As many expected, Chancellor Rachel Reeves’ first Autumn Budget was dramatic and consequential with taxes rising by a hefty £40 billion overall – the largest amount since Norman Lamont’s epic budget in 1993.
The details of the budget will have impacts for future investment in the UK, by both businesses and individuals, albeit these remain to be fully seen. However, in the immediate aftermath UK markets rose strongly – mid caps had a notable boost, while the FTSE AIM index rose by close to 4% after the announcement that IHT relief on AIM shares would be reduced rather than abolished altogether, welcome news for investors. UK gilt yields also fell – a sign perhaps that markets were reassured by the chancellor’s plans to cut debt and increase financial stability.
Here is the view from Liontrust’s Economic Advantage team:
“We are delighted with the chancellor’s clarification on the status of IHT relief on AIM shares. In announcing the 50% IHT relief, it recognises the vital role played by this market in the UK’s economic growth and puts the question over its removal to bed for the foreseeable future. Despite the market rallying 4% today there remains a huge valuation opportunity and upside in investing in AIM – these companies are not valuable because of their tax treatment but because of their underlying fundamentals.
“With interest rates reducing, growth returning, a stable government and this question now resolved, we believe the headwinds that have been plaguing AIM have now turned into tailwinds. Year to date (including today’s move) the FTSE Small Cap Ex-IT is up 11.5% vs AIM down 2.6%, and at the very least we would expect this gap to continue to narrow.
“Having said, this we believe that it is vital that the government continues to use policy to support UK capital markets. First, by simplifying ISAs and introducing a requirement for investing a proportion in UK shares. Secondly, using the pension review to re-introduce a UK home bias as seen in so many other markets. Thirdly, the Mansion House Compact should be further clarified to explicitly encourage investment in AIM (as an unlisted UK equity).”
One of the most previously leaked tax increases was the announcement that employers NI contributions will rise from 13.8% to 15% from April 2025. There will also be a reduction in the threshold of when employers are required to start making NICs, falling from £9,100 to £5,000.
This was the biggest tax-raising measure announced in the budget with the combined changes expected to net the government revenues of around £25 billion a year.
However, in a move aimed at addressing concerns from small businesses about the impact of tax rises, the chancellor announced the Employment Allowance would go up from £5,000 to £10,500. This is the amount that eligible employers can reduce their national insurance liabilities by.
As expected, capital gains tax (CGT) rates charged on profits from the sale of assets such as shares and property will also rise, although less aggressively than expected. The lower rate of CGT will increase from 10% to 18%, with the higher rate going from 20% to 24%. In her speech the chancellor said this would mean “the UK will still have the lowest capital gains tax rate of any European G7 economy.”
The lifetime limit for business asset disposal relief was maintained at £1 million in the budget – a decision that should help to reassure entrepreneurs to continue investing in their businesses, according to the chancellor. Business asset disposal rate will remain at 10% this year but rise to 14% next year in April and increase to 18% by 2026/27.
So what else was announced?
Key Budget takeaways
- The Office for Budget Responsibility (OBR) forecasts GDP growth of 1.1% in 2024, 2.1% in 2025, 1.8% in 2026, 1.5% in 2027, 1.5% in 2028 and 1.6% in 2029.
- The UK’s inflation rate to be 2.5% this year and the target of 2% to be reached in 2029.
- £70 billion of investment through newly created National Wealth Fund, to stimulate investment and the building of new infrastructure.
- A 2% productivity and savings target for all government departments
Personal tax changes
- Income tax – the freeze on income thresholds will be removed from 2028/2029 when they will be uprated again.
- IHT – The tax-free threshold of £325k to be maintained to 2030, to £500k for direct descendants, and to £1 million for a spouse or civil partner.
- From April 2027 inherited pensions will come into scope of IHT. Currently people can pass on pension pots tax free if they die before the age of 75, but from this point they will be added to the value of the estate and taxed accordingly.
- An increase in the capital gains tax rate on carried interest to 32%, from April 2025.
- A reform of agricultural and business property reliefs – from April 2026 the first £1 million will not be subject to IHT. There will be a 50% relief for assets over £1 million threshold, equating to an effective rate of 20%.
Business taxes
- The rate of corporation tax will be capped at 25% for the duration of parliament.
- High street – 40% relief on business rates for businesses in the retail, leisure and hospitality industries until 2025/26, up to a cap of £110,000. From 2026/27 permanently lower business rates will be introduced.
Miscellaneous
- National minimum wage to increase by 6.7% to £12.21 an hour, with a move to a single adult rate phased in over time.
- Pensions – the basic state pension to be uprated by 4.1% in 2025/26.
- Fuel duty – 5p reduction in fuel duty maintained beyond March of next year.
- The non-dom tax regime will be abolished from April 2025.
- The Energy Profits Levy introduced in May 2022 will go up by three percentage points to 38% and the end date of the Levy will be extended to 31 March 2030.
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