The first Labour Budget for 15 years was expected to include a raft of revenue raising measures, with the Chancellor Rachel Reeves trailing ‘difficult financial decisions’ as she looks to find £40 billion.
Here John Cunliffe, Specialist Financial Adviser to the Education sector at Wesleyan Financial Services, answers the three most common questions teachers have been asking about the changes announced in the new Government’s first budget.
Q: How could the changes to employers’ National Insurance contributions affect my finances?
A: This will depend on whether you work in the public or private sector.
The Chancellor announced a 1.2% increase to employers’ National Insurance, which will go up from 13.8% to 15% on earnings over £5,000, down from £9,100.
Private schools had already been told they would have to charge 20% VAT on their fees from January, which comes after a period when inflation – especially on wages and energy – has seen their cost base surge.
As a result, they are looking to make savings, and the Teacher’s Pension Scheme (TPS) has been an obvious target.
For teachers, it’s a great scheme, but for employers, it’s expensive as they have to contribute 28% of a teacher’s salary.
And our research has found that more than a third of all independent schools in England and Wales have either withdrawn, or plan to withdraw, from the TPS, which is a trend that has accelerated during 2024.
The extra cost of their new NI obligations is only likely to add to this exodus.
In the state sector, we have also seen academy trusts balloting teachers to opt out of the TPS in return for a less generous scheme and a higher salary.
While this may be attractive in the short term, it’s important that teachers who are put in this position consider the impact over the course of their career.
If you are thinking about giving up a guaranteed benefit for a less certain outcome, get expert advice first.
One side effect is that schools might be more inclined to look more favourably on teachers who want to take phased retirement, which means they can retain their skills and experience but reduce their NI liability.
Q: How will the decision to maintain the freeze on Income Tax bands affect the amount of tax I pay?
A: It seems inevitable that this decision will mean more teachers become higher rate taxpayers in the years to come.
Teachers received a 5.5% pay rise in September, which means an experienced teacher in the UPS3 salary scale saw their wage go up from £46,525 to £49,084, within a whisker of the £50,271 higher rate tax bracket.
If they have any additional responsibilities, this could already push them above the limit.
But the saving grace could be contributions to the TPS, which don’t attract Income Tax and will help bring teachers’ earnings back below the higher rate threshold.
At least the Chancellor did promise that thresholds will begin to increase in line with inflation from April 2028.
Q: How will the Budget affect my retirement plans?
A: Before the budget, this was probably the issue that teachers were contacting us about the most.
So, members of the Teachers’ Pension Scheme will be relieved that the ability to take 25% of their pension pot as a tax-free lump sum, up to a maximum of £268,275, was left untouched.
This is a significant benefit that forms a central part of many people’s retirement plan.
More tinkering, coming after public pension schemes have seen significant reform, including the McCloud judgement, could have discouraged people from saving into their scheme.
And the Chancellor maintained the triple lock on the State Pension, which she said would mean an extra £470 for pensioners during 2025-26.
Q: And what about my succession plans?
A: Though Inheritance Tax is only paid by 6% of families, the decision to freeze the threshold at £325,000 for a further next two years is welcome given recent speculation.
However, the sting in the tail is that, while previously pensions did not count towards this total, from April 2027 inherited pensions will now be included.
This doesn’t mean pensions are no longer tax efficient investments, but teachers may now look differently at how they take them at retirement.
Rather than moving funds into income drawdown so they can be inherited by their dependants for example, they now may choose to take them and place them in a more IHT friendly investment such as an investment held in trust.
It has made IHT and retirement planning more complicated as there will need to be a comparison between the IHT liability of leaving the funds in a pension compared to the tax incurred for withdrawing the funds.
This remains a complex area of tax law with numerous allowances and exemptions, so professional advice will be important to ensure teachers’ succession plans are as tax efficient as possible.
Please bear in mind that advice in relation to inheritance tax planning is not regulated by the Financial Conduct Authority. Tax treatment depends on individual circumstances and may be subject to change in future.
NAHT is a trade union whose registered office is situated at Centenary House, 93-95 Borough High Street, London SE1 1NL. Telephone: 0300 30 30 333; website: www.naht.org.uk. NAHT is an introducer-appointed representative of Wesleyan Financial Services Limited.
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