The government has announced that it will commission a further independent review of the Loan Charge to help bring the matter to a close for those affected whilst ensuring fairness for all taxpayers. Further details about the review will be set out by the Exchequer Secretary in due course.