On Wednesday, 30 October, Chancellor Rachel Reeves will deliver Labour’s first Budget in 14 years. It’s expected to include tax increases and spending cuts amounting to £40bn, as the government aims to address the significant financial challenges it faces, including a £22bn shortfall. With these impending changes, businesses and individuals need to be prepared for the potential financial impacts, ranging from National Insurance hikes to adjustments in capital gains tax. This blog outlines the key areas that could affect business owners, employees, and those managing personal wealth.
1. National Insurance (NI) Contributions
One of the most closely watched areas of speculation surrounds employer National Insurance (NI) contributions. While Labour has pledged not to raise taxes for employees, the same assurance has not been extended to businesses. Currently, employers pay NI at a rate of 13.8% on workers’ earnings. Increasing this rate would significantly raise operating costs for businesses, making it more expensive to hire new staff and potentially causing companies to reconsider their workforce strategies.
There are also suggestions that the government may remove the current NI exemption on employer contributions to employee pensions. This change would further increase the tax burden on businesses, especially those with significant pension commitments to their staff. For employers, particularly those in sectors that rely heavily on human capital, this could present a substantial financial challenge.
Business Implications:
- Higher payroll costs: A rise in NI would directly increase costs for businesses, especially those with large workforces.
- Hiring decisions: Employers may be forced to reconsider hiring plans or even downsize to accommodate increased costs.
- Pension contributions: If the NI exemption on pensions is removed, companies will need to reassess their pension schemes and potentially adjust their contribution levels.
Businesses should prepare for these changes by reviewing their payroll budgets and considering proactive measures, such as workforce planning and potential adjustments to employee benefit packages.
2. Inheritance Tax (IHT)
Inheritance tax, or IHT, is currently set at 40% on estates valued over £325,000. However, reports suggest that the upcoming Budget could include changes to IHT exemptions, which would affect how much tax beneficiaries need to pay on inherited assets.
While no concrete figures have been confirmed, these changes could see a tightening of exemptions, which would increase the tax burden on estates. For individuals with significant wealth, particularly those planning to pass on family businesses or property portfolios, it’s important to stay informed and consider pre-emptive planning.
Key Considerations:
- Estate planning: Individuals with assets above the £325,000 threshold should review their estate plans. Estate planning tools, such as trusts, can help reduce the taxable value of an estate and potentially lower IHT liability.
- Gifting: Gifting assets before death is a strategy that some individuals use to reduce IHT. However, it’s important to understand the tax rules surrounding gifting, as gifts made within seven years of death may still be subject to IHT.
By working closely with financial advisors and accountants, individuals can take steps to mitigate the impact of any future IHT changes and ensure that their loved ones retain as much of their inheritance as possible.
3. Capital Gains Tax (CGT)
Another area of focus in the Budget will be capital gains tax (CGT). CGT is levied on the profit made from selling assets that have increased in value, such as property or investments. For higher-rate taxpayers, CGT is currently charged 20% for assets like shares and 24% for additional properties. However, there has been speculation that these rates could increase in the coming Budget, although it is unlikely they will rise as high as the 39% that had been suggested earlier.
If CGT rates rise, it would primarily affect individuals and business owners who regularly sell assets or investments. Property investors, in particular, could face higher tax bills when selling second homes or buy-to-let properties.
Key Considerations for Business Owners:
- Property investors: Those looking to sell property may want to consider selling before any CGT hikes take effect to avoid a higher tax bill.
- Business owners: Entrepreneurs who plan to sell their business or assets should consult with tax advisors to explore potential tax-saving strategies, such as using Entrepreneur’s Relief, which can reduce the CGT rate on qualifying business sales.
CGT can already be mitigated through the use of ISAs, pensions, and other tax-efficient investment vehicles. Business owners and investors should review their portfolios and consider options to reduce their exposure to potential CGT increases.
4. Pension Taxation
Private pensions are another area where the chancellor could look to raise additional revenue. Currently, pension contributions benefit from tax relief, with basic-rate taxpayers receiving 20% relief and higher-rate taxpayers receiving up to 45%. One proposal that has been floated is the introduction of a flat rate of tax relief, which would standardise pension contribution relief across all income levels, making it less advantageous for higher earners.
Additionally, the chancellor may consider reducing the tax-free lump sum that individuals can withdraw from their pensions, which currently stands at 25%. Reducing this figure would increase the taxable portion of pension withdrawals, thereby boosting government revenues.
Strategies for Individuals:
- Maximising contributions: Higher-rate taxpayers should consider maximising their pension contributions now, ahead of any potential changes, to take full advantage of the current tax relief structure.
- Reviewing pension plans: Individuals close to retirement should review their pension plans to ensure they are optimising their tax-free withdrawals. Consulting a pension advisor can help tailor strategies to individual circumstances.
Pensions remain a vital part of retirement planning, and any changes to the tax treatment of pension contributions could have significant implications for higher earners. Acting now to maximise contributions can help protect against potential future changes.
5. Stamp Duty Land Tax (SDLT)
Stamp Duty Land Tax (SDLT) is a tax on property purchases, and changes to this tax could also be on the cards. In 2022, the thresholds for SDLT were increased, meaning that buyers did not need to pay stamp duty on properties worth less than £250,000. These changes are due to expire in March 2025, at which point the threshold will return to its original level of £125,000 unless Labour extends the higher thresholds.
Impact on Property Buyers:
- First-time buyers: The current exemption for first-time buyers up to £450,000 is set to expire. Buyers looking to purchase property may want to act before 2025 to benefit from the current higher thresholds.
- Property investors: The potential return to lower thresholds could increase costs for investors, especially in high-demand areas where property prices exceed £250,000.
For those considering property purchases, it may be wise to bring forward transactions to take advantage of the current SDLT rules before any changes take effect.
6. Non-Dom Tax Status
The non-dom tax status allows UK residents with foreign domiciles to avoid paying UK tax on income earned abroad. While Labour has previously pledged to abolish this status, reports suggest that changes may instead be more targeted. The government is reconsidering the potential revenue generated from abolishing non-dom status altogether, as there are concerns it could bring in less money than expected.
Potential Impact:
- Wealthy individuals: Those currently benefiting from non-dom status should prepare for changes and consider alternative strategies for managing their overseas income.
- Businesses: For businesses employing individuals with non-dom status, changes could increase the tax liability of key executives, potentially affecting talent retention.
It remains to be seen whether the government will completely eliminate non-dom status or introduce more incremental changes. Either way, those affected should be prepared to adjust their tax planning accordingly.
7. Energy Windfall Tax
The energy sector is also expected to be affected by the Budget, with the government planning to increase the energy windfall tax on profits from oil and gas companies. The current rate of 35% is set to rise to 38% on 1 November, and this higher rate will remain in place until at least 31st March 2030.
For companies in the energy sector, this increase represents a significant additional tax burden. Businesses may need to adjust their financial forecasts to account for this higher rate and consider strategies for mitigating the impact on profitability.
Conclusion
With tax hikes and spending cuts expected, the 2024 Budget is set to introduce significant changes that will impact businesses, investors, and individuals. From National Insurance increases to potential changes in capital gains tax and inheritance tax, it is vital to stay informed and take proactive steps to mitigate any negative financial consequences.
Business owners should review their budgets, hiring strategies, and employee benefit packages in light of potential NI changes. Likewise, individuals should consider their estate planning, pension contributions, and investment portfolios to optimise their financial strategies ahead of any tax changes.
If you want to know more about how any of these prospective changes will affect you or your business please contact us.