Roger Phillips, Tax Partner at PM+M: Working people will pay the price for the Budget, no matter how much the Treasury dresses it up.
It’s been 112 days since Labour came to power, and after three months of febrile speculation, Rachel Reeves finally delivered the most hyped-up budget that I can remember in 20 years of being a tax professional. This prolonged period of speculation hasn’t been helpful as the markets, businesses and taxpayers have been crying out for stability and certainty.
Much of the talk in advance of this Budget was around the £22bn black hole, which was there for anyone to see if they had delved into the data which is fairly readily available – and I expect the new government were well aware of this before they penned their manifesto. As well as dealing with the black hole, it’s clear that this government wants to borrow, spend and grow the economy.
The Chancellor’s change to the way in which her “fiscal rules” operate, combined with the tax rises that we have seen today, should give her the headroom to do this. But this will come at a cost – a cost which, despite assurances, will fall on the category of people who the government have seemingly been unable to define in the days leading up to this Budget – and the people who they said would be protected from tax rises in their manifesto: “working people.”
Costs to business - employer’s NIC
To a degree, the government had tied their own hands in their manifesto by saying that they wouldn’t increase income tax or NIC for working people. The jump in Employer’s NIC to 15% from April 2025 is being spun as Labour having not broken their manifesto commitment, as this cost will be borne by business rather than workers. However, the announcement that threshold at which it gets paid come down from £9,100 per year to £5,000 did come as surprise and will inflict further pain for employers across the UK.
By the letter of the law, this ‘spin’ may be true. The cost will be paid by employers. However, when this is combined with the increased cost burden in the form of a national minimum wage increase, these costs will undoubtedly be felt by employees in the future, either through reduced pay rises, or in the worst of cases, the loss of jobs for those where these increased employment costs are unsustainable by businesses. The pain is likely to be most felt by those in the already squeezed hospitality and retail sectors despite the announced 40% relief on their business rates. The PM intimated that he doesn’t want people to see lower amounts going through people’s payslips and into their bank accounts but, indirectly, it will, no matter how the government dresses this up.
Capital Gains Tax, Inheritance Tax and Pensions
Capital gains tax and inheritance tax are relatively low fund raisers for the government – and paid by relatively few.
The jump in the rates of CGT (the lower rate will rise from 10% to 18%, and the higher rate will go up from 20% to 24%) will not be huge money spinners for the government. The rates have not been equalised with income tax, as some were calling for, which is sensible. However it is disappointing not to see some kind of relief for inflation being introduced for those realising long term gains.
IHT appears to be in line for some relatively radical reform. An extension of the freezing of the IHT thresholds to 2030 will pull more families into IHT. The biggest announcement, on which the Chancellor spent a very short period of time announcing, was that inherited pensions will now be subject to IHT.
Additionally, there will be reform to the BPR and APR rules – effectively placing a cap on those reliefs equivalent to £1m per taxpayer, with anything over and above that being taxed at an effective IHT rate of 20%. Some drastic changes from the current position where pensions can be inherited tax free and shares in family companies attract no IHT on death.
The government claims that there is ‘no return to austerity’, but with a total rise in taxes of £40bn, this is the largest any chancellor has announced since Norman Lamont in 1993. Time as they say will tell.