After months of speculation, Labour’s first Budget in 14 years is finally here. Back in August, Rachel Reeves referred extensively to a ‘black hole’ in the UK’s finances and that things would inevitably get worse before they got better. The challenge facing Labour, was the majority of the £1 trillion raised by the previous Government in 2023/2024, came from sources that Labour had committed not to raise taxes on. Today, Reeves took to her feet in the Commons and delivered a budget that includes a range of tax increases and spending cuts in response to the growing £22 billion deficit. While Labour ruled out raising taxes on working people, tax increases from other sources were highly anticipated to address the economic challenges. Let’s take a closer look at what’s been announced in the Autumn Budget and consider what it might mean for the UK.
Business Taxes
Labour was opposed to increasing corporation tax on businesses. Whilst they have committed to freezing this rate at 25% for now, it would be prudent not to rule out an increase at the next election. Other anticipated changes which have come to pass include the windfall tax on oil and gas companies which has been increased to 38%. The profitability of energy companies operating in the UK will experience a direct hit. This could result in lower dividends for shareholders whilst consumers might feel the pinch if these rising tax costs are passed on. On a positive note, the windfall tax hike might accelerate the shift towards renewable energy as companies look to prioritise sustainable energy solutions to mitigate future tax liabilities.
Employment
Labour pledged to “not increase taxes on working people” and would therefore “not increase National Insurance” (NI). Whilst employee NI rates were not raised, employers NI has been. This levy is paid directly from the company to the Government rather than being deducted off employee’s payslips. However, research shows the majority of the impact will hit staff all the same, rather than employers and shareholders. As a result we might see:
- Lower wages for staff
- Less hiring than otherwise would have happened
- Fewer hours of work than would have been offered
Many have described employers NI as a “tax on jobs” and argue that this would still fall on working people. This new rate of 15% is expected to bring in around £9 billion to the Treasury when it’s implemented April next year. In addition, the band where you start paying has also been reduced from £9100 to £5000.
Another impact employees will experience in April 2025 is the increase in National Minimum Wage (NMW) from £11.44 per hour to £12.21 in a bid to make it a “genuine living wage”. This is higher than the Low Pay Commission’s, recommendation of £12.10. Looking ahead to the 2024/2025 financial year, there will be four minimum wage categories, three of which are age based and one that is for apprentice workers.
Capital Gains Tax
Capital Gains Tax (CGT), the profits made from the sale of assets that have increased in value, was at an historic low so we were likely to see hikes. The lower rate of CGT will rise from 10% to 18%, and the higher rate from 20% to 24%. This could be a concern for investors who will be less inclined to finance new ventures. For business owners this may also discourage them from scaling up their companies or preparing for exit. Founders will often gain capital from selling their business to fund their next endeavour, so higher taxes may disrupt this cycle.
Conversely, headstrong leaders who are developing startups may not be deterred as they are motivated by innovation and the desire to leave a legacy. Whilst there have been claims that raising CGT rates could garner £5 billion, the actual yield may be significantly lower. Some will be happy to see this rise claiming it cultivates a fairer economy. They argue that it’s wrong for individuals who profit from selling land, buildings, shares, or artwork are taxed at a lower rate than those who earn their income through regular employment. The chief argument against the rise in CGT is that it penalises wealth creators. The entrepreneurs who take huge risks in setting up a business and employing people should be rewarded for their efforts and risk-taking. They will argue that raising the rates contradicts with Labour’s plan for a growth economy.
Income Tax
A freeze in the income thresholds at which different rates of income tax are paid has seen no change. There had been speculation this would be extended, but the chancellor ruled this out, saying thresholds will rise in line with prices from 2028. Until then, any sort of pay rise could drag people into a higher tax bracket, or see a greater proportion of your income taxed than would otherwise be expected.
Industrial Strategy
Labour’s new modern industrial strategy, ‘Invest 2035’ will fully launch in 2025 and aims to invest in the high growth sectors of the economy that will drive the UK’s growth mission. On the subject of growth, whilst research & development (R&D) didn’t feature in the Autumn Budget, it was indicated earlier in the year that Labour planned to maintain the current structure of R&D tax credits over the next Parliament. They believe there have been too many changes to R&D in recent years, with five changes being announced under the last Government. Their focus lies in stamping out fraudulent R&D claims. Labour also aims to target genuine innovation in sectors such as biosciences and engineering while retrenching relief for less productive sectors. This could save up to £3 billion and boost growth in key industries.
The Budget also covered Labour’s ten-year plan that will focus on eight key sectors, including advanced manufacturing, clean energy, and life sciences, with investment through the National Wealth Fund targeting green initiatives like hydrogen and steel.
Shops, cafes and pubs, were spared from a jump in business rates next year. Reeves unveiled a 40% relief on business rates for the retail, hospitality and leisure industries in 2025, capped at £110,000 per business.
Inheritance Tax
Arguably this is the UK’s most disliked tax and according to a recent YouGov poll, only 20% of people agreed inheritance tax was ‘fair’. Prebudget, it stood at a rate of 40% and is paid on the value of deceased person’s assets above a threshold of £325,000.
Labour will extend the inheritance tax threshold freeze for a further two years to 2030. This means the first £325,000 of any estate can be inherited tax-free, rising to £500,000 if the estate includes a residence passed to direct descendants, and £1m when a tax free allowance is passed to a surviving spouse or civil partner.
Reeves also declared that Business Asset Relief and Agricultural relief will be tax free for £1m and above that at the 20% rate. There will also be a 50% inheritance tax reduction on shares passed down.
There are those who will argue that with the projected growth of inheritances, social mobility will be improved by an increase. Whilst younger generations are expected to inherit large sums, the capital will not be equally spread.
Labour faced the difficult task of filling the £22bn black hole while sticking to their promise to not increase major taxes on working people. For most people, the Budget has been significantly better than initially anticipated. Ultimately, the success of this will fall on the Government’s ability to strike a balance between necessary fiscal measures and cultivating an environment of business growth and job creation. Businesses will need to adapt to these changes strategically, ensuring they can thrive in the evolving economic landscape while contributing to the broader objectives of the UK economy.