Budget 2024

Rachel Reeves today delivered the first budget under a Labour Government for 14 years, and the first ever by a female Chancellor.

Amongst all the warnings, the challenge for this budget was to balance tax and spend, to convince the public of better days ahead, in order to create some optimism in this country.

There is so much content (I’ll include links to some excellent summaries) so I’ll focus more on tax and benefits and what this means for you, rather than on changes to fiscal rules, borrowing, or departmental spend.

A humble caveat, this is a reaction straight off the bat, but given the size and scale of the measures today, this budget is likely to be debated for many months to come.

This budget statement contains details of taxation, welfare, fiscal rules, economic forecasts, departmental spending, borrowing increases, capital investment increases and indeed political principles.

Its all accompanied by analysis from think tanks, the media, political commentators and independent watchdogs such as the Office of Budget Responsibility (OBR) and the Institute for Fiscal Studies (IFS).

This statement should be considered, if at all possible, in the context of all of these combined.

However this note will focus largely on the tax rises announced, said to be in the region of £40bn.

Freeze on Tax Thresholds (Fiscal Drag)

I’ve started with this as a bit of good news.

You’re probably well versed in the current tax thresholds, being the earnings points at which tax rates are applied.

That familiarity is for good reason because they’ve been pretty stagnant of late. This is important because it drags a greater percentage of your earnings into higher rates of tax, as wages increase through inflation. So whilst rates stay the same, your overall tax burden goes up.

From the 28-29 tax year, contrary to expectations, personal tax thresholds will start to increase again in line with inflation. Extending the freeze would have been a tempting, stealthy manoeuvre which the Government have chosen not to take.

Employers National Insurance Contributions

This was one of the only realistic targets for the Government that would raise any meaningful additional revenues, whilst maintaining their ‘no tax increase on workers’ pledge (the OBR disagree) via a technicality.

I will need to get the calculator out as to the extent of the impact here, however this looks like good news for smaller employers, and less good news for sole proprietors with a substantial extra cost for larger businesses and their staff.

Currently Employers pay 13.8% tax on an employee’s salary over and above £9,100 (known as the secondary threshold). This will change from April 25 to 15.0% on an employee’s salary over and above just £5,000. Blimey.

However, the Employers allowance, which is a rebate at source of Employers NI for small businesses who employ people, will increase from £5,000 to £10,500.

Business clients of this Practice who are registered Employers, can be split in to 3 broad categories. I’ve explained what these categories are, and what it means for you if you occupy this category:

• Sole proprietors – those business owners who are the sole person on the business’ payroll – you do not qualify for Employers Allowance. The 19% corporation tax saving you make on your salary payments, exceeds the Employers NI liability but by a much smaller amount. This will need to be considered when salary withdrawals are recommended for sole proprietors next year.

• Smaller Employers – those businesses with 2 or more people on the payroll (1 of whom is not a company director), that therefore qualify for the Employers Allowance, whose Employers NI annual bill is less than £10,500. This change will not impact you at all as all of your Employers NI is reimbursed at source. Indeed there may be some tax savings to be utilised here.

• Larger Employers – those businesses with 2 or more people on the payroll (1 of whom is not a company director), that therefore qualify for the Employers Allowance, whose Employers NI annual bill is more than £10,500. This change will impact you because your overall Employers NI bill will increase, and consequently the amount not reimbursed by the Employers Allowance also increases.

This is expected to raise £25bn. This is dependent of course on in scope employee numbers remaining the same, and whether this acts as a barrier to entry for new businesses and new employers.

National Minimum Wage

This will increase from £11.44 currently to £12.21 (increase of 6.7%) from Apr 25 for over 21s and an increase from £8.60 currently to £10.00 (increase of 16.3%) for 18 to 20 year olds, moving towards a single adult rate in this parliament.

Apprentices get the biggest bump from £6.40 to £7.55.

Capital Gains Tax

This is a levy applied on the profit made on the sale of assets such as shares or investment property.

Currently 10% (for basic rate taxpayers) or 20% (for higher rate taxpayers) on gains over £3,000. This will change to 18% and 24% for basic and higher rate taxpayers respectively from Apr 25.

For entrepreneurs, up to £1m of business asset disposal relief (BADR), formerly known as entrepreneurs relief will remain. But the discounted rates will increase from 10% to 14% (Apr 25) then to 18% (Apr 26). Ultimately no distinction between core rate and discounted rate for basic rate taxpayers. Rates on the sale of investment property remains unchanged

Asset holders will decide how much additional revenue this will generate, by the timing of their sales and through their investment decisions in the first place.

Inheritance tax

This is a tax applied on the estate of someone who has died. It’s a tax that is levied on very few families and raises comparatively little revenue.

The tax free threshold will remain at £325,000 until 2030.

Pensions will be included within the estate from Apr 2027 which is a huge change.

Relief offered on inherited businesses and farmland will be capped to £1m with a discounted 20% tax on those assets in excess of this.

Funding for tax and benefit recollection

The effectiveness of a tax and benefit regime is hugely impacted by the Governments ability to claw back money that has been paid out in error or claimed fraudulently.

The Chancellor announced additional funding for a range of measures to crackdown on aggressive tax avoidance schemes and umbrella companies.

A Covid fraud squad is to be set up to recoup funds unlawfully claimed by businesses and individuals during the pandemic.

HMRC will be given funds to invest in their technology and higher interest charges will be applied on taxpayers accounts for late payment of liabilities

Other

• Corporation tax – a commitment to corporations that the top rate of corporation tax will remain at 25%.

• Pensions – State pensions up 4.1%. The government has promised a fundamental review of tax relief on private pensions, but no immediate changes announced in this statement

• Duties – fuel duty frozen for another year, tax up on tobacco and vaping, duty on draught alcohol cut, non-draught alcohol increased

• VAT and Business rates relief on private education to be withdrawn

• Non-domicile tax status - will be abolished as planned. The domicile concept in it’s entirety will be reviewed.

• Stamp Duty Land Tax – From tomorrow, a stamp duty surcharge on second homes will increase from 3% to 5%.

Summary

This was big budget with huge tax, borrowing and spending increases, which is sure to spark a political slanging match, particularly with a new Conservative leader expected next week.

Lots of debate as to whether goal posts were moved and promises were broken. Economic predictions were ok but will not have people dancing in the streets, with modest growth of between 1% and 2% over the next 5 years, and interest rates and inflation likely to rise marginally again towards the end of this administration.

However, this was billed as a ‘wipe the slate clean’ and ‘short term pain for long term gain’ sort of budget. The IFS describes tax rises as inevitable given the ‘dire’ fiscal inheritance and unrealistic spending plans.

I think everyone will welcome an improved infrastructure and set of public services, if not less money in their pocket. Lets hope the money is spent well.

If you have any questions you think I may be able to help with, please let me know.

Additional Reading

FT Budget in Brief - https://www.ft.com/content/a918030e-f026-4a9a-b256-896c0ca96c6f

BBC Key points at a glance - https://www.bbc.co.uk/news/articles/cdxl1zd07l1o

Government press release - https://www.gov.uk/government/news/chancellor-chooses-a-budget-to-rebuild-britain

Autumn Budget -https://assets.publishing.service.gov.uk/media/6722120210b0d582ee8c48c0/Autumn_Budget_2024__print_.pdf

OBR Forecast - https://obr.uk/efo/economic-and-fiscal-outlook-october-2024/

IFS Response - https://ifs.org.uk/articles/autumn-budget-2024-initial-ifs-response