What does the Chancellor have up her sleeve?

With Rachel Reeves’ first official Budget taking place in just over a week, we thought we would do our best to collate all the available comment and analysis about what the key decisions will be that could affect your business. 

Main economic indicators ahead of the Budget

The Chancellor has to balance raising billions more in funds against a backdrop of sluggish investment, low productivity and a rising youth unemployment rate.

While the overall economy has slowed with two consecutive months of static growth (July and August) there have been some upticks and declines in various sectors. 

The service sector including health and computer programming has improved over this period while manufacturing and construction have dipped. 

Over the same period retail sales rose 0.7% in July and 1% in August although they remain 0.4% below overall pre-Covid sales volumes. 

Inflation has fallen to 1.7% in September which is the first time it has dipped below the Bank of England’s 2% target since 2021 fuelling further expectation that interest rates will be cut again when the Monetary Policy Committee meets in early November. 

Speaking at a recent accountancy conference Mike Brewer, Interim Chief Executive of the Resolution Foundation said that going back to “normal” is not “a great prospect” for the UK after four years of turmoil. 

Citing the IMF predicting economic growth of just 1% for the current parliament along with a faltering labour market and high rates of sickness, he said: “Going back to normal means going back to stagnating economic growth and living standards.”

Professor Joe Nellis of Cranfield University said that Britain has been “very, very poor at investing right across the economy but particularly in skills.

“Investment is the engine of growth. Without that investment, not only in infrastructure, but in skills, we’re not going to go into another gear of growth in years ahead.”

Mike Brewer did make an optimistic case for growth saying: “The downside of being behind the productivity race means there is scope to make a lot of fairly easy gains just to catch up to where our competitors are.” He pinpointed green technology and AI as great opportunities for long-term investment in the UK but noted the instability of geopolitics as a potential pinch point. 

In their new industrial strategy the Labour government announced that they would focus on four economic missions:-

  • Delivering clean power by 2030
  • Caring for the future
  • Harnessing data for the public good
  • Building a resilient economy

OBR prepares ground for increase in investment spending

A timely new report from the Office for Budget Responsibility (OBR) has laid out the case for the Chancellor to increase public investment. 

Their analysis found that a sustained 1% of GDP increase in public investment could increase the economy’s level of potential output by just under 0.5% after five years rising to 2.5% in the longer term. 

They noted that public and private investment in the UK has averaged around 17% of GDP since the global financial crisis, the lowest of all members of the G7. 

The Prime Minister and the Chancellor have publicly pledged not to increase any of the “big three” taxes in their triple-lock promise to voters. These are income tax, corporation tax and national insurance contributions paid by employees.  They have also pledged not to raise VAT either to by process of elimination, what does that leave as potential changes?

Employers National Insurance Contributions

While employee NICs are off the table, they didn’t say anything about employer contributions which are now being played out by analysts. 

A 1% increase from 13.8% to 14.8% is estimated to raise an additional £8.5 billion for HMRC which would make it attractive. 

More technically difficult would be trying to bring a closer alignment between income tax and NICs although merging them would be seen to be too difficult although the system is ripe for modernisation. 

NICs began in 1911 with the National Insurance Act which has had few fundamental changes since then. In 1975 they began to be calculated based on earnings rather than a blanket flat rate and collected via payroll and PAYE, which itself was founded in 1944. 

One possible reform could be to move NICs to an annual, cumulative or aggregate basis similar to income tax. This would have the advantage of simplifying the system and making it more inclusive although there would always be winners and losers in every change. 

Basing employers’ NICs on total payroll costs would also simplify the system as would changing its name to a payroll tax. 

Additionally they could extend NICs to employer pension contributions or even pension payments themselves; align NICs position for employed and self-employed workers so everyone receives the same benefits from the system; align tax and NICs to apply equally to pay and benefits so the scope of charges and reliefs are the same and bring taxable benefits in kind into Class 1 NICs while abolishing Class 1A NICs with mandatory payrolling of benefits to simplify payroll processes. 

With the National Living Wage (NLW) set to rise from the current £11.44 per hour and the lower rate for 18-20 years old being phased out, employment costs should be expected to rise regardless of any changes to NICs. 

Capital Gains Tax

As speculation continues around the future of Capital Gains Tax of the Budget on October 30th, new data shows that ironically a reduction in the rate has helped to increase receipts. 

Data from HMRC shows that the reduction from 28% to 24% from April 6th 2024 generated £854 million in receipts in the period from April 1st to August 31st 2024.  In the same period for the year before only £778 million was raised.

Analysts think that this may in part be a product of the property market warming up generally in light of interest rate cuts but there could also be action taken by some to sell ahead of any potential changes to CGT in the Budget. 

Between 2016/17 and 2022/23, the number of taxpayers liable for CGT at the higher rate of 28% more than doubled from 50,000 to 120,000. £1.58 billion was taken in 2016/17 compared to £3.36 billion in 2021/22.  This fell to £3.04 billion in 2022/23 due to a decline in property transactions.

This has to be set against a background of media “leaks” and speculation that says the Chancellor Rachel Reeves is considering raising CGT possibly as high as 39% to help offset a budget deficit the Institute of Fiscal Studies (IFS) says is as much as £25 billion.

A rise of some kind is probable but it would still be surprising to see one instigated at such a high level. It is more likely that business asset disposal relief – BADR – will be reformed or discontinued. 

Inheritance Tax

Despite only 4% of UK estates paying it, the 40% rate on estates worth over £325,000 could also be reformed to close  the many loopholes and provisions that law allows including business relief which is supposed to allow family businesses to be handed down a generation without being broken up. 

Research from the Centre for the Analysis of Taxation (Centax) shows that estates worth £10 million or more have paid an average rate of inheritance tax of just 9% in recent years suggesting that this provision is being taken advantage of. 

Both Centax and the IFS have proposed closing the loophole, which also includes the “seven year rule” and investments in private companies and companies listed on London’s junior stock market, the AIM. 

This would be estimated to raise as much as £4 billion but could disproportionately impact smaller family businesses that the government has stated it wishes to protect and encourage. 

Pension contributions

While a range of tax reliefs exist to encourage pension saving, many analysts think these could be made less generous while still incentivising saving. 

One method would be if the Chancellor introduced a flat rate of tax relief on pension contributions. They currently attract income tax relief in line with the individual’s marginal tax rate with distributions then taxed as the pot is drawn down. This is now seen as unlikely as it would disproportionately impact public sector workers. 

Other options could be to limit the tax-free lump sum – that currently allows savers to withdraw 25% of their pension tax-free up to a limit of £268,275. If this was limited to £100,000 then it could raise around £2 billion a year and would only impact one in five retirees. 

Pension pots are also not included as part of the estate under inheritance tax which seems irrational and could also raise a few hundred million pounds according to the IFS if rules are changed.

We will conduct our regular comprehensive report and analysis after the Chancellor addresses the house on October 30th but the best thing you can do to shore up your positions, anytime of the year, is get in touch with us to arrange a free initial consultation.

They will be able to work with you to strengthen your foundations and help you orient towards your goals – whatever they are. 

If you can get started before any tax or legislative changes come in, then so much the better but you can’t until you contact us first!