Four key changes from the Budget

This week saw the first Budget from Labour since they came into power in July. There was lots of speculation ahead of the announcements about what would happen, and it ended up being one of the biggest tax-raising Budgets in recent history. But a lot of those additional taxes will come from businesses rather than directly from individuals.

Here we look at four announcements that could affect your personal finances.

Taxes on investment gains are rising

The tax that you pay on investment gains was increased immediately. This Capital Gains Tax only affects investments that aren’t in an ISA or pension, but it means that when you sell the investments if you owe tax, you’ll have to pay a bigger sum.

Before you’d pay this tax at a rate of 10% if you’re a basic-rate taxpayer and 20% if you’re a higher or additional rate taxpayer. But from 30th October those rates have increased to 18% for a basic-rate taxpayer and 24% for a higher or additional rate taxpayer.

Everyone can make some gains before they must pay the tax - in the current tax year, it’s £3,000 per person. So, if you made gains of £5,000 when you sold an investment, you’d only pay tax on £2,000 of that amount (assuming you haven’t already used the tax-free allowance this year). For a basic-rate taxpayer you’d now pay 18% tax, equating to £360 – where previously you’d have paid just £200 in tax. For higher and additional rate taxpayer your tax will be £480, where previously you’d have paid £400.

There are different rates of Capital Gains Tax if you’re selling a property that isn’t your main home, and they were unchanged in the Budget.

The Budget changes mean it’s more important than ever to consider using an ISA or pension for you investments rather than a Dealing account, as they have tax perks that protect you from this tax (and others).

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Income tax bands frozen until 2028

The amount we can all earn tax free and before we hit the higher rate of income tax will remain the same until 2028, as Labour announced it will continue with the Conservatives’ plans to freeze income tax bands until 2028. There had been some rumours ahead of the Budget that Chancellor Rachel Reeves may extend the freeze until 2030, but that didn’t happen.

It means the Personal Allowance (the amount you earn before paying tax) will stay at £12,570 until April 2028, and the threshold where you start paying the higher rate of income tax (the 40% rate) will stay at £50,270 until then too. Normally these bands increase by inflation each year, meaning we can all earn a little bit more before we must pay tax.

By the time the tax band freeze ends we’ll have had six years of the freeze, which will significantly impact how much income tax you pay. Because the bands won’t have moved in that time, but wages will have risen, more people will be pushed into paying tax or into the higher-rate tax band.

Minimum wage will rise

One positive for lower earners is that the minimum wage will increase again from next April, from the current £11.44 to £12.21 an hour. For someone working 35 hours a week on the minimum wage that means they’ll see a £1,400 a year pay rise as a result. That rate applies to those who are aged 21 and over, but the rate will also rise for younger people.

If you are aged 18, 19 or 20, the National Minimum Wage will go up from £8.60 an hour to £10, while those aged 16 or 17 or apprentices will see it increase from £6.40 an hour to £7.55 an hour. Overall, the change will affect around 3.5 million workers.

Stamp duty rates are changing

The cost of buying a property will rise thanks to changes announced in the Budget. The first change, effectively immediately, only affects those buying an additional home (so landlords or property investors). These buyers already face higher rates of stamp duty than people buying their main residence, but rates will increase further. Before the Budget these buyers paid an additional stamp duty rate that’s three percentage points higher, but Labour has now extended this to five percentage points. The change happens immediately, for any sales completing from 31st October onwards.

The second change comes in in April next year, when other homebuyers will see stamp duty rates rise. The Conservatives brought in some temporary reductions in stamp duty rates that end on March 31st next year, and Labour has chosen not to extend them.

Currently, first-time buyers can pay reduced stamp duty rates if they buy a property worth £625,000 or less. It means they pay no stamp duty on the first £425,000 of the value of the property and then 5% stamp duty on any remainder up to £625,000. However, from 1 April the property limit to be eligible for the discount will reduce to £500,000 and you’ll only get the first £300,000 of the value of the property stamp duty free, with 5% paid on any remainder up to £500,000.

For those moving onto their next home the rates will rise too. Currently the first £250,000 of a property purchase is free of stamp duty, and then you pay it at 5% on any amount up to £925,000. However, from April only the first £125,000 of property purchase will be stamp duty free, with a 2% rate charged from £125,000 to £250,000 and then 5% on £250,000 up to £925,000.

A first-time buyer buying at the current limit of £625,000 will face a £11,250 hike to their stamp duty bill from April*, as they would no longer be eligible for the first-time buyer tax break. And the re-introduction of the 2% band for stamp duty means that those moving on to their next home will face an up to £2,500 increase in their tax bill.

We’ll inevitably see a flurry of people looking to lock in their home purchase before the deadline next March, to avoid paying higher bills.

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*AJ Bell calculations.

Want to hear more analysis of the Budget and how it impacted investment markets? Listen to the AJ Bell Money & Markets podcast.