Market reactions on UK Chancellor Rachel Reeves 30 October 2024 Budget
Commentary by Richard Stanley, Tax Partner at UHY Hacker Young
The Budget ‘red book’ forecasts a net increase in taxes of £138.7bn over the next five years (including the current tax year). This is largest increase in tax of any Budget in the past 15 years says UHY Hacker Young the national accountancy group:
Says Richard Stanley, Tax Partner at UHY Hacker Young : “This was already the most highly anticipated Budget in a generation – but the scale of the changes is far more radical than most anticipated.”
“This Budget raises taxes by more than twice as much as the Emergency Budget of November 2022 – itself an enormous tax increase in response to the preceding ‘Mini Budget’.”
“The vast majority of these tax increases will fall on businesses – many of whom are still struggling from high interest rates and years of high inflation.”
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By GlobalData“There’s a real risk that many businesses simply won’t be able to absorb these extra costs – which may force some businesses to lay off employees. This would be bad for the economy and hamper the Government’s growth agenda.”
Commentary by Derry Crowley, CEO of Xeinadin and Adam Owens, Head of Tax at Xeinadin
Changes to employers’ national insurance contributions were expected, but the slashing of the secondary threshold from £9,500 to £5,000 is reckless. Despite there being a relief for the very smallest of businesses, this will represent a massive hike in tax for the majority of the UKs SME sector. The chancellor stated Britain was falling behind other countries in the race for new jobs, but raising national insurance contributions for employers is counterintuitive. Increasing the cost of UK based employees – and simultaneously increasing workers wages – makes the UK a far less attractive place for hiring new talent. It is the employers that will bear this cost. Whilst swallowing up the black hole in public finances, it will create a host of problems for the majority of businesses in this country.
Commentary by Adam Owens, Director of Tax at Xeinadin
Despite all the tax shake-ups in the Budget this autumn, the changes to capital Gains Tax (CGT) and Inheritance Tax are less significant than many had feared. Increasing CGT to 18% on the low end and 24% on the high, is thankfully less than expected and a far cry from aligning with income tax rates. And business owners will certainly be relieved that Business Asset Disposal Relief haven’t taken the drastic hit we all feared, ensuring business disposals should continue to benefit from a significantly lower tax rate.
However, when looking at the wider picture we must consider the impact of secondary National Insurance Contributions taking the brunt of the new revenue drive. With the threshold for employer NICs lowered from £9,100 to £5,000, this increased burden is hardly a recipe for job creation. For many labour-intensive businesses, it is likely to represent a serious hurdle to hiring staff. It seems contradictory for a ‘budget for growth’ to increase both the cost of employment and protections for workers. It doesn’t exactly make the UK attractive for business, especially in a tight labour market.
Commentary by Hamish Martin, Partner at LAVA Advisory
What the latest budget means for the M&A industry
The UK’s Autumn Budget, delivered by Chancellor Rachel Reeves on 30 October 2024, was highly anticipated, not least due to widespread speculation about significant tax reforms. As Jean-Baptiste Colbert,Louis XIV’s finance minister famously said, ‘The art of raising taxes is to pluck the most goose feathers with the minimum of hissing.’ Well, there will inevitably be some hissing, so let’s take a look at exactly what’s changed, what hasn’t, and what it means for the M&A industry.
From an M&A perspective, there are a few key areas of interest – one we can dispatch fairly quickly is the VAT on private school fees as this was already known about and planned for, and a great many institutions have already announced how much of that additional cost they’ll be passing on to parents. The biggest impact this is likely to have in the deals space is that we expect increased consolidation as major global education players take the opportunity to acquire some of the smaller, less financially stable institutions that will otherwise struggle to continue. We’ve already seen some of this consolidation in recent months, and we’re only expecting that to increase as the more cash-strapped institutions face higher costs. Additionally, the indications for the defence sector were very positive, with a further government commitment to ongoing funding to Ukraine ensuring a robust period for our many clients in defence and aerospace.
Capital gains tax reform
Capital gains tax (CGT) is another area where significant changes have been confirmed, but they’re not as drastic as many feared. The higher CGT rate of 20% will only rise to 24%, less drastic than the 40% that the M&A market had been bracing its clients for.
These changes will particularly affect property investors and business owners, who could see a substantial increase in the tax they pay when selling assets. Critics argue that the move could deter investment in the property market and reduce incentives for entrepreneurs to grow and sell businesses. However, supporters suggest this change will help ensure that capital gains are taxed more fairly and equitably, bringing them closer to the rates on earned income.
The most important element of this from an M&A perspective is the timing. With the change being introduced immediately the hit is effectively already priced in. We’ve had a flurry of recent deals looking to close ahead of the budget for exactly this reason, so now that it’s done and dusted we can get back to business as usual, with greater certainty about the fiscal future than we’ve had in some time.
Employers’ National Insurance
The announcement that Employers’ National Insurance contributions will be going up by 1.2% from April isn’t a huge surprise, but it does come as a bit of a blow for business owners, especially when combined with the threshold at which it becomes relevant, which is dropping from £9100pa to just £5000. However it’s pitched by the government, this change will also directly impact employees across the UK as employers have to rethink hiring strategies, and, in combination with the minimum wage rise, it will also cast a pall over bonus and pay rise plans as the extra 1.2% will have a big impact when applied across an organisation. Another interesting element, however, is the new lower business tax rates being introduced for retail, leisure and hospitality companies which the government will be hoping will offset some of the pressure applied by the other reforms. It will be interesting to see if we see an uptick in hospitality exits in the coming months as entrepreneurs find their margins slashed, and whether this will also prompt a greater number of Employee Ownership Trust transactions to restore stability and improve employee engagement in these types of businesses where customer experience is so vital.
Finally it wasn’t even disastrous news for our friends in Private Equity – an extra 4% on their carried interest should be manageable to dispatch through greater operational efficiencies and a bit of elbow grease applied to portfolio optimisations.
Commentary by Adrian Young, a tax partner, HURST
Adrian Young, a tax partner at accounting and business advisory firm HURST, said:
“The Budget announcement from Rachel Reeves will likely hit many businesses hard.
The fact that they will bear the brunt of the new tax-raising measures is potentially damaging. It’s worth remembering that employment is perhaps the most fundamental link in the chain that drives prosperity.
“The creation of employment is central to the economy, and it is often forgotten that privately-owned businesses are responsible for something in the region of 60 per cent of all employment in the UK.
To hit these businesses with £25bn of increased employers’ national insurance contributions per year by the end of the forecast period could lead to two unintended, linked and unpleasant consequences.
The first is that privately-owned businesses will likely create fewer jobs. The second is that, in extremis, they will lay workers off.
The national insurance increase is therefore in my view misguided, because employment produces a very strong double positive for the Treasury. It reduces reliance on welfare and contributes hugely to the tax coffers.
What is more, given that around three-quarters of UK private businesses are in the services sector, by far their single biggest cost is employment.
“So, the national insurance contribution increase will go straight to the bottom line, meaning that returns for entrepreneurs, the people who ultimately create the jobs, will be diminished, potentially along with their appetite for investment. The unpalatable alternative is that these costs will be passed around the economy in the form of price inflation and job losses.
Another potentially problematic set of measures confirmed today were the large increases in national minimum wage levels. The headline rate for people aged 21 and over is increasing by 6.7 per cent to £12.21 per hour, while the rate for 18 to 20-year-olds is increasing by a full 16 per cent, from £8.60 to £10. The apprentice rate is increasing by even more – an 18 per cent raise from £6.40 to £7.55. Increases to the national minimum wage are inflationary throughout a business’s salary structure, as employers have to react to them more generally around the workforce.
While increases to the national minimum wage should be seen in a positive light from a societal perspective, let’s not forget that it is funded entirely by employers. When combined with the increase in employers’ national insurance announced today, they are looking at a significant increase in costs.
The increases in capital gains tax rate from 20 per cent to 24 per cent for the main rate, and 10 per cent to 18 per cent for the lower rate are, perhaps, slightly lower than anticipated, and will be met with a degree of relief. However, it would be easy for business owners to start to question Labour’s friendliness towards business. The inevitable challenge is that private business appears to be seen as a source of quick-fix tax revenues which can be shaken down at any time and without recourse or complaint.
Proposed changes to inheritance tax regarding pensions and private company shareholding, due in 2026, will cause concern to many, but particularly family businesses, and will require careful thought in the months to come.
People understand the need for tax-raising measures and the critical services they fund. However, the truism remains that we cannot tax our way out of economic difficulties and, instead, there has to be a focus on growth and productivity. From a business perspective, there were some glimmers of hope, as existing corporation tax rates and reliefs, for example for research and development tax credits and investment allowances, were left intact. However, whether that is sufficient to get local business leaders on side with the new Labour administration remains to be seen.”
Commentary by Stephen Ford, Adviser Product Strategy lead at FE fundinfo
Stephen Ford, Adviser Product Strategy lead at FE fundinfo, said, “This tax-raising budget was focused firmly on the top 5% wealthiest in society. These high net worth and ultra high net worth individuals will see immediate effects, from the inheritance tax changes to the rises in capital gains tax, requiring swift tax, retirement, and estate financial planning to understand the trade-offs and weigh up future investment decisions. There was a clear push to minimise changes for the general population, avoiding tax rises and unfreezing income tax bands to avoid bracket creep.
“Financial advisers have been preparing for this moment for months, and they need to move quickly to help wealthier clients work through the changes and put together a plan that will work for their individual needs. To manage the impact of the capital gains tax rise, we are likely to see more interest in unitised funds or offshore bonds. With changes now set in stone for the next decade, expect to see high net worth individuals and advisers act now. The end of the non-domiciled regime in 2025 will be a big milestone, especially with the government ending the use of offshore trusts to shelter assets from inheritance tax.
“The minimal changes to the pension regime will be particularly welcomed by the industry, supporting the long-term growth of retirement savings and ultimately protecting stable income for retirees. Fundamentally, many investors will also be breathing a lot easier at the end of the rumour and uncertainty that has hindered long-term planning since July”
Commentary by The National Institute of Economic and Social Research
Main points:
- The Chancellor has changed the measure of debt used in the fiscal rules from public sector net debt to public sector net financial liabilities. While this is a step in the right direction, it still restricts public investment by not leveraging the value of fixed assets on the government’s balance sheet nor allowing enough time for public investment to generate returns through higher GDP.
- Rather than raising the rate of income tax, corporation tax or VAT, the chancellor has opted for a 1.2 percentage point rise in the rate of employer National Insurance Contributions (NICs) and a reduction in the threshold at which employers start paying NICs. As a tax on jobs, we expect this to lead to a fall in job creation and, over time, a rise in the unemployment rate.
- The decision to keep personal income tax thresholds frozen until 2028/29 acts an increase in income tax for a significant portion of the workforce over the next four years. Given our forecast for wage inflation, we project that 2.9 per cent and 0.8 per cent of workers will be pushed into the basic and higher marginal rate brackets respectively in 2024/25.
- The government has confirmed that the NLW is to rise by 6.7 per cent effective from April 2025, exceeding the average regular pay growth of 3.9 per cent projected for 2025. Moreover, the NMW for 18 to 20-year-olds will see a 16 per cent increase. This is the third consecutive increase in the NLW above average pay growth, which we estimate to affect over 3 million workers, most of whom are in the bottom decile of the income distribution.
- Through the Corporate Tax Roadmap, corporation tax is confirmed to be capped at 25 per cent (the lowest rate in the G7) for the duration of this Parliament, and full expensing measures are to be kept in place. This is welcome news as it provides certainty for investors, which can help boost business investment and improve the potential long run trend rate of growth.
- But businesses will face higher employment costs in terms of the above inflation rise in the NMW and the NLW, the higher rate of employer NICs and the lower NICs threshold for employers. Given that businesses with more than 10 employees account for more than 80 per cent of employment in the private sector, we expect significant negative impacts on employment and wage growth, especially in low-paid sectors such as hospitality.
Commentary by Tom Minnikin, partner at Manchester tax consultancy Forbes Dawson
On changes to employers’ National Insurance
“Probably the worst kept secret of this Budget, it will come as no surprise to employers to find that the Chancellor has increased their National Insurance contributions.
“In their manifesto, the Labour Party said they would ‘not increase National Insurance’ and yet they have done exactly that, lifting the rate of employers’ contributions from 13.8 per cent to 15 per cent from April 6, 2025.
“Admittedly, the manifesto promise was prefaced with a reference to ‘working people’. However, some will see this as pure window-dressing, especially if it causes employers to limit wage increases at the next pay round.
“Reducing the secondary threshold – the point at which employers start to pay National Insurance on an employee’s earnings – from £9,100 to £5,000 was a surprise move. This means employers will have to pay an additional £615 in National Insurance for every employee who earns £9,100 or above.
“These changes amount to a tax on jobs and may lead businesses to reevaluate their expansion plans in light of the decision.”
“It comes as no surprise that Rachel Reeves has decided to increase capital gains tax, having been widely speculated in the run up to today’s Budget.
“There were fears that the Chancellor might have sought to align capital gains tax with income tax. However, Ms Reeves has opted for more modest increases, with the basic rate increasing from 10 per cent to 18 per cent and the standard rate moving from 20 per cent to 24 per cent from today.
“In making these changes, the Chancellor may have deliberately avoided the obvious ‘Halloween Horror’ headlines.
“It is likely that the government has been advised that more substantial increases would have had a disincentive effect, particularly if it led wealthy individuals to leave the UK for lower tax jurisdictions.
“Ms Reeves has probably pitched it about right in preventing a mass exodus, although there will be some for whom the changes are unpalatable.”
On property tax changes
“Both the Prime Minister and Chancellor had suggested ahead of this Budget that landlords would be the target of tax rises. However, Rachel Reeves has opted to largely leave property investors alone.
“There was no increase in capital gains tax on residential property gains, even though capital gains tax was increased for other types of assets. Main rates of capital gains tax have now been aligned at 18 per cent for basic rate gains and 24 per cent for higher rate gains.
“However, the Chancellor did increase the Higher Rate for Additional Dwellings in Stamp Duty Land Tax on purchases of second homes, buy-to-let residential properties, and companies purchasing residential property, from 3 per cent to 5 per cent from tomorrow.
“Property investors will dislike the increase in stamp duty, but overall they have got off fairly lightly compared to others at this Budget.”
On Business Asset Disposal Relief
“The announcement that Business Asset Disposal Relief (BADR) has been retained will come as a pleasant surprise to business owners, who had worried that the measure would be abolished at today’s Budget.
“However, the Chancellor has severely reduced the value of the relief by increasing the rate at which BADR gains are taxed from 10 per cent to 14 per cent from April 6, 2025 and then to 18 per cent from April 6, 2026. This compares to a main rate of capital gains tax of 24 per cent, which was also increased from today.
“The relief remains limited to a lifetime allowance of £1 million, meaning that by April 2026 it will only save a maximum of £60,000 in capital gains tax. For a relief which was once worth £1 million, this is now small beer.
“With the qualifying conditions also being complicated to navigate in some instances, BADR is likely to have declining importance in future.
“I would not be surprised if we see it being phased out altogether over time.”
On personal tax thresholds
“The decision to continue with the Conservative Party’s policy of freezing personal tax thresholds until April 2028 will come as a disappointment to many voters, who might have been hoping for an end to this stealthiest of austerity measures.
“Various income tax thresholds, including the personal allowance and basic rate band were last increased in April 2021. Since then, figures from the Office for National Statistics show that wages have increased by over 20 per cent. This has undoubtedly led to ‘fiscal drag’ where taxpayers are pulled into higher tax brackets as a result of pay rises.
“The Labour manifesto promised not to increase taxes on working people, but the reality is that freezing tax thresholds is a tax rise through the back door.
“The Chancellor said that thresholds will be updated in line with inflation from April 6, 2028. It is welcome that the end is at last in sight, although taxpayers will have to endure another three and a half years of hardship before they get there.”
On Investors Relief
“Within the capital gains tax changes unveiled today was an announcement that Investors Relief will be watered down. The relief currently allows shareholders in unlisted trading companies to enjoy a 10 per cent rate of capital gains tax on up to £10 million of lifetime gains. The Chancellor has reduced the allowance from today to just £1 million.
“The rate of capital gains tax for Investors Relief will also increase to 14 per cent for disposals on or after April 6, 2025 and then to 18 per cent from April 6, 2026. By then, the relief will only be worth a maximum of £60,000 – a tiny fraction of the £1 million it was worth before today’s Budget.
“Curtailing Investors Relief was widely expected, given that its sister relief, Business Asset Disposal Relief, had already been watered down.
“However, in cutting these reliefs back to such paltry amounts, Rachel Reeves has dealt a hammer blow. Many business owners will be left wondering what is in it for them if the tax system does not reward entrepreneurship.
“That said, it is worth noting that the Treasury expects the impact of the Investors Relief changes to be negligible. This suggests that very few people are actually claiming the relief in practice.”
On the inheritance tax liability of pension schemes
Andrew Marr, managing partner at Forbes Dawson added:
“This measure is only set to come in from 6 April 2027 and the impact is huge. An individual with a £2m pension scheme would leave his beneficiaries with an £800,000 additional IHT bill if he were to die after 6 April 2027.
“The details are currently vague because there will be a consultation but in broad terms this will involve pension administrators paying IHT over to HMRC when the scheme beneficiary dies.
“A significant benefit of making pension contributions has been the IHT shelter that pensions provide. Those individuals will feel like they have had the rug snatched from under their feet.
“It seems that beneficiaries will still have to pay income tax when they take out benefits. This means that if a 45% taxpayer inherits a £3m scheme, they will only be left with £990,000 after tax. This represents a 67% tax rate.
“For many people who feel like they have done the responsible thing by paying into pension schemes this will be a kick in the teeth.
“This is perhaps the most killing blow of the Budget to the wealthy people of Britain.
“The very wealthy may now seek to leave the UK and look for opportunities to empty their pension schemes without paying tax.
“This shows how dangerous it is to engage in very long-term tax planning, because different governments mean that taxpayers can have limited faith in the long-term outcome.”
On inheritance tax
“There are two key points to pull out from the Budget on inheritance tax (aside from the pensions tax changes):
· Business Relief on AIM listed shares portfolios has been cut from 100 per cent to 50 per cent.
· Business Relief on family businesses has been cut from 100% to 50% on all value over £1m.
“With the inheritance tax nil rate band rates frozen for another two years until 5 April 2030, millions of more estates are likely to fall within the scope of the tax.
“Many shareholders have used AIM portfolios as an inheritance tax planning mechanism. Given that these have performed poorly over recent years they will now be particularly disappointed to find that the relief will be halved from 6 April 2026.
“Some may think that it is a good idea to gift shares before 6 April 2026 to escape the rules. However, they have thought of this and the new rules would catch them if they were to die with seven years.
“There do not seem to be any well thought out plans for how a beneficiary should pay the tax if they continue holding onto the business. This may encourage more sales of businesses to pay the inheritance tax bill.
“Sometimes inheritance tax can be paid over 10 years, but this comes at a hefty interest expense and the Chancellor also suggested that they will ramp up late payment interest rates in her speech.
“Although these changes come with a £1 million exemption for genuine small businesses, there are a huge number of businesses which are worth more than £1million.
“As inheritance tax is charged at 40 per cent, reducing Business Relief to 50 per cent gives an effective rate tax of 20 per cent on the value of a business more than £1 million. To expect estates to stump up this amount in normal timescales may be unrealistic.”
On stamp duty land tax (SDLT)
“The measure involves the SDLT surcharge for ‘second homes’ and company acquisitions being increased from 3% to 5%.
“The main aim here is to increase the cost of residential property for buy to let landlords and second house buyers, but the rate also applies to companies and trusts.
“Strangely, the big buy to let landlords are now more motivated to buy six or more properties in one transaction to avoid any surcharge, because then non-residential rates would apply.
“It seems odd that they have failed to take the opportunity to clamp down on rules which make it fairly easy for large properties to avoid the high residential SDLT rates altogether by having anything that is non-residential in the transaction.
“They have increased residential rates without clamping down on opportunities to avoid residential rates altogether.”
On VAT on private school fees
“Although VAT on private school fees is no surprise, perhaps predictably, the business rates exemption has also been removed. This is an added cost that schools will need to absorb or pass on to parents.
“Some parents have been paying fees in advance in a bid to avoid this measure. However, any fees paid from 29 July 2024 in respect of terms from 1 January 2024 will still be subject to VAT. It is possible that these parents will end off worse off than if they had just done nothing.
“In the unlikely event that schools agreed that such invoices were VAT inclusive then they could be left carrying the can.
“On the bright side for private schools, they can potentially now reclaim large amounts of VAT for capital projects that took place in the last 10 years. They should get on to this as soon as possible.”
Commentary by Gemma Hedges, Director at Hampshire-based HWB Chartered Accountants
Gemma Hedges, Director at Hampshire-based HWB Chartered Accountants says there were few surprises in Chancellor Rachel Reeves’ first Budget which sets out a decade of national renewal.
“We saw this coming and that it was expected that we would need to pay more tax to make much needed improvements to public services, however, employers will feel it more than others with the double whammy of salary increases and a hike in employers’ NIC.
“The national living wage for over-21s goes up 6.7% from £11.44 to £12.21 per hour from April 2025 with an increase in the national minimum wage from £8.60 to £10 per hour for 18 to 20-year-olds, with some businesses already warning it could hit job creation.
“Businesses will be also less enthusiastic about the headline rate of national insurance for employers being increased from 13.8% to 15% from April next year. Also, the earnings threshold at which employers start making national insurance contributions has been lowered to £5,000 from £9,100, bringing more of their employees within the scope.
“There was still good news for businesses though in the shape of Corporation Tax rates and Annual Investment Allowances remaining unchanged as part of the Government’s Corporate Tax roadmap. We also welcome a 40 per cent business rates relief for retail, hospitality and leisure business, capped at up to £110,000 per business for next year and 2026.
“Whilst there has been a significant increase in HMRC enquiries into Research & Development claims recently, the Chancellor made clear that this relief is staying and is fully supported, which is welcomed where the relief is vital to so many businesses.
“It was no surprise to see that the Government support is only for valid claims. In line with her predecessor, the Chancellor has continued the attack on those seeking to abuse the system, whether through fraudulent welfare or covid claims.
“There is also again more investment into finding the ‘missing tax’ the Government perceive as lost, this time through umbrella companies, close company loans and car schemes.
“Capital Gains Tax (CGT) increases were highly anticipated, but significantly lower than could have been expected, with the lower rate increasing to 18% and the main rate to 24%, in line with the current rates for UK residential property disposals.
“Many will be delighted to see that despite significant speculation to the contrary, Business Asset Disposal Relief (BADR) is staying, although this will increase to align eventually to the new lower CGT rate, so for people selling businesses this rises to 14% from April 2025 and 18% from April 2026.”
“Inheritance tax (IHT) was another widely anticipated area of reform, but the Chancellor surprised everyone by extending the freeze on the nil rate and residence nil rate bands until 2030. Although on the face of it not increasing the tax, by bringing pensions within the IHT regime from 2027, the reality is that more estates will exceed the £2 million threshold whereby assets are actually taxed at an effective 60% rate of IHT.
“A further blow to business owners has been the restriction of 100% business property relief (100% protection from IHT) to only the first £1 million of qualifying agricultural and business assets, the excess only qualifying for relief at 50%. For many businesses this will simply not be enough to allow them to pass the mantle to the next generation, who will likely now need to sell the farm or the business in order to pay the IHT bill.
“Landlords, who have faced significant attacks in previous budgets did not escape unscathed this time either, with Stamp Duty Land Tax surcharges on second homes increasing from 3% to 5% from tomorrow.”
Gemma added; “For individuals, the good news comes in the national minimum wage rises, the fuel duty freeze and of course for all of us, the spend on public services. I’m looking forward to someone answering the phone at HMRC and one million less potholes on our roads each year.”
