Forty billion pounds tax increase
This is the cumulative size of the tax changes announced by the new Chancellor of the Exchequer, Rachel Reeves, in her long awaited first Budget for the new Labour Government. The overall parameters of the Budget had been expected; a large tax increase to cover increased spending with more capital investment, but the speech detailed measures which will impact businesses and their investors in particular.
The single largest increase was the 1.2 percentage point increase in National Insurance Contributions (NIC) for employers from 13.8 percent to 15 percent which has effect from 6 April 2025. In addition, the secondary threshold for employee earnings above which employer’s NIC are due is to be reduced from £9,100 to £5,000 (on an annualised basis) from 6 April 2025. This threshold will be increased by the consumer price index (CPI) after 6 April 2028.
As partial recompense for small businesses, the Employment Allowance, which currently allows qualifying employers to deduct £5,000 from their employer’s NIC liability if their total NIC liability was £100,000 or less in the previous tax year, is to be increased to £10,500 from 6 April 2025 with the £100,000 limit being abolished.
There were no changes to employee’s NIC, which was reduced earlier in the year.
This change to employer’s NIC will impact large employers, and together with the increases in the National Living Wage will increase the economic burden of employing labour. Increasing the cost differential between employed and self-employed labour has the potential to increase the use of arrangements that aim to disguise an underlying employment relationship. We might therefore expect to see an increase in HMRC’s ‘off-payroll working’ and ‘IR35’ enforcement activities in due course.
The other main change for large corporates with global income in excess of €750 million was the expected confirmation that the third element of the pillar two OECD multinational tax changes, the undertaxed profits rule (UTPR), will apply to accounting periods beginning on or after 31 December 2024. As a quid pro quo, the income tax charge on offshore receipts in respect of intangible property (ORIP) that was introduced five years ago will be abolished with respect to income arising from 31 December 2024.
Otherwise, the publication of the corporate tax roadmap confirmed that during the current parliament the corporation tax rate will be capped at 25 percent, with the core features of the capital allowances regime (full expensing for plant and machinery, £1million Annual Investment Allowance and the Structures and Buildings Allowances) remaining in situ. Also, the current generosity of the R&D rates and patent box will be maintained with further consultation on reforms to transfer pricing, permanent establishments and diverted profits tax. Corporates will welcome the stability that this promises. The roadmap also highlights a number of future consultations and of particular interest will be two that focus on giving more advance certainty in relation to the tax treatment of major investments, an area which corporates often highlight as having a negative impact on increasing investment in the UK.
From 1 November 2024 the energy profits levy will increase to 38 percent from 35 percent with the investment allowance abolished and the rate of the decarbonisation allowance set at 66 percent to maintain its cash value. The levy has been extended to end on 31 March 2030 but legislation is already in place to end the levy earlier if prices fall to, or below, pre determined levels for a sustained period.
The Government also hopes to increase its coffers through greater investment in collecting tax that is due through more compliance and debt management staff at HMRC and modernising HMRC systems and data. It also plans to charge higher levels of interest on late paid tax.
The changes to the taxation of capital assets will impact investors and business ownerships. Whilst the increases to the capital gains tax rates from 10 percent and 20 percent to 18 percent and 24 percent for the lower and main rates of capital gains tax respectively with effect for disposals made on or after 30 October 2024 was less than some had expected, there are corresponding (but tapered) changes to business assets disposal and investors’ reliefs with the rate at which tax is charged on qualifying gains increasing from 10 percent to 14 percent from 6 April 2025 and then 18 percent from 6 April 2026. The changes to inheritance tax were more substantive.
The existing 100 percent relief for agricultural and business property will only apply from 6 April 2026 to the first £1 million of combined agricultural and business property with the remaining value subject to 50 percent relief. In addition, shares listed on AIM and other similar stock markets would not benefit from this £1 million threshold with the 50 percent relief only being available. Agricultural property relief will be extended from 6 April 2025 to include land managed under an environment agreement with requisite government bodies. The inheritance tax nil rate band of £325,000 will be frozen for a further two years until 5 April 2030.
Additionally, unused pension funds and death benefits payable from a pension will be brought into a person’s estate for inheritance tax purposes with effect from 6 April 2027.
The Budget also confirmed promises made in the Labour Manifesto to impose VAT on private school fees from 1 January 2025 and also to remove their ability to claim charitable rate relief from business rates from April 2025, subject to the parliamentary process.
Other promises confirmed included the reform of carried interest for managers of private equity firms, increasing the capital gains tax rate from 28 percent to 32 percent from 6 April 2025 and then bringing all carried interest within the income tax regime from April 2026 applying a 72.5 percent multiplier to provide a reduced rate of tax.
The abolition from 6 April 2025 of the long-standing remittance basis for non-UK domiciled individuals was also confirmed. There will be an exemption for the first four years of residency for foreign income and gains, available to individuals with 10 or more consecutive years of non-residence prior to their arrival in the UK. This will enable foreign income and gains arising during the qualifying period to be brought into the UK without taxation. Overseas workday relief for employment income will be reformed, increasing the period from three years to four years and will be available irrespective of where the earnings are received or whether they are brought to the UK. However, the amount claimed annually will be limited to the lower of £300,000 or 30 percent of the employee’s net employment income. Further transitional measures have been confirmed for individuals who are currently claiming overseas workday relief.
For capital gains tax purposes current and past remittance basis users will be able to rebase personally held foreign assets to 5 April 2017 values where certain conditions are met. A new temporary repatriation facility will be available for individuals who have previously claimed the remittance basis enabling a designation and remittance of those sheltered foreign income and gains, including in trust structures, at a reduced rate of 12 percent for 2025/2026 and 2026/2027 and 15 percent in 2027/2028.
The current domiciled basis for inheritance tax will be replaced from 6 April 2025 with a new residence-based system, applying to individuals if they are long term resident in the UK for at least 10 of the last 20 years, remaining in scope between three and 10 years after leaving the UK. The IHT treatment of non UK assets put into settlements will depend on the Settlor's status at the time, or on death.
The confirmation of these changes will provide internationally mobile individuals a short period to consider how these new rules will impact them before they take effect on 6 April 2025.
Overall, the Government claimed that these changes did not adversely impact the payslips of workers and retained fuel duty rates for another year. How long this 14-year freeze on fuel duty can remain is uncertain as yet again the increase in rates is assumed in the Government calculations going forward.
The impact of this Budget will be felt in the near future, but whether the Budget facilitates growth and investment in the UK economy will only be determined in a few years’ time.
