By Falco
30 Oct 2024
The challenge for Chancellor Reeves, in the first Labour government budget in 14 years, was to entrench financial stability and credibility. The context is simultaneously daunting. On the one hand, a Labour election manifesto commitment to avoid austerity matched with a promise to avoid taxing 'working people'. Added to that, a tepid improving outlook for economic growth set against a gilts market worried about future borrowing projections as public capital spending is set to rise by 1.4% of GDP or £100 bn.
First the good news in terms of credibility. The Chancellor has put a strong emphasis on strengthening institutional oversight through an improved charter for the Office of Budget Responsibility. The target for balancing the current spending budget is now the third rather than the fifth year of the budget forecast. Starting at a £125 bn shortfall this year, the redefinition of government borrowing as public sector net financial liabilities has broad support and again is targeted to balance in the third year, which offers the government some £15 bn in terms of headroom or buffer to unexpected bad news.
Meanwhile, total control expenditure growth has been upgraded to 1.7% pa. in real terms from 1.4% for the review period, an outcome considered restrained in the context of current pressure on unprotected areas. The start of the restoration of local government budgets and the added support to defence spending will be seen as addressing immediate pressures. Many will be relieved that the income tax thresholds' freeze will end in 2028. Finally, the macroeconomic growth outlook has also seen an upgrade to forecasts at least for the next 2 years.
On to the not-so-good news then; the effort to balance the books is deeply affected by the so-called £22 bn fiscal 'black hole' where the current government claims that its predecessor made a number of unfunded spending commitments in the March 2024 Budget. In turn, that has now contributed to the 'need' for a truly monumental tax bomb of £40 bn in order to restore fiscal credibility across its 5-year projections. Some would argue it is in part there to fund generous public sector employee wage settlements. Wealth holders and the non-domiciled will be expected to make a meaningful contribution.
Call it getting all the skeletons out of the closet early in the government term, but the deeply problematic aspect of this Budget is the manner in which those revenues are being raised. The hike in employer national insurance contributions (NIC) to 15% from 13.8% is painful, but the reduction in the threshold for employers' NIC to £5,000 from £9,100 carries potentially a really nasty sting, which must be expected to have implications for dividends, wage growth and ultimately employment. The perception of a potential hit to future employment growth will be added to in the form of a 6.7% rise in the National Living Wage. The OBR estimates that the budget changes will add 0.5% to the price index, with the tax burden at a historic 38% in 2029/30.
• Capital Gains Tax (CGT) will increase from 10% to 18% for those paying the lower rate and 20% to 24% for those paying the higher rate. These new rates will match the residential property rates, which will remain unchanged at 18% for the lower rate and 24% for the higher rate. The OBR says changes to CGT will raise £2.5 billion by the end of the forecast, and the UK will continue to have the lowest CGT rate of any European G7 country.
• VAT at the standard rate of 20% will be added to private school fees from 1st January 2025. The government will also remove business rates and charitable rate relief from private schools in England from April 2025.
• Freeze on Income Tax and National Insurance thresholds to end in 2028.
• The tax system for non-domiciled individuals will be abolished from April 2025 and replaced with a new residence-based regime.
• Freeze on inheritance tax thresholds extended beyond 2028 to 2030. Inheritance tax (IHT), currently 40%, is usually paid on the value of a deceased person's assets above a threshold of £325,000. Any money saved in a pension does not count towards this, but from April 2027, inherited pensions will be included. This is likely to bring more estates into the inheritance tax net, owing to pension savings that have not been spent before somebody dies. Until now, various exemptions have allowed certain types of property, such as farms and family business assets, to be disregarded in terms of inheritance. However, starting in April 2026, the rules will ensure that tax will be paid on more than £1m assets.
• Rates for Air Passenger Duty will increase by the forecast Retail Price Index and be adjusted to account for previous high inflation. The higher rates apply to larger private jets and will increase by 50%. For the tax years 2027 to 2028 and subsequent years, rates will be rounded to the nearest penny.
• Business Asset Disposal Relief (BADR) will remain at 10% this year before rising to 14% on 6 April 2025 and 18% from 6 April 2026-27. Typically, investors can claim a total of £1m in BADR their lifetime.
• Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) tax relief has been extended through to April 5, 2035.
• As of April 6, 2026, Business Property relief (BPR) and Agricultural Property Relief (APR) will remain at 100% for the first £1 million, above this threshold it will be reduced to 50%, with an effective rate of inheritance tax at 20%.
• The additional Stamp Duty rate for second-home buyers and landlords will rise from 3% to 5%, starting from 31/10/2024.
The information contained within is for educational and informational purposes ONLY, do not constitute tax advice and investors should seek their own independent tax advice. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional at Falco Private Wealth before making an investment decision. Falco Private Wealth are Authorised and Regulated by the Financial Conduct Authority. Registered in England: 11073543 at Millhouse, 32-38 East Street, Rochford, Essex SS4 1DB.
