Rachel Reeves the first female Chancellor in British history delivered broadly the budget expected with significant tax rises combined with large amounts of both spending and borrowing. Ms Reeves asserted the only way to achieve economic growth is to ‘invest, invest, invest.’
Large tax increases
The budget will overall raise taxes by £40 billion, the biggest tax raising budget in 30 years reminding some of Denis Healey’s comments in 1978 of squeezing the rich ‘until the pips squeak.’ The tax take is forecast at 38% of GDP by 2029/30, the highest level ever in the UK in a bid to improve public services. Businesses will bear the brunt of the tax hike with employer National Insurance contributions increasing by 1.2% to 15% from April 2025, as well as a reduction in the NI threshold for employer National Insurance from £9,100 to £5,000. This tax change alone is anticipated to raise £25 billion. Small businesses will be cushioned from this National Insurance increase with the employment allowance rising from £5,000 to £10,500.
Capital gains tax
The lower rate of CGT will increase from 10% to 18% and a higher rate from 20% to 24% for investments from April 2025. There is no change to CGT for property. The CGT annual exemption remains at £3,000.
The Chancellor confirmed that business asset disposal relief on the sale of a business will be retained with a maximum limit of £1m at 10% tax rate, which will increase to 14% in April 2025.
Inheritance tax
The tax-free nil rate band of £325,000 will be frozen until 2030 dragging more estates into paying IHT. The residence nil rate band will be kept in place with a taper for estates over £2m, so a married couple can potentially continue to leave up to £1 million tax-free on second death to children.
Business owners and farmers hit
From April 2026, agricultural and business relief providing 100% reduction in IHT will be capped on businesses and agricultural land valued at £1 million. Above £1 million, agricultural and business relief will be restricted to 50%, so there will be an effective 20% IHT bill on larger businesses and farms on death. In addition, business relief on AIM shares will be restricted to 50%, so there will be an effective 20% IHT bill in future.
Pension death benefits hit with IHT
The capital value of death benefits from pensions will be brought into the IHT regime from April 2027. However, it is anticipated that the IHT spousal exemption will apply on pension death benefits, so a spouse should not face a IHT bill on a pension inherited from a partner. This change will raise significant tax revenue for the government bringing about 10,500 additional estates within the scope of IHT. Charging IHT on unspent pensions is a seismic change in pension regulation. It will mean that pensions revert to their original objective of providing a retirement income rather than acting as a tax-efficient estate planning vehicle for high net worth clients.
Although there was speculation in advance of the Budget in respect of a tax raid on pensions concerning the pension tax-free lump sum and higher rate tax relief on pension contributions, neither of these areas were impacted today.
The State pension is expected to increase by 4.1% in April 2025.
ISAs
There are no changes to ISAs despite speculation before the Budget. The annual limit remains £20,000 and £9,000 for Junior ISAs. The British ISA proposed at the last Budget will not go ahead.
Second Homes
The additional Stamp duty on second homes will rise from 3% to 5% from 31 October 2024. This will potentially deter new landlords and may increase rent for tenants over time.
Specialist investments – VCT and EIS
The taxed privileged status of Venture Capital Trusts and Enterprise Investment Schemes has been confirmed until 2035, so as to support entrepreneurship and small high-growth companies in the UK.
New residency rules
The concept of tax domicile is to be scrapped from April 2025 and a new set of residency rules introduced abolishing ‘non-doms’.
Private school fees
As previously announced, VAT will be added to private school fees from January 2025. Private schools will also be brought within the scope of business rates.
Personal tax threshold to increase by inflation in future
Chancellors generally like to pull a rabbit out of the hat at Budget time. In this case, Ms Reeves announced that personal tax thresholds in respect of income tax and National Insurance will increase in line with inflation from 2028/29.
UK Gilt market unsettled
The Chancellor announced a new rule to target debt falling as a share of the economy. In future, the government will measure debt as public sector net financial liabilities recognising the benefit of investments. With around £300bn additional gilt issuance expected, the 10-year gilt yield saw significant volatility during the day of the budget increasing from 4.2% to over 4.4% before settling back to around 4.3% by the end of the trading day.
The Office of Budget Responsibility has forecast inflation of 2.5% in 2024 rising to 2.6% next year before gradually reducing to 2% in 2029. GDP growth is forecast at 1.1% this year, 2% next year and 1.8% in 2026.
The government’s budget deficit is anticipated to be £26.2 billion in 2026 before moving to a surplus of £10.9 billion in 2027/28. Government spending is now forecast to rise by £72bn by 2029/30. Public sector net debt is expected to fall from £127 billion this year to £70.6 billion by 2029/30. Capital investment of an additional £100bn has been announced over the next 5 years focused on housing and transport, much of which is front-loaded.
Budget for growth?
Critics of today’s budget are pointing to much higher interest costs on increased borrowing, a tax burden which is the highest in living memory, a ballooning welfare bill, an unreformed public sector and increasing red tape on employment. Many of these issues were inherited by the current government, but the new government is making clear choices to favour a Keynesian approach of spending and borrowing to invest, as well as changing the fiscal rules to suit their approach.
This is potentially saddling future generations with a worrying debt burden and results in a new socio-economic model with a much greater role for the state. Such a change moves the UK economy closer to many continental European countries and marks a step change away from the market driven reforms of the Thatcher government in the 1980s. The concern is that the OBR’s new forecasts for growth are little different from those of the previous government and the history of state directed spending in the UK is not good. The danger is that productivity in the UK economy continues to flatline and real economic growth remains elusive impacting future living standards. The OBR growth forecasts imply that higher government consumption and investment will be more than offset by crowding out private consumption, business investment and trade.
However, the government hopes that with time on its side the enormous tax rises from today’s Budget will allow it to rebuild public services, including £22.6bn cash injection for the NHS. In addition, the significant investments in infrastructure will provide a backdrop for economic growth in future years and a much-needed uptick in productivity. A potentially unintended consequence of the hike in employer’s national insurance and the higher minimum wage is that it creates a strong incentive for businesses to automate low-skilled work. The chancellor is also counting on the markets to accept her two new fiscal rules regarding stability – balancing the budget over 3 years and for public sector net debt to fall as a share of GDP in 3 years as evidence of economic competence.
We will be monitoring markets closely so we are ready to respond as market participants digest the detail of today’s Budget over the coming days and weeks.
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