Autumn Budget 2024: Filling the black hole

We’ve had the first Budget of the new Government and the first thing that was noticeable was a change of tone.  The Chancellor presented a grave and unforgiving picture of the public finances. If you took a drink every time the Chancellor mentioned the ‘£22bn black hole’ then… well I’m amazed you can read this, put it that way.  And combined with what the Chancellor believes to be an urgent need for capital investment, and other bills to pay, we come up with the magic number: £40bn of tax rises needed.  Gulp! The problem with the black hole metaphor is that from my understanding it’s not actually possible to fill a black hole.  Give a black hole more matter and it just gets bigger and more powerful.  I think.  Physicists, do write in.

So, plenty to talk about. But a lot of the announcements also fell well short of the fevered imaginings of a hyperactive press that's been given three months to imagine the craziest things that the new Government might do.

How does a new Chancellor raise that much money when the Labour manifesto ruled out the vast majority of tax levers available to them?  No changes to income tax, no changes to VAT, no changes to employee NICs.  The answer is a stonking increase in employer’s NICs and lots of odds and sods.  No question that employer NICs are the big story today.  So here’s my summary of the main tax changes affecting businesses and entrepreneurs.

Who agrees with NIC?

From next April the Government is increasing the rate of employer National Insurance Contributions by 1.2%, from 13.8% to a roundish 15%.  Some kind of rate increase had been heavily trailed but employers may feel (very slightly) grateful that the increase isn’t as high as the 2% increase the press was reporting.  In addition the threshold from which it starts being paid is being significantly reduced, from £9,100 per year to £5,000 per year.

The Government claims this isn’t a breach of their manifesto commitments not to raise taxes on ‘working people’, despite the fact that any economist worth their salt will explain that higher employer taxes have a tendency to depress wages over time.  Who pays the tax isn’t necessarily the same as who bears the cost of the tax.  So employees and employers will likely end up sharing the brunt of this.

From a tax policy point of view, wonks everywhere will be sobbing.  A change like this increases both (1) the gap between how NICs and income tax works, and (2) the gap between the taxation of employees and the self-employed.  Both gaps can create distortions and abuses of various kinds and take us another step away from the Holy Grail of merging income tax and NICs and stopping the ludicrous pretence that NICs are anything other than an effective tax on income.  Hey ho. Some things change, some things stay the same.

It's mildly off-set by an increase to the Employment Allowance (which reduces employer NIC costs for all businesses but mainly benefits very small businesses) from £5,000 to £10,500.

CAPITAL GAINS APOCALY… oh wait, it’s fine

Who knows whether the righteous fury of the press ultimately moderated the Chancellor’s ambitions, but crazy predictions that capital gains tax might be equalised with income tax have (surprise surprise) not come to pass.  However I am – stupidly – on record as predicting an increase in the main rate to 30%, so I guess I can’t throw too many stones.

In the end the changes to capital gains tax are relatively modest.  The main rate of 20% has been increased with immediate effect to 24%.  And the ‘business asset disposal relief’ rate of 10% will go up to 14% from April 2025, then 18% from April 2026.  So rest easy righteous warriors of the press, your work here is done, and you may return to your dyspeptic slumber until the country needs you once more.

Less eye-catching, because it doesn’t seem to apply to all that many investments, is the reduction in the lifetime Investors’ Relief allowance from £10m to £1m, combined with an increase in rates over time to keep pace with the business asset disposal relief rate.

The Umbrella Reckoning

I think The Umbrella Reckoning could be the title of a John Grisham novel, but in this case what I’m referring to is the long war against non-compliance with PAYE and NIC rules in the less-salubrious corners of the umbrella company sector.  The Government announced today that they will be consulting on a plan to crack down on this non-compliance by – and I’m paraphrasing here – ‘doing an IR35 on ‘em’.  Just as compliance failures by personal service companies were tackled by shifting the compliance burden to (much more compliant) large business end-users, so too will employers and engagers be at risk of PAYE and NICs if they hire someone through a non-compliant umbrella company.  Reforms are expected to be introduced from April 2026.

Our employment tax expert Victoria Goode has more to say on this proposal here.

Envy or fairness?

There are a whole bunch of changes which will tend to disproportionately affect those with higher incomes and net assets.  You can paint this as class war or a just rebalancing of the system, pick your poison, but to summarise briefly: 

• VAT on private school fees: happening from January 2025
• Major reform to the non-dom rules from April 2025, replacing it with new rules for temporary residents. At a high level, the new regime is expected to be much less generous (with a shorter lifespan, and caps on the maximum amount of foreign income and gains which can be sheltered) but with hopefully fewer perverse incentives (unlike the current regime which actively disincentivises some individuals from bringing their money into the UK).
• The IHT exemption for pension pots left behind on death will be abolished from 2027
• Substantial changes to agricultural property relief and business property relief from April 2026, restricting the current 100% relief to 50% relief in a variety of cases
• The stamp duty land tax surcharge on additional dwellings (colloquially: the second home surcharge) is going up from 3% to 5%

Chicken soup for the sole (purpose of cowardly politicking)

I have a great joke for you. Very funny.

Why did the chicken fail repeatedly to tackle the increasingly ludicrous spectacle of announcing every year a freeze on fuel duty when no one thinks they have the guts to increase fuel duty for fear of the political fallout?

Oh wait I think I’ve answered my own question.

And this is meant to be honest politics?

Sinners repent!

Aside from the deadly sin of petrol cars, the Chancellor had plenty to say about some of the other so-called sin taxes.  Increases in air passenger duty (particularly for larger private jets – cue an obvious dig at the former PM), increases in tobacco duty rates, a brand new duty on vaping products (which the boffins down in Catchy Names are calling ‘Vaping Products Duty’) and an increase in the Soft Drinks Industry Levy (colloquially; the sugar tax) to reflect the past six years of inflation.

Some alcohol duties have been uprated in line with inflation, but a special carve-out was announced for draught products so that the Chancellor could utter the immortal line that so many of her predecessors have revelled in: this will reduce the duty payable by one pence per pint.  Let joy be unconfined!  As I said, some things change, some things stay the same.

Rateable Retail

The Government announced that it would be permanently lowering business rates multipliers for retail, hospitality and leisure (RHL) properties with a rateable value of less than £500k from 2026/27 (there will be a higher multiplier for properties with rateable values of £500k and above).  The multiplier will also be frozen and a 40% relief on bills for RHL properties (up to a cash cap of £110k) will apply in 2025/26. The Government is also starting a conversation with stakeholders about the design of business rates in the future, but radical reform remains a long way off.

Old MacDonald had a worker-owned collective. E O E O T

The results of the EOT consultation have now been implemented, and new employee ownership trusts will be subject to additional conditions and procedures.  Nothing that wasn't heavily trailed in the consultation; trustees need to be UK resident, former owners cannot indirectly control the post-EOT business.  They will need careful consideration; the new conditions do make the EOT regime less flexible and may dissuade some (particularly smaller) businesses from converting despite good intentions.  

Carry me home

Carried interest is a key part of the fund business model and a significant part of the incentive for managers of private equity, and other, funds. The Government has been clear in its ambition to bring carried interest within the income tax regime as opposed to the capital gains tax treatment it currently benefits from.  Any reforms, however, are coming on a piecemeal basis.  The first step (coming into effect from April 2025) is to raise the CGT rate applicable to carried interest to 32%.  After that, the Government intends to bring it within the income tax regime, but with a 72.5% multiplier (which seems to work out at a maximum rate of approximately 32%). This reduced income tax rate still represents a material benefit to those in receipt of returns from carried interest, but the qualifying conditions for that reduced rate are the subject of ongoing consideration and consultation.

Strong and stable government?

Rachel Reeves is the sixth Chancellor we’ve had in the past five years.  Stability has been in short supply and credible long-term visions a pipe dream.  So after all that hullabaloo, the sight of a ‘Corporate Tax Roadmap’ was like putting on a pair of well-worn slippers. Ahhhh!

The roadmap document itself doesn’t contain too many bombshells; most of it is reassurance that the Government is committed to the status quo.  So features like the patent box regime, R&D relief, creative sector tax reliefs and even the 25% corporation tax rate are all affirmed by the new Government. And various incremental improvements and reforms will be consulted on.  In particular there’s a long list of international reforms due to be introduced or consulted on, some as part of wider OECD cooperation.

A swishy new roadmap document and the promise of stability is all very well; now they just have to deliver on that promise.  Which really goes for the rest of the agenda as well.