UK Autumn Budget
Rachel Reeves will be pleased that her budget has led, so far, to a relatively calm reaction in the UK equity and fixed income markets. This is because many of the ‘big numbers’ were known in advance, particularly in terms of changing the fiscal rules to allow more investment spending.
The Black Hole
Language around the £22bn black hole had in recent weeks changed to a need to raise taxes by at least £35bn to sustain public services. On the day, Reeves announced an even bigger increase than expected: taxes will go up by £40bn over the term of this Parliament.
Unlike Kwarteng’s budget in 2022, the OBR were asked, and had time, to deliver their forecasts of the different effects the different tax and spending announcements would have. The 2022 announcement led to carnage in the long-dated fixed income market, affecting pension funds and destabilising the economy, a situation Reeves was obviously anxious to avoid.
‘Crowding out’ of the private sector
This was the first Labour budget in 14 years, and a chance for Labour to set out their ‘business friendly’ stall. Unfortunately, I think there are some fairly significant problems in the way they have gone about it, because it seems to me that it won’t deliver the private sector growth we so badly need in the UK. The OBR share that view.
There is a huge rise in government spending in the next 18 months, and then only small increases. The big initial increase might risk inefficient allocation of resources and inflation. Inflation might mean interest rates stay higher, and this and taxes on the private sector will hit growth.
A small pool to fish from
By excluding rises on VAT, income tax, employee national insurance contributions and corporate tax, effectively Reeves left herself with a small pool to fish from.
Source: Tax Policy Associates
Increase in Employer National Insurance Contributions
The Labour Party’s manifesto commitment not to raise VAT, income tax, employee NI contributions and corporation tax was honoured. However, this isn’t a particularly employment-friendly and growth-friendly budget. NI contributions by employers rise 1.2% to 15% and the threshold over which they pay contributions on their employees nearly halves to £5000. These changes are forecast to raise a whopping £25bn. This will, of course affect employees ultimately, as it will cost employers more to hire them, reducing their willingness to do so and how much they will pay.
‘The broadest shoulders’
Time and again politicians say that those with the broadest shoulders can afford to pay more tax. It seems as if they forget that they already do! Reeves has hit those who are better off. Whilst this might be politically expedient, I would expect that some of these measures will not raise the levels of revenue expected, and in some cases, have entirely the opposite affect and eventually cost the Treasury. Some fear that this will be the case with the introduction of VAT on Private Schools, which Reeves said will raise £9bn over the life of the parliament, as private schools may be able to write off capital expenses against tax.
Inheritance Tax
Agricultural Relief on farming properties over £1mn will be reduced from 100% to 50% from April 2026. This will lead to pain for many families passing on their farms. Business Property Relief on family businesses will be subject to the same changes.
Many clients have invested in AIM IHT portfolios which meant that qualifying shares were eligible for Business Property Relief after two years, so no inheritance tax was paid on these shares. This relief will now be cut by 50% on any amount held within an AIM portfolio. Again, this is from April 2026.
Many had feared a complete abolition of BPR on AIM IHT portfolios and there has been a relief rally in AIM shares since this announcement, though the market remains down on where it was when the election was announced.
Source: Stockopedia
Pensions will not be exempt from IHT from 2027 onwards. This is a blow for those trying to maximise what they can pass on to their families. Changes such as these are unsettling. Tax and estate planning requires being able to think long term.
Capital Gains Tax
CGT has been increased, with the basic rate taxpayers paying 18% (previously 10%) and higher rate taxpayers paying 24% (previously 20%), effective immediately. CGT of 24% on residential property is unchanged.
Second Homes
The extra stamp duty paid on a second home will rise from 3% to 5%. In documents accompanying Reeves’ announcements today, the reason for this is that this means that those looking to move home, or purchase their first property, have a comparative advantage ‘over second home buyers, landlords, and businesses purchasing residential property’. This comes into effect immediately.
Duties
Rather surprisingly, the fuel levy was left as it is, with the 5p reduction brought in by the Conservatives at the outbreak of the Ukraine war kept on. I thought that fuel duties might have increased as part of Labour’s transition to a greener economy. Alcohol duties for bottled drinks increased but was brought down for draught beers.
The rabbit
In a piece of good news – the proverbial ‘rabbit from the hat’ a Chancellor tries to pull with each budget statement – Reeves said that the thresholds for income tax would start to rise again from 2028-29 (some way off!), meaning that lower rate payers aren’t dragged into higher tax bands simply through inflation.
Overall…
The main aspect for me is that government spending, already at a post war high, is going to rise yet further. Time will tell if this money is well spent, history shows us this is not always the case. However, companies and households, who have been worried for months about the new Government’s frankly gloomy tone, will be relieved to have, finally, some clarity.
