The October Budget 2024 today, Labour’s first Budget for 14 years, was the most eagerly anticipated for years, albeit simply because of the concerns about what might be announced.
The new Labour administration is keen to make its mark and set out its ‘road map’ for the taxation of individuals and businesses in the UK.
Addressing the ‘black hole’
Ms Reeves’ dilemma was quite clear as she stood up to make her maiden Budget speech; she has inherited a ‘black hole’, and increased its size by awarding above inflation pay rises in the public sector. Many weeks ago, she indicated that she would address the black hole with tax rises for those with the ‘broadest shoulders’. I had thought that the broadest shoulders might simply mean anyone paying tax above the basic rate.
We have already seen that the Labour Party are prepared to make decisions which many may find tough, evidenced by the winter fuel furore. The expectation in the lead up to the Budget, was that the Budget would contain measures that may be unpleasant and unwelcome.
Ms Reeves had to create a balance between tax rises and spending cuts to avoid the economic ‘turbulence’ which followed the ill-fated Truss/Kwarteng Budget.
To my trained eye, it appeared that Ms Reeves and her advisers had overlooked one basic fact, the taxes she is supposedly targeting are for many taxpayers discretionary in nature:
- Capital gains tax – assets can be retained and sold at a time that suits the taxpayer and not the government;
- Non-domiciliaries – they simply leave the country, as many have done in the lead up to the Budget. The relocation specialists have been inundated with new enquiries;
- Inheritance tax – sensible estate planning can vastly reduce potential tax bills; and
- Entrepreneurs – they will simply set up their new businesses in alternative locations.
The manifesto pledge not to raise income tax, may come back to haunt Labour. An increase in income tax, for those with the broadest shoulders, could eliminate the black hole at a stroke without Ms Reeves having to tinker at the margin with other taxes.
As we have seen with previous budgets, there has been plenty of speculation about the likely changes, and Ms Reeves received a rebuke from the Speaker of the House who suggested that MPs might not need to attend the House to listen to the announcements as so much detail had been released/leaked.
The announcement that the Budget would deliver £40 billion of tax rises set the scene.
Striving for stability and growth
The expectation was headline grabbing tax increases and continued digs at the previous administration. We got plenty of the latter with a full twenty minutes of sniping at the Conservatives.
Ms Reeves stated that the Labour administration wants to restore stability, stimulate national renewal and deliver change.
In what follows I concentrate on the tax measures Ms Reeves announced.
Key highlights at a glance
- No extension to the freeze on income tax thresholds (fiscal drag);
- National Insurance increases for employers;
- Increases in Capital Gains Tax;
- Amendment of certain IHT tax reliefs;
- Confirmation of the abolition of the non-domicile regime; and
- Imposition of VAT on fees, and the removal of business rates relief, for schools.
Tax measures announced today
Personal taxation
Income tax rates
No change to the rates of income tax as this would have broken one of the main Labour Party manifesto pledges.
However, the main surprise was no further extension of the income tax threshold freeze in place until 2027/28. Fiscal drag is a major income generator for the government. With wage inflation more individuals end up paying tax, with more also moving into the higher tax brackets. Ms Reeves suggested that any extension would break the Party’s election pledge.
National Insurance Contributions (‘NIC’)
The rate of NIC for the employed and self-employed individuals has not been increased following the Labour Party’s manifesto pledge.
National Living Wage
It was announced yesterday that the National Living Wage for individuals over the age of 21 will increase to £12.21 per hour with effect from April 2025. This represents a 6.7% increase.
The government plans to align the National Living Wage so that there is one rate for all individuals no matter their age.
Whilst this is no doubt welcomed by affected individuals, it is likely to create further pressure for small businesses struggling to survive in these difficult economic times.
Capital Gains Tax (‘CGT’)
The rates of CGT will increase from today as follows:
- 10% to 18% – for any proportion of the gain in the basic rate band.
- 20% to 24% – for any proportion of the gain above the basic rate band.
Business Asset Disposal Relief (‘BADR’), which gives a reduced rate of CGT on the sale of certain business assets, has been revamped.
- The lifetime allowance is to remain at £1 million; but
- The rate of tax payable will be increased to 14% from April 2025 and 18% from April 2026.
This sends a message to entrepreneurs; the Labour Party is not interested, despite what Ms Reeves said in her speech, in supporting those prepared to devote considerable, time, effort and money to create and build new businesses.
The rate of tax on residential property disposals will be retained at 24%.
Inheritance Tax (‘IHT’)
Business Property Relief (‘BPR’) and Agricultural Property Relief (‘APR’) have for many years been potential targets for chancellors. Action has now been taken.
From April 2026 the rate of BPR and APR relief will change. The first £1 million will attract relief at 100%. Any excess will attract relief of 50%.
In addition, AIM shares will no longer qualify for full IHT relief. The relief will be reduced to 50% with effect from April 2026.
With effect from April 2027, it will no longer be possible to transfer IHT free on death pension pots to beneficiaries. It is not clear to me yet whether this measure will apply to all pension pots.
Pensions
Notwithstanding the flurry of comment before the Budget, no changes were announced.
Non-domiciliaries (‘non-doms’)
The non-dom regime will be abolished, as will the concept of domicile, which is a peculiarity of the UK tax system. A simple system will be introduced based on residence.
From April 2025 new arrivals to the UK will have a four-year tax break following which, if they remain resident in the UK, they will be taxed as any other UK tax resident. There will of course be transitional rules to be navigated by those affected.
Ms Reeves expects to raise £2.7 billion in additional tax with the changes. I have my doubts if the non-dom exodus is anything to go by.
The non-dom regime has been in the spotlight of all parties for some time.
Those potentially affected may need to consider what changes they have to make to their tax status to address the new rules or indeed whether to stay in the UK.
It is expected that the new rules will also bring in to charge foreign assets held in trust (protected trusts).
The new rules are very complex and have not been fully detailed here. If you require further advice, please get in touch.
Furnished holiday letting (‘FHL’)
Although there was no mention of FHL in the Budget speech, it is expected that the favourable FHL regime will be abolished from 1 April 2025.
Thus, the beneficial tax treatment of interest and deductible expenses, the reduced rate of CGT and potential IHT reliefs will all go. This will mean that FHL landlords will be subject to the same rules as buy to let landlords.
TIP: Existing FHL landlords may need to carefully consider their options for addressing the changes to minimise any costs. Selling up may not be so easy with the CGT changes and the number of properties which may be on the market in FHL ‘hot spots’.
Business taxation
Corporation tax (‘CT’)
In keeping with the manifesto pledge, no increase in corporation tax was proposed. The 25% to rate will be retained for the term of the Labour administration.
See details of the current corporation tax rates later.
Research & Development (‘R&D’)
No new changes were announced. Ms Reeves confirmed her commitment to encouraging innovation.
Please see further below for the R&D reliefs which are already in place.
National Insurance contributions (‘NIC’)
As heavily predicted, the rate on employer’s NIC will increase to 15% from 13.8% with effect from April 2025.
The salary level at which employer’s NIC will be payable will reduce from £9,100 to £5,000.
These two changes will supposedly raise £25 billion.
These changes, coupled with the increase in the National Living Wage, and the employment rights changes, will put serious pressure on thousands of small independent businesses already suffering from the cost of living impacts. This move does call in to question the Labour Party’s concept of stimulating business growth.
The employment allowance will increase from £5,000 to £10,500 from April 2025 for those employers with annual NIC bills of less than £100,000. This is a sop to those smaller businesses who will be most troubled by the NIC increase.
The Chancellor resisted the temptation to subject employer’s pension contributions to National Insurance.
Business rates
There will be a range of reliefs for smaller businesses in the retail, hospitality and leisure industries.
Other issues
Private equity
The rate of CGT payable on carried interest will increase to 32% from April 2025 with new rules planned for 2026 to codify the tax treatment. Ms Reeves was careful here following suggestions that any material change could drive private equity operators out of the country.
Private schools
Ms Reeves confirmed that school fees will be VAT-able with effect from 1 January 2025. The devil will be in the detail especially when determining which entities might be subject to the new rules. There were suggestions leading up to the Budget that universities and colleges could be at risk.
It will be interesting to see how the sector will cope with private school closures and the expected increase in competition for state school places.
TIP: Be careful with any planning you might consider, such as prepaying school fees, to ensure that any such planning would not be caught by any anti-forestalling rules.
Business rates relief will also be removed.
VAT
No changes were announced, other than those regarding private schools as detailed above.
Stamp Duty Land Tax (‘SDLT’)
The SDLT threshold will reduce to £125,000 from £250,000 for transactions on or after 1 April 2025.
The additional rate of SDLT payable on the purchase of second homes will increase from 3% to 5% from tomorrow.
Fuel duties
Fuel duty has been frozen for another year until April 2026. The 5 pence per litre reduction introduced by the Conservatives will be retained for another year. Fuel duties have remained pegged since 2011.
Ms Reeves likely decided not to increase duties for fear of a backlash from colleagues and the motoring public.
Alcohol duty
Alcohol duty on draught beer will be reduced by 1.7%.
Air passenger duty
The duty payable on business class flights will increase from 1 April 2025.
The increase for flights in private jets will increase by 50%.
Families
Targeted help for families on lower incomes will continue.
Investment
Ms Reeves confirmed her commitment to the EIS and VCT regimes.
The plans for a new ‘British ISA’, which was announced in Mr Hunt’s last budget, have quietly been shelved by the Labour Party.
Personal taxation – what we know
Income tax rates
The personal allowance and higher rate thresholds are frozen until April 2028:
- The personal allowance is £12,570;
- The 40% higher rate of income tax applies on income over £37,700; and
- The 45% additional rate of income tax applies on income over £125,140.
Dividend tax rates
The following rates apply from 6 April 2024:
- 8.75% for dividends in the basic rate band;
- 33.75% for dividends in the higher rate band; and
- 39.35% for dividends in the additional rate band.
The dividend allowance is currently £500.
The rate of tax payable by companies on any overdrawn director’s loan account (‘DLA’) is 33.75% as this rate is linked to the rate of tax payable on dividends. As always, DLA planning is important for all owner managed businesses.
Owner managers should review their profit extraction strategies for the current and future tax years to maximise any tax saving opportunities which may be available.
Reviewing the company’s shareholding structure may give owner managers tax planning opportunities with the use of ‘alphabet shares’. With all such planning the practical and commercial factors should not be overlooked.
Capital Gains Tax
The annual exemption is £3,000 from 6 April 2024.
Inheritance Tax
The nil-rate band is £325,000 and will be frozen at this level until April 2030.
Pensions
The pension lifetime allowance was with effect from 1 April 2024.
The annual allowance is £60,000 for the current and future tax years.
No further changes were announced today.
Business taxation – what we know
Corporation tax
The rate of corporation tax is 25% for companies with taxable profits of more than £250,000.
For small companies, with taxable profits below £50,000, the rate of corporation tax is 19%. The rate tapers for companies with taxable profits between £50,000 and £250,000. This will provide a gradual increase in the effective rate of corporation tax. The rate of corporation tax in the margin will depend on the level of profits in the margin.
The lower and upper limits will be proportionately reduced for short accounting periods and where there are associated companies. Group loss relief planning is likely to become important for many groups.
The above rates mean that company tax planning may now become more important for a lot of companies.
Capital expenditure – full expensing
Where a company incurs capital expenditure on assets that would otherwise qualify for the main pool, such as plant and machinery, furnishings, manufacturing equipment, IT equipment and capital investment on software, it is entitled to claim a first year allowance and take a 100% in year deduction in respect of the expenditure. The expenditure must be on new and unused items.
There are separate rules for motor cars, as briefly referred to elsewhere in this summary.
R&D
A merged R&D tax relief scheme is in force for accounting periods beginning on or after 1 April 2024.
The merged R&D scheme sees the existing R&D tax relief incentives brought together into a single scheme:
- Enhanced tax relief and payable credits for qualifying SME expenditure; and
- R&D expenditure credit (‘RDEC’) for large businesses, SME subcontractors and subsidised R&D expenditure.
The merged scheme works like the existing RDEC scheme.
There is also a separate set of rules for R&D intensive companies.
If you are an SME, you will need to identify whether you fall under the R&D intensive company rules or the merged scheme rules. The R&D intensive scheme is for companies, from 1 April 2024, with 30% or more of their total expenditure spent on R&D activities.
The merged scheme will provide relief for profit-making companies of all sizes at the current RDEC rate of 20%. The gross RDEC is subject to corporation tax, which means that the most profitable companies, paying tax at the full rate of 25%, will receive a net benefit of 15%.
The notional tax rate for loss-making companies of all sizes is 19% in the merged scheme, resulting in a payable credit worth 16.2% of a company’s R&D expenditure.
The procedure for making an R&D claim:
- Make an application for advance assurance, for eligible new claimants;
- Make a claim notification, unless an R&D claim has been made in one of the last three periods, within six months after the end of the accounting period;
- Submit an additional information form with your CT600 or earlier; and
- Claim tax relief via the corporation tax computation and the CT600 and attach an R&D report.
The above procedure must be followed. If it is not, HMRC will remove R&D claims from submitted computations.
Creative tax reliefs
The reliefs available to those companies involved in the creative sectors (museums, art galleries, theatres, orchestras etc.) are as shown in the following table:
Relief | To 31/3/24
(%) |
To 31/3/25
(%) |
From 1/4/25
(%) |
Theatre – non-touring/touring | 45/50 | 45/50 | 40/45 |
Orchestras | 50 | 50 | 45 |
Museums, galleries, exhibition
Non-touring/touring |
45/50 | 45/50 | 40/45 |
The above rates, which had been increased due to the pandemic, are now permanent.
The expenditure credits from 1 January 2024 are 34% for film, high end television and video games and 39% for the animation and children’s TV sectors.
Other reminders of recent tax changes
The following are measures which are already in place.
Residential property sales
The reporting and payment requirements for CGT in connection with residential property sales are still causing problems for taxpayers with investment property and/or second homes. The sale of a main residence does not normally need to be reported in this way.
The reporting and tax payment deadline is 60 days from the date of completion.
Many taxpayers are still unaware of the new rules.
With suitable planning, the calculations taxpayers need to complete should be straightforward to complete, perhaps with a little help from their accountant!
Once a taxpayer has set up their CGT account with HMRC, it is then easy enough for them to appoint an agent to make the necessary return on their behalf. Once that has been completed the payment process is routine.
TIP: If you have a UK residential disposal which is due to complete before 5 April 2025, you can avoid the above if you can file your 2025 income tax return within 60 days of completion. The other benefit of this approach would be that the tax due would be payable in accordance with the self-assessment regime, i.e., by the 31 January 2026, and not 60 days from completion.
Making tax Digital (‘MTD’)
MTD for VAT is now mandatory for all VAT registered businesses. All new VAT registrations will result in an automatic inclusion within the MTD regime.
MTD for income tax is getting closer! The new target date for self-employed individuals, and property owners with income over £50,000 is 6 April 2026.
Given the problems which HMRC have experienced to date with this initiative, even 2026 may not be achievable.
MTD for corporation tax will be the last of the MTD initiatives and will not be in place for some time yet.
Penalties
With the progression of the MTD initiatives we now have a new points-based penalty regime for filing failures.
The new regime is effective as follows:
- For VAT accounting periods starting on or after 1 January 2023;
- For businesses, self-employed individuals, and property owners with income over £50,000 from 6 April 2026; and
- For businesses, self-employed individuals, and property owners with income over £30,000 from 6 April 2027.
The new regime is intended to ‘punish’ more harshly those who miss deadlines regularly, rather than those who occasionally default due to a simple oversight. The penalties are clear because they are fixed.
With the delay to the introduction of MTD for income tax, no ‘soft landing’ is expected with the new penalty rules, so all taxpayers will need to be aware of them in time to avoid unexpected fines.
Basis period reform – sole traders and partnerships
The reform will involve businesses moving from the ‘current year’ basis to a ‘tax year’ basis. This will mean that business profits will be calculated for the tax year rather than for the accounting year ending in the tax year. This will align the treatment of trading income with non-trading income.
The change is effective for the current tax year starting 6 April 2024.
The current tax year is the transitional year for sole traders and partnerships that do not use 5 April or 31 March as their accounting date. This will advance tax liabilities for many businesses.
Zero emissions vehicles
There are 100% first year capital allowances for business expenditure on new and unused business cars, and zero emissions good vehicles for expenditure incurred prior to 1 April 2025.
With the company car benefit in kind percentage at 2% for 2024-25, now could be a good time to consider switching to an electric company car. With the BIK rate increasing in the coming years, they will still be at a very low level which should encourage many company car drivers to make the switch.
Vehicle excise duty will be payable on electric vehicles from April 2025.
Conclusions
Once Ms Reeves had finished her sniping at the Conservatives, which did take rather a long time, she quickly led us through her £40 billion of tax rises.
My fear is that the measures announced will do nothing to stimulate growth. The material increases in employer’s NIC, alongside the changes underway to workers’ rights, will discourage many businesses from taking on additional employees. This in turn will undoubtedly limit the growth prospects.
The changes to BADR, whilst not seemingly huge, though ultimately nearly a doubling of rates in the fullness of time, may have a material effect on budding entrepreneurs who may simply decide to set up their new business venture outside the UK. Other owners with established businesses may simply decide to sell up before the rate increases come into effect. Stimulating growth?!
Ms Reeves mentioned further funding for HMRC to deal with tax avoidance both in terms of ensuring that taxpayers pay what they owe, and the promoters of tax avoidance schemes are targeted, but there is still a degree of naivete in my view in this area. I do not believe it is quite so easy to recoup the sums mentioned from those who are determined not to pay their way. This is evidenced by the massive loss to the Treasury during the pandemic.
There was no mention in the speech of any attempt to simplify the UK tax code, or indeed address some of the troubling issues which are in prospect such as making tax digital. This was disappointing for me.
Whilst there were no direct changes to the taxes for individuals, I still believe that all will suffer to varying degrees as a result of today’s announcements.
Businesses, and their owners, were clearly in the firing line with increased employment costs, CGT and IHT increases, and very little in the way of meaningful tax incentives.
All in all, a miserable Wednesday for many I suspect.
Contact
If you have any questions, or other points, in connection with the contents of this summary of the October 2024 Budget, please do not hesitate to get in touch through the normal channels.
Disclaimer
Please bear in mind that this is a general overview of the October 2024 Budget announcements.
Please take appropriate detailed professional advice before acting on any of the points made in this overview.