After a four month wait since the election, the nature and extent of the tax increases on businesses and individuals under the new Labour government is now clearer. The Budget is expected to raise £40 billion annually, which makes it the largest tax increase in three decades.
Somewhat unexpectedly, most of the tax increase will be borne by business employers. The Chancellor had proposed back in 2018 – as a backbench MP – to radically overhaul the wealth tax system for individuals by replacing council tax with land tax, reforming inheritance tax, restricting higher rate pension contribution reliefs and having capital gains tax paid at income tax rates, to raise over £20 billion annually. The increases in these areas are in the low billions, however, and more than £25 billion will be raised instead by increasing employers' National Insurance and lifting the national living wage levels.
The increase in capital gains tax rates – raising the higher rate for asset disposals from 20 to 24%, to align with the current 24% rate for residential property – is also significant and will reduce capital and investment returns for individuals. This increase applies to disposals from 30th October and so it is immediately applicable. The 10% CGT rates for business asset disposal relief and investors' relief will also be increased over time, to 14% in April 2025 and 18% in April 2026.
Our insights into five of the key measures affecting corporate, real estate, employment and other areas is set out below. Our tax team would be happy to discuss any comments or queries on the changes.
Employers' NICs and national living wage
The main tax measure, to raise £25 billion annually, will lift the rate of employer National Insurance contributions (NICs) by 1.2% to 15%, and reduce the per-employee threshold at which employers pay NICs from £9,100 per year to £5,000 per year, with effect from April 2025. There is relief for small businesses, by increasing the Employment Allowance from £5,000 to £10,500 and removing the £100,000 threshold, so that apparently 865,000 small employers will pay no NICs next year.
This 1.2% increase in employers' NICs should not be understated. It is one of the largest single tax increases in history. The rationale is for owners and shareholders, rather than "working people", to help repair the country's finances. Presumably, it was also favoured over a large increase in CGT rates, because the revenue increase would be more regular and reliable, and NICs increases are seen as less likely to excite opposition given the Conservative party has proposed similar measures in the past. However, the effect of increased NICs can of course be widespread and uncertain, as owners may suffer reduced profitability and, in practice, pass on the cost to workers, customers or suppliers.
Employers will also be required to pay a higher national living wage (up 6.7% from April 2025) and higher national minimum wage for 18-20 year olds (up 16.3%), the largest ever increase in cash and percentage terms.
Capital gains tax
As noted above, CGT rates are going up, but not as high as predicted.
CGT, which is paid by individuals on the increase in value of an asset when it is disposed of, will now be charged at main rates of 18% (lower band) and 24% (higher band), up from the current rates of 10% (lower band) and 20% (higher band), for disposals on and after 30th October 2024. It is eyebrow-raising, but not unexpected, that the change took effect from the start of Budget day before the announcement, especially given it was not a manifesto promise and not confirmed.
The main rate will match the existing residential property rate, as the higher rate for residential property reduced from 28% to 24% in April 2024. When that reduction was made earlier this year, the Conservative government believed that 24% was the optimal rate to maximise CGT revenues. Now the Labour government has followed suit and made 24% the higher rate for all asset disposals (save that the rate for gains from carried interest will remain at 28% and be increased to 32% from April 2025). It is a relief to CGT taxpayers that the main rates are not rising above 30%, or levelling with income tax rates, as some had predicted.
One point of detail to note is the "anti-forestalling" provisions which bring unconditional (but uncompleted) contracts entered into before Budget day into the higher tax rate unless the taxpayer satisfies a purpose test (and a "wholly for commercial reasons" test if the parties were connected) relating to the benefit obtained from making the contract unconditional and triggering CGT. This could be contentious.
The 10% CGT rates available under the business asset disposal relief and investors' relief regimes will be lifted to 14% from April 2025 and 18% from April 2026 to bring them closer to new main CGT rates. Business asset disposal relief life-time allowance will remain at £1 million, but investors' relief allowance will reduce from £10 million to £1 million.
Stamp duty land tax (SDLT)
The higher rates of SDLT for Additional Dwellings will increase from 3% to 5% from 31 October 2024. These higher rates apply to purchases of second homes, buy-to-let residential properties and companies purchasing residential property. The Budget announcement provides that those who exchanged contracts prior to 31 October 2024 are not affected by this rate increase. The draft legislative provisions provide that such contracts will be affected if there is a variation of the contract (or assignment of rights under the contract) on or after 31st October 2024, or the transaction is effected in consequence of the exercise on or after that date of any option, right of pre-emption or similar right, or on or after that date, there is an assignment, sub-sale or other transaction relating to the whole or part of the subject-matter as a result of which another person becomes entitled to call for a conveyance. Care needs to be taken in considering these provisions.
This is an unwelcome change for the private rental sector, which could mean fewer landlords acquire properties, and fewer rental properties.
Employee ownership trusts (EOTs)
There are proposed amendments to the highly tax efficient EOT regime, which enables the sale of a controlling interest in a company to a special type of trust. The EOT holds shares on trust for the company's employees and, among other benefits, the individuals who sell their company shares to the trustees can enjoy a full capital gains tax relief.
No changes are being proposed to the principal types of reliefs available in respect of EOTs, but the proposed amendments would tighten up some of the existing rules. Specifically, former owners will be prevented from having control of the trustee board of the EOT. Currently there are no rules that prescribe who can be on the trustee board and, in some circumstances, this has enabled former owners being appointed to the majority of board seats meaning that they have not lost control of the company. The new rules will require that the former owners make up less than half of the EOT trustee board. The other significant change is that the rules will require EOTs to be UK resident, so that any future disposal of shares by the EOT remains within the charge to UK tax.
Corporation tax
The rates of corporation tax were unaffected by the Budget, but other changes may arise in future under a new "Corporate Tax Roadmap". This will cap the headline rate at 25%, keep the small profits rate and maintain the existing capital allowances system (including permanent full expensing) but initiate consultations and propose reforms of UK and international tax rules, including transfer pricing and diverted profits tax. It is also expected to develop new processes to increase the tax certainty available in advance of major investments. Watch this space!
This article is created on a general basis for information only and does not constitute legal or other professional advice.
