A new Government, a new Chancellor and a new approach to the UK’s fiscal policies.
Rachel Reeves entered her first Budget with a strong message that her measures would lead to “an economy that is growing, creating wealth and opportunity for all”.
To achieve this, she made it clear that the “only way to drive economic growth is to invest, invest, invest”.
Echoing the last Labour Government’s pledge on “Education, Education, Education” more than 14 years ago, the Chancellor was quick to recognise that there was difficult work ahead with slow economic growth and a £22 billion hole in the public purse.
Recognising her position as the UK’s first female Chancellor of the Exchequer, she pulled no punches about the inheritance that the Government had found and the impact that it would have on her plans as she set out to raise taxes by £40 billion.
She launched into a speech containing a series of policies that would not seek shortcuts but would instead focus on generating economic stability in the long term.
Labour promised a “painful” Budget and the measures confirmed will certainly be challenging for many, as her speech focused on:
Economic Outlook
While the Labour Party inherited a black hole of £22 billion, the economic outlook for the UK looks more positive.
The Chancellor said that the Government aimed to build on this to bring “balance and stability” to economic growth, with a focus on long-term goals.
Looking at the OBR’s forecast, real GDP growth will be:
- 1.1 per cent in 2024
- 2.0 per cent in 2025
- 1.8per cent in 2026
- 1.5 per cent in 2027
- 1.5 per cent in 2028
- 1.6 per cent in 2029
To ensure this economic stability is reflected in the nation’s finances, Rachel Reeves has committed the Government to a new set of financial rules.
Under this new approach to fiscal policy, the Government will not borrow to fund current spending and will instead rely on higher taxes to ensure an end to austerity.
Instead, borrowing will only be reserved for investment that benefits Britain’s future.
A Tax on Employment
Before the Budget, the Chancellor and Prime Minister reaffirmed their commitment to not increase Income Tax, VAT and National Insurance for ‘working people’.
Interestingly, the rumoured extension to the tax freeze beyond 2028 also did not go ahead, with personal tax rates in 2028-29 rising in line with inflation.
Instead, Ms Reeves set out changes to employers’ National Insurance Contributions (NICs) that will raise an additional £25 billion.
This huge injection of cash into the public finances will be raised by increasing the rate of employer NICs by 1.2 percentage points from 13.8 per cent to 15 per cent from 6 April 2025.
If this change wasn’t significant enough, the threshold (per employee) at which employers begin paying NICs will decrease from £9,100 to £5,000 per year.
To help the smallest of businesses, the Employment Allowance will increase from £5,000 to £10,500, while also removing the existing £100,000 threshold on employers’ Class 1 National Insurance liabilities.
The National Living Wage (NLW) will rise by 6.7 per cent to £12.21 per hour from April 2025 – adding £1,400 to the annual earnings of a full-time worker on the NLW.
The National Minimum Wage (NMW) for 18-20-year-olds will also increase by 16.3 per cent to £10.00 per hour – the largest rise ever in both cash and percentage terms.
The Government is also working towards a unified adult wage rate and has tasked the Low Pay Commission (LPC) with recommending a minimum wage for 18-20-year-olds that will gradually bridge the gap with the main NLW rate.
Capital Gains Tax
One of the most immediate and substantial changes in the Budget was an increase in the standard Capital Gains Tax (CGT) rate.
From today, the main rates of CGT will change as follows:
- Lower rate – Increases from 10 per cent to 18 per cent
- Higher rate – Increases from 20 per cent to 24 per cent
The separate CGT rates for property disposals will remain unchanged.
However, those looking to dispose of a business or a significant shareholding via a sale or succession should take note of changes to Business Asset Disposal Relief (BADR).
The CGT rates for BADR and Investors’ Relief will increase to 14 per cent from 6 April 2025 and match the main lower rate of 18 per cent from 6 April 2026.
The lifetime limit for Investors’ Relief will be reduced to £1 million for all qualifying disposals made on or after 30 October 2024, aligning it with the existing lifetime limit for Business Asset Disposal Relief.
Inheritance Tax
For those hoping to pass on wealth to the next generation, there was more bad news with significant changes to two key elements of an individual’s estate.
The Government is tightening the Inheritance Tax (IHT) system by imposing the tax on unspent pension pots from April 2027 and cutting back the benefits of agricultural property relief and business property relief.
Despite existing nil-rate bands and exemptions, the 100 per cent relief will only apply to the first £1 million of combined agricultural and business assets, dropping to 50 per cent after that – adding pressure on family farms and businesses.
The Government also plans to reduce business property relief to 50 per cent across the board for shares “not listed” on recognised stock exchanges, like AIM.
Also, while the tax rates on Income Tax will be unfrozen from April 2028, for IHT the nil-rate bands will remain unchanged until April 2030.
Overseas Wealth
As planned, the Labour Party will abolish the current non-dom tax status from 6 April 2025.
In its place, it will introduce a new residence-based regime. Individuals opting into the regime will get a short-term break, avoiding UK tax on foreign income and gains for only the first four years of tax residence.
However, from 6 April 2025, the Government will introduce a strict residence-based system for Inheritance Tax, effectively ending the use of offshore trusts to shield assets from IHT.
The 50 per cent reduction in foreign income in the first year, previously proposed by the last Government, will be scrapped entirely.
For Capital Gains Tax, remittance basis users can rebase foreign assets to 5 April 2017 upon disposal under restrictive conditions, offering limited benefit, while overseas Workday Relief will remain but in a reformed, restrictive format.
In addition, the Temporary Repatriation Facility will be extended to three years with expanded scope to offshore structures.
Business Tax
To provide certainty to businesses looking to invest and grow, the Chancellor left the existing Corporate Tax rates and reliefs relatively untouched.
In its Corporate Tax Roadmap, the Government has confirmed that it will retain the cap on the rate of Corporation Tax at 25 per cent.
It also reiterated that it remained committed to maintaining the UK’s generous R&D tax reliefs and world-leading capital allowance offer. Full Expensing, the Annual Investment Allowance, and the Patent Box scheme will all stay the same.
Businesses will also be able to benefit from an extension to the 100 per cent first-year allowances for zero-emission cars and electric vehicle charge-points to 31 March 2026 for Corporation Tax and 5 April 2026 for Income Tax.
Invest, Invest, Invest
The key message of the Government’s speech was the promise to invest in long-term growth.
To achieve this capital investment will be boosted by more than £100 billion over the next five years, with a focus on transport, housing and R&D.
Alongside this investment, the Government has reiterated its commitment to the National Wealth Fund, which will bring together private and public sector funding to encourage more than £70 billion of private investment.
The Government has also introduced plans for a forward-looking Industrial Strategy to boost investment in key growth sectors and initiated a pensions review aimed at unlocking more investment in UK growth assets.
Final Thoughts
For small and medium-sized companies this latest Budget will be a blow, both for the organisation itself and its owners.
The significant hike in National Insurance and the National Living Wage will more than likely limit job creation, suppress wage increases and add unwanted ongoing costs to businesses still struggling with a cost-of-living crisis.
Changes to Capital Gains Tax and Inheritance Tax will also restrict the ability of business owners to generate wealth from their enterprise and pass it on.
However, if Labour can achieve its promised investment in national growth and calm the markets with its promises of innovation and Corporation Tax certainty then the nation may benefit from greater economic prosperity.
Those people who find themselves facing uncertainties about their future plans as a result of this Budget must seek professional advice urgently.
To read the full Autumn Budget document, please click here.
