Looking ahead to 2025, AJ Bell experts preview some of the key personal finance changes to look out for next year, including:
- Another year of frozen thresholds
- IHT on pensions consultation
- ISA simplification could be on the cards
- State pension rises by 4.1%
- Employer costs rise thanks to NI hike and minimum wage
- Stamp duty holiday ends
- VAT on independent school fees kicks in
- Student fees and maintenance loans to rise
- Childcare support doubles for some
- Commuters face rail fare hike
- Energy price cap increase
- Another year of frozen thresholds
April sees the start of a new tax year but, once again, taxpayers will be denied any uprating to income tax thresholds or the personal allowance. Likewise, thresholds such as the IHT tax-free allowance will be frozen for another year, with Rachel Reeves extending the freeze on the IHT nil rate band till 2030.
AJ Bell pensions and savings expert, Charlene Young, says:
“Frozen tax thresholds punish taxpayers by stealth. When asset prices and wages rise but thresholds fail to track inflation, the result is higher tax bills.
“Employees were spared from an extension to the freeze on the income tax personal allowance and higher rate threshold at the chancellor’s inaugural Budget, with the increase in tax on employment being channelled through employer NI instead.
“Nonetheless, employees still face yet another year of frozen thresholds come April. It means another year when our tax bills are set to go up, despite the headline rate remaining the same. That’s because the freeze, which began in 2021, will continue for another year in April 2025.
“We will at least be over halfway through the planned freeze on income tax thresholds by then, although the finish line in 2028 will still feel some way off for those taxpayers snared by the stealth tax raid.
“Frozen thresholds apply beyond tax on income as well. Astonishingly, the main IHT free threshold won’t have changed in over two decades by the time the freeze is lifted in 2030.
“Although a new exemption has been introduced since then – the residence nil rate band – it actually doesn’t compensate for frozen thresholds. Had government done nothing whatsoever other than index the IHT allowance to CPI over the last 20 years then the tax-free limit would be almost £1.1 million for a married couple in 2030.”
- IHT on pensions consultation
Announced at the October Budget by chancellor Rachel Reeves, proposals to apply IHT to unused pension assets on death are subject to a consultation, which closes on 22 January.
AJ Bell has opposed the proposals, suggesting two alternative options. This could mean utilising a similar treatment already applied to ISAs on death. Alternatively, income tax applied on withdrawals at the marginal rate of the beneficiary represents another simpler option.
AJ Bell CEO, Michael Summersgill, says:
“The proposals set out by the government create huge complexity and will delay families from accessing money in a timely fashion following a bereavement. In some cases the proposals will be unworkable and will create financial gridlock in the probate process, especially where assets held in the pension can’t be sold quickly.
“Add to this the fact that the proposals could result in millions of people paying a minimum tax rate of 64% on inherited pensions, and there is a real risk that confidence in pensions will be seriously eroded.
“We’re urging the chancellor to instead consider alternative proposals from the industry, which would be fairer and simpler, without undermining her plan to tax unused pensions on death.”
- ISA simplification could be on the cards
In 2024 chancellor Rachel Reeves moved to end proposals for a British ISA. But that doesn’t mean reform of the ISA system has been forgotten. Labour’s plan for financial services, published in early 2024, promised reform to make it easier for people to save and invest.
The paper said Labour would look to deliver a modern ‘Tell Sid’ campaign.. It also said Labour planned to simplify the Individual Savings Accounts (ISA) landscape to make it as easy as possible for people to feel the benefits of saving and investing their money, including through increased utilisation of Stocks and Shares ISAs.
Tom Selby, director of public policy at AJ Bell, comments:
“The proposed British ISA was a political gimmick that was always doomed to fail in its objective of boosting investment in UK Plc. What’s more, it would have layered extra complexity on an already complicated ISA landscape. Rachel Reeves’ decision to ditch the ill-thought-out proposal was the right one and should pave the way for radical ISA simplification.
“Merging Cash and Stocks and Shares ISAs is the obvious starting point, a reform that would make life easier for investors and would-be investors and could provide a significant boost to UK capital markets at the same time. Over the longer term, the government should consider whether the best features of the current ISA regime can be combined into a single ISA product.
“The benefits of simplification for consumers and the UK economy could be substantial. In particular, merging Cash ISAs and Stocks and Shares ISAs – the two most popular ISA products in the UK – would make it easier for those holding money in Cash ISAs to transition towards long-term investing.”
- State pension rises by 4.1%
Rachel Vahey, head of public policy at AJ Bell, comments:
“UK pensioners should see a sizeable increase to their state pension of almost £500 a year, to bring the full new state pension to just under £12,000 from April.
“Criticism of the decision to scrap the Winter Fuel Payment for all pensioners except those that claim Pension Credit still lingers. Government will hope this rise in Brits’ state pensions will publicly reinforce its commitment to the triple-lock, although some will still be reeling from the £200 most pensioners lost this winter.
“But how long they can keep these promises remains to be seen. The state pension will be at a level perilously close to the frozen personal allowance and should overtake it in a couple of years if things continue, thanks to frozen tax thresholds. At that point something must surely give. But slowing the increase in state pension growth or unfreezing the personal allowance both seem unlikely.
“It could be that this fast-approaching crunch time means the government will finally be forced to address the question of how much the state pension should really offer, at what age, and how it can increase payments sustainably each year.”
- Employer costs rise thanks to NI hike and minimum wage
The National Living Wage will rise for those age 21 and over from £11.44 to £12.21 from 1 April.
Employer NI will rise to 15% and the threshold falls to £5,000, with the increase starting in the new tax year for 2025/26.
Laura Suter, director of personal finance at AJ Bell, comments:
“Firms are in line for big hikes to payroll costs coming from National Insurance increases and a higher minimum wage. Put together it means that it will cost a business almost £2,400 more to employ someone on the minimum wage working 35 hours per week from April next year.
“The smallest businesses will be protected from some of these cost increases, as the Employment Allowance will more than double from £5,000 a year – meaning they can claim back up to £10,500 a year on their National Insurance bill. This will also be extended to all businesses, providing some respite for employers.
“Nonetheless, the move will raise huge sums for the government and many businesses have indicated they expect to see the cost of staffing increase by millions of pounds.”
Increased cost of hiring someone on minimum wage
- Stamp duty holiday ends
AJ Bell pensions and savings expert, Charlene Young, says:
“From April the 0% rate of stamp duty when buying a home will drop from £250,000 to £125,000. That is set to cost homebuyers £2,500 if they complete after the window closes.
“For first-time buyers the changes are even more significant. At present there is no stamp to pay on properties up to £425,000. But from April that will change to £300,000.
“The result could be an extra £6,250 on the stamp duty bill for those buying their first home worth £500,000.
“It’s very likely we’ll see a rush of completions in March as those looking to buy try to get the deal over the line before the new thresholds kick in on 1 April.”
- VAT on independent school fees kicks in
AJ Bell pensions and savings expert, Charlene Young, says:
“One of the most controversial policies under the new Labour government, private school fees will no longer be exempt from VAT from January.
“Private schools will be able to offset some of the cost increase by claiming VAT back on goods and services. Labour estimated the net cost for most schools at 15%. It’s up to each school how much of that cost increase they absorb and how much they pass on to parents.
“While some parents will opt out of private school altogether in favour of the state system, others will absorb the price hike, make cuts to their budget elsewhere, or ask family for help with the higher fees.”
Total cost of private school
- Student fees and maintenance loans to rise
AJ Bell pensions and savings expert, Charlene Young, comments:
“Student fees are set to rise for the first time in 8 years, by 3.1% (or £285) to £9,535 from the next academic year in 2025/26.
“Universities have been calling for an increase in fees and, although they have got one, it’s been described in some circles as little more than a sticking plaster. There’s also the risk that a rise could put potential students off if they feel they won’t get value for money.
“Maintenance loans are also going up to help with the increased cost of living.
“The exact increase depends on whether you are studying in or outside of London, and whether you live at home. But it could prove to be as much as £414 for someone living away from home and studying in London.
“Although the fee hikes aren’t as significant a change to student finances as the new ‘plan 5’ scheme that was introduced in 2023, it is still a significant change to the calculations for those applying to Uni. It’s likely more loans will be written off for lower paid graduates too.”
- Childcare support doubles for some
AJ Bell pensions and savings expert, Charlene Young:
“The continued rollout of the extended free hours childcare funding system will see free hours entitlement double in September.
“This was announced back in 2023 and the rollout began first in April 2024, when 15 free hours were extended to two year olds. From September 2024 that then applied to children from nine months. Eventually, in September 2025, entitlement will be increased to 30 free hours from nine months. It will mark a major increase in childcare subsidies by the time it is in full force.
“However, some people won’t get the full benefit. Those households where there is an earner with income over £100,000 stand to miss out on the new arrangements.
“That compounds the impact of the £100,000 ‘cliff-edge’ which sees higher earners lose out on tax free childcare worth up to £2,000 per child as well.
“In total, families with two children aged nine months and two years old could miss out on £20,000 of additional support by September 2025.
“In contrast, moderately well-off families where the main breadwinner earns £60,000 could access all of this support, with the figures illustrating how middle-income families have benefitted hugely from government reforms to child benefit and free hours childcare funding in the last couple of years, but the highest earners are excluded.”
Source: AJ Bell. Assumes a family where both parents work and the main breadwinner earns £60,000. Children aged nine months and two years old as at the start of each academic year. September 2023 figures factor in 50% entitlement to child benefit, accounting for the April 2024 changes to HICBC. Value of free hours based on UK average hourly childcare prices in Coram childcare survey 2024, uprated by 2% for 2025.
- Commuters face rail fare hike
AJ Bell pensions and savings expert, Charlene Young, says:
“The Budget handed rail passengers a surprise about as unpleasant as arriving at the station to find a replacement bus service in operation.
“The annual increase in rail fares is normally linked to the RPI measure of inflation from July of the previous year. Back in the summer it stood at 3.6%.
“Although in recent years the government has deviated from the usual practice of raising rail fares by this amount every January, instead delaying the price increase as well as reducing it from the headline RPI rate during periods where it was sky high.
“Instead of doing the same for another year, however, government has decided the regulated rail fares cap will rise by 4.6% on from March 2025, a full percentage point above the RPI reference point from July 2024.
“Rail passengers who faced widespread cancellations over Christmas will look ahead to that forthcoming price hike with considerable irritation.”
- Energy price cap increase
Danni Hewson, AJ Bell head of financial analysis, comments:
“Alongside rising energy costs, for millions of pensioners there’s also the troubling issue of scrapped winter fuel payments. January’s changes come after a sizeable increase in October as well.
“People have made changes, they’ve lowered thermostats, added draught excluders and limited the number of rooms they heat. There are new tariffs which could offer ways to bring down bills, but for those struggling under the weight of energy debt the forthcoming increase in energy bills will just pile on the worry.
“Whilst inflation has come down, prices haven’t, and with the prospect that energy costs are unlikely to return to pre-2022 levels, finding a sustainable solution to the UK’s long-term energy situation must remain a priority.”