We have witnessed the first and long-awaited budget speech by Rachel Reeves, the new Labour Chancellor of the Exchequer since the July 2024 general election. In a moment of history, she is also the first woman to hold the office in its 800 years existence, and the first woman to deliver a budget speech.
The speech was long – 80 minutes – but first impressions were that this was not the nightmare before Halloween that many feared.
As usual there was more detail in the published materials than in the speech, and it will be interesting to see if anything unexpected emerges or unravels over the next few days.
The main headline is that this budget raises annual tax revenues by about £40 billion – more than 1% of GDP – and that means there are many tax increases for businesses and property owners.
National insurance contributions
The bulk of the increased tax revenues – around £25 billion per year – comes from the widely-trailed increase in employer’s national insurance contributions (NICs).
The rate of employer NICs – that is, secondary Class 1 NICs – will rise by 1.2 percentage points from 13.8% to 15% with effect from 6 April 2025. This increase is hard to square with Labour’s manifesto commitment that “we will not increase National Insurance”. But there we are.
Not so expected was a halving of the per-employee threshold for employers to pay employer NICs, from earnings of £9,100 to £5,000 pa. This means that employers will be paying secondary Class 1 NICs at a level significantly below the point when employees pay their own primary Class 1 NICs, and even before the Lower Earnings Limit at which employees accrue credits on their National Insurance record that count towards entitlement to state pensions. This “jobs tax” is a payroll tax with nothing to show for it. Perhaps this is intended to make sure that there is no NICs incentive to employ several part-time workers to fill a single role.
This substantial tax rise is slightly undercut by a doubling of the employment allowance – the deduction from the NICs liability of small employers – from £5,000 to £10,500. So in broad terms, an employer could pay up to four employees at the minimum wage before employer NICs become due.
Other costs of employment are also increasing, with the national living wage increasing from £11.44 to £12.21 per hour on 1 April 2025, and moves to increase the lower rate for younger people to £10 and ultimately to align at a single national adult rate.
Added to the granting of day one employment rights, all of these changes increase the financial and other burdens falling on employers. There could be unwanted impacts on levels of employment, which seems inconsistent with the government’s desire to deliver economic growth.
Corporate tax roadmap
Published alongside the budget was a rather thin document setting out a “corporate tax roadmap” for this parliament. It focuses on broad themes of economic stability, predictability, and certainty, to encourage economic growth.
The roadmap includes a confirmation of Labour’s manifesto commitments to cap the headline rate of corporation tax at 25% in this parliament, and to keep the regimes of full expensing of expenditure qualifying for capital allowance, and the £1m annual investment allowance.
It adds a promise to maintain tax relief for research and development and the UK patent box regime, and to keep the general system of corporation tax in similar shape in terms of tax base and territorial scope. It also commits the government to follow the OECD’s Pillar 2 rules on 15% minimum taxation, to review rules on transfer pricing and taxation of permanent establishments, and to modernise corporation tax compliance (what that means is not clear, as compliance is already fully digitalised).
Interest rates
A further unwelcome change was an unexpected jump in the rate of interest on late payments of tax. The rate of interest charged by HMRC will increase from 6 April 2025 by 1.5 percentage points, from bank base rate plus 2.5% to base rate plus 4%.
If the base rate remains at 5%, the rate of interest on late tax payments will increase from 7.5% currently to 9%. It seems the rate of interest on overpayments will remain at base rate minus 1%, which gives 4% on repayments currently.
CGT rates
Several rates of capital gains tax (CGT) were increased with immediate effect.
The main CGT rates on disposals of most assets are increased from 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers to 18% and 24% respectively, for disposals made on or after 30 October 2024. These rates are aligned with the 18% and 24% rates that already apply to gains on residential property.
These changes are subject to anti-forestalling rules where a disposal takes place pursuant to an unconditional contract entered into before budget day, unless the person making a disposal can confirm that a contract was entered into for reasons that do not include tax planning by reference to the time of disposal, and (for disposals to a connected person) for wholly commercial reasons.
For business assets and shares that qualify for business asset disposal relief (formerly known as entrepreneur’s relief) the applicable CGT rax rate is currently 10% for gains within the £1m lifetime allowance. This rate will increase in two stages over the next two tax years – rising to 14% for disposals made on or after 6 April 2025, and to 18% for disposals made on or after 6 April 2026. As in the current tax year, in the 2025-26 tax year, BADR will deliver a discount of 10% to the prevailing higher tax rate, so saving up to £100,000 of tax, but this discount will fall to 6% (saving up to £60,000) from April 2026.
(Equivalent changes will be made to the rates of the separate “investors’ relief” in April 2025 and 2026, but the lifetime limit was cut from £10m to £1m with effect from 30 October 2024, reducing the benefit of this relief markedly. Given poor take-up, few would miss it if it were abolished entirely.)
For gains on carried interest, the CGT rates are currently 18% and 28%. The upper rate will increase to 32% from 6 April 2025. Carried interest gains will be taxed as trading income from 6 April 2026, albeit with a 72.5% multiplier for qualifying carry (effectively 27.5% is not taxed, so for amounts falling in the current 45% additional rate band, that results in an effective income tax rate of 32.625% plus 1.45% Class 4 NICs, or 34.075% in total).
This follows through on a manifesto commitment to “close [the] loophole” under which private equity is “the only industry where performance-related pay is treated as capital gains.”
Registration of tax advisers
Amid concerns about a minority of unqualified tax advisers who may not be giving good advice, and to strengthening the regulatory framework applicable to tax advisers, from April 2026, all tax advisers who interact with HMRC on behalf of a client – and who are not already members of a regulated profession, such as solicitors, barristers or auditors – will have to register with HMRC first.
Stamp duty land tax
Rates of stamp duty land tax (SDLT) on residential land transactions continue to spiral upwards.
With effect from 31 October, the day after the budget, but subject to transitional provisions for pre-existing contracts, the SDLT surcharge for the purchase of additional dwellings is increased from 3% to 5%, with a similar increase in the flat rate on purchases of high value dwellings by companies and other “non-natural persons” from 15% to 17%.
Adding the separate 2% surcharge for non-residents, we will see some buyers paying SDLT rates of up to 19%. If the government goes through with its manifesto commitment to increase the 2% surcharge for non-residents to 3%, the top rate will touch 20%. For a transaction tax levied on gross values, that is extraordinary.
Some further SDLT increases lower down the scale are baked in when the temporary increase in the nil rate band for residential transactions introduced in 2023 disappears from 1 April 2025, reviving the 2% rate of SDLT on the band from £125,000 to £250,000. With the surcharges, that band can be taxed at 2, 4, 7 or 9%.
All of these changes affect residential property transactions only. Rates of SDLT on non-residential property are unchanged, and peak at 5% on consideration over £250,000. As a result, the gulf between SDLT charged on residential land compared to non-residential land becomes ever wider. This puts more pressure on transactions that are claimed to have an element of “mixed use” and which have come under increasing scrutiny from HMRC as a result of the tax saving. It cannot be too long before HMRC turns back to their earlier proposals to apportion “mixed” transactions between residential and non-residential elements, rather applying the non-residential rates.
Business rates
The Labour manifesto included a commitment to replace the business rates system which raises around £26 billion each year, and funds a quarter of local authority spending.
Alongside the budget, which included some changes to business rates reliefs to benefit retail, hospitality and leisure businesses, there is consultation on priority areas for further reform. This will include providing incentives for growth, making rates fairer by addressing avoidance and evasion, and speeding up revaluations and the digitisation and centralisation of business rates data.
Disappointingly, there does not seem to be much appetite for more wide-ranging reform of business rates.
Not mentioned today was council tax, which is also ripe for reform. The bands of council tax are still based on 1991 property values.
This note is intended to provide a first point of reference for current developments in aspects of the law. It should not be relied on as a substitute for professional advice. If advice on a particular circumstance is required please contact your Boodle Hatfield lawyer or one of the lawyers listed as authors.
On 30 October, the Chancellor delivered the Autumn Budget, announcing £40bn of tax rises and an agenda for growth. The first Budget from the new Labour government, and the first ever from a female Chancellor, includes immediate increases in CGT; a significant restriction on inheritance tax relief for business and agricultural property, and further detail on the major reforms to non-domiciled taxation.
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