It’s a shame that politics has to be so divisive, but that’s the nature of the beast. So how we view the first Labour Budget in 14 years – and the first presented by a female chancellor – will very much depend on a commentator’s given standpoint, wealth, and position on the political spectrum.
However, one thing is clear – Fleet Street headlines won’t have pleased the government: “Reeves’ £40bn Tax Bombshell For Britain’s Strivers” (Daily Mail), “Reeves’ great £40bn tax gamble” (i), “Return of tax and spend” (The Guardian), and “At least she kept it down at the Pump(kins)!” (The Sun). The headlines tell it all. But most telling was that former chancellor Kwasi Kwarteng was sympathetic and said on inews that “Reeves is cleaning up our mess”.
Ever since the election in July the new government has come across as overly negative about the state of the UK’s finances. So much so that some have suggested that its rhetoric has put off investors and frightened the chattering classes into financial decisions they’ll come to regret. By way of example, many withdrew sums tax free from pensions on the basis that Reeves would place limits on this practice. However, the arrangement was left alone yesterday.
Indeed, listening to the speech, it’s easy to come away with a sense of relief that the Budget could have been a lot worse.
Remember, Labour had promised not to hike taxes for ‘working people’; Income Tax, employee National Insurance, and VAT were all protected. Even so, Sir Keir Starmer recently found himself embroiled in a row about how exactly a working person should be defined.
So, what was announced and what could it really mean?
The big news – that taxes overall were to rise by £40bn – was nothing new. It had been presaged for some time; the Budget was the biggest tax grab since 1993, and the government will soon take close to 39% of the UK economy’s worth.
Reeves was ebullient though and predicted that the economy will grow between now and 2029 – by 2% in 2025, 1.8% in 2026 and 1.5-1.6% in the years thereafter. By comparison, the EU average for 2025 is ‘just’ 1.5% according to European Commission forecasts.
How the Budget affects employees
For employers the news that the National Insurance that they have to pay is to rise from 13.8% to 15% from April 2025, along with a lowering of the threshold at which it’s paid – from £9100 to £5000, is less than ideal.
Some believe that it could very well lead to either job losses as marginally profitable businesses close or, alternatively, employers curtail hiring or not replacing departing staff. It’s also possible that employers could decide that they want more ‘self-employed’ workers instead of full timers to save on National Insurance liabilities. However, one option for employers wanting to stay attractive to staff is to enhance their salary sacrifice scheme offerings – through better use of pensions and bikes for example; such schemes become more appealing precisely because they don’t carry National Insurance liability.
The only saving grace for employers, if it can be put that way, is that the Employment Allowance – which allows eligible small employers to reduce their National Insurance bill by £5000 per year – is to be increased to £10500 per year from April 2025. As the chancellor said, “this means 865,000 employers won’t pay any national insurance at all next year, and over one million will pay the same or less than they did previously.”
Naturally, employees will be pleased that their National Insurance bills won’t be rising and that the lower rates brought in by the previous Conservative government won’t be reversed.
Similarly, the rise in the National Minimum Wage and National Living Wage from next April isn’t going to do much for an employer’s balance sheet. However, it may ease the financial pain experienced by the low-paid who may be able to spend more which, in turn, could feed back into the tills of (other) hard-pressed businesses.
For employees, there’s another a little glimmer of light on the horizon as Reeves stated that the freeze on income tax thresholds will end in 2028/29. Thereafter it will be uprated in line with inflation. But that’s years away and not unsurprisingly won’t come into effect until around the time of the next election. In the meantime, fiscal drag will bring more people into the tax regime and/or take them into higher tax brackets.
It’s worth pointing out that the government had already announced the creation of Skills England to address ‘skills challenges.’ Beyond that, Reeves spoke yesterday of transforming the Apprenticeship Levy into “a more flexible Growth and Skills Levy” that offers new foundation and shorter apprenticeships in key sectors.
Business
Businesses and private individuals will be pleased that the expected end of the 5p per litre cut in fuel duty has been postponed and the planned increase in-line with inflation for 2025/6 has also been cancelled. However, air passenger duty will rise so those taking flights will see the average short-haul flight in economy rise by no more than £2 each way, while a long-haul economy single ticket will go up by around £12.
Those with premises in the retail, hospitality and leisure sector will be a little happier that there’s to be £1.9bn in support through a 40% relief on business rates from 2025-26 – up to a £110,000 cap. The Small Business Rates Relief was untouched, and the Small Business Tax Multiplier will stay at 49.9p. Naturally, these businesses would be happier still if business rates were reformed to even up the playing field between traditional outlets and online. However, that’s a task for another time which is being kicked off via a consultation that the Treasury is running between now and March 2025.
While Corporation Tax was increased by the last government on taxable profits over £250,000, Reeves said that the current regime will stay at 25% until next election. The Corporation Tax Small Profits Rate and marginal relief at current rate and thresholds is also being left as is. As for the future, the government will publish a Corporate Tax Roadmap that will detail its thinking on the direction of travel and how tax should be administered.
Turning to those selling businesses, they may want to get their skates on as Business Asset Disposal Relief is to remain at 10% this year, but will rise to 14% from April 2025, and to 18% from 2026/27. While some were worried that this relief would be abolished, it’s clearly not yet for the block and will continue to help those shield the first £1 million of gain in their lifetime, albeit with a higher tax charge.
However, Business Property Relief, which provides relief to business assets on death, is to be reformed from April 2026. The 100% rate of relief will continue for the first £1 million of business assets to help protect businesses but will be lowered to 50% thereafter. This will have an impact on those passing businesses on as it effectively introduces a 20% tax on the unrelieved amounts.
In general terms, those with assets with a capital gain will be ‘glad’ that the already lowered exempt amount hasn’t been lowered any further. However, they will now – from Budget day – be paying more with 18% on gains if they pay Income Tax at the basic rate, or 24% if they pay at higher rates.
And for those with an interest in electric vehicles (EVs) the Budget outlined incentives to make the purchase of EVs more attractive. The government will widen the differentials in Vehicle Excise Duty First Year Rates between EVs and hybrids or internal combustion engine cars. Reeves is maintaining EV incentives in the Company Car Tax regime and will extend 100% First Year Allowances for zero emission cars and EV charge points for a further year.
On industrial strategy, Reeves said that the government will invest around £2 billion over five years to support the automotive sector including “the zero-emissions vehicle manufacturing sector and supply chain.”
Lastly, the Budget gave local authorities £500m road maintenance to reduce the number of potholes.
Summary
The Budget could have been a lot worse, but it was never going to get any better. Typically, governments raise taxes at the start of a new term and lower them nearer the next election. This Budget was no different. But how the public and businesses view Labour over time will be interesting.
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