Over the last few months, the strong words coming from the Prime Minister and the Chancellor have been designed to prepare the electorate for the worst, and to manage expectations, but this has already caused damage to the economy. But was the bark worse than the bite and were the predictions about where the pain would be felt correct? As ever, it depends on who you are, but for SMEs and the wider impact, analysts seem to agree that this budget will have damaging ramifications.
In the weeks before the big reveal, the Labour leadership had wrapped itself up in the question of when is a working person not a working person. They also stressed that this would be a budget for growth and that ‘working people’ will not be affected.
In truth, after having committed to not increasing tax, NI or VAT, the Chancellor found herself having to aim primarily at businesses, capital gains tax, pensions, and inheritance tax, but also went after non-doms as predicted. Let us look at the main changes that will raise the most revenue and those that will impact founders and SMEs the most.
It appears that at least the government listened to all the compelling reasons why making employers pay NI on pensions contributions would have had a severe impact on pension savings. Instead, employers NI contributions across the board were increased from 13.8% to 15% – this being more than expected. In addition, these will become payable from only £5,000 rather than the present £9,100 – this was totally unexpected and even more damaging. These two moves alone will raise £25 billion each year. This was partly mitigated for micro businesses by increasing the employment allowance from £5,000 to £10,500 which means that around 865,000 of the smallest businesses may not pay employers NI at all.
This was increased from 10% to 18% for lower rate taxpayers and 20% to 24% for higher rate taxpayers. Research previously released by HMRC suggested that an increase of one or two percent would lead to an overall increase in tax take, but if it was higher than that the overall tax take would reduce, as people adjusted their behaviour. Perhaps the fact that the poorest have suffered the most with these different increases is designed to limit the damage, but this does not fit in at all with protecting the ‘working person’. The rate of CGT levied when an entrepreneur sells their business has also almost doubled from 10% to 18%, acting as a disincentive for entrepreneurs to accept the high levels of risk associated with starting a business.
For the majority of people, their worst fears did not materialise, but loopholes on business property relief, agricultural land and certain other assets are to be closed, meaning that in the future many family farms and business will incur IHT, albeit it at a reduced rate of 20%. Separately, investments made into companies listed on the Alternative Investment Market (the junior stock exchange) were historically IHT free if held for two years, but will now also incur IHT at 20%. It is unclear as yet whether this will also apply to investments made under S/EIS. These last changes will severely impact investment into early-stage business and could indeed sign the death warrant for AIM, which has lost popularity in more recent years.
Whilst all governments state that they wish to encourage people to save into pensions to support themselves in retirement, one announcement in the budget can only have the opposite effect. Pension funds have always been written in trust and, as such, not included in the estate on death and have not been subject to IHT. From 2027 they will be taxed. No details are available as yet but for anybody with a defined contribution pension fund this becomes a huge disincentive to save into a pension and act responsibly. This action alone will drag many more ‘working people’ into the rapidly growing IHT net. Due to the high cost of defined benefit pension schemes, it is only public sector employees that benefit from such generous pensions now, and these will not be affected. It could be argued that this is yet another indication of how this government views the public sector in one way and those working for the private sector in another way.
As was widely predicted, this is to be scrapped from April 2025. My pre-budget article for Elite Business reported how even the threat of this was making some 9,500 high net worth individuals leave the country and how independent research from many separate organisations calculated that this would actually reduce the overall tax take.
Since covid there has been a temporary reduction to business rates for some sectors. Whilst they will not be restored to the full level the discount will reduce from 75% to 40%, so an effective 35% increase for hard pushed businesses.
As had already been announced, the minimum wage will increase to £12.21 per hour, an increase of 6.7%. Previous rises have been 6.6%, 9.7%, and 9.8%, meaning that the minimum wage has grown by 37% in just four years. Whilst increasing the minimum wage is obviously very beneficial for workers, this again hits the smallest companies much harder than most.
The constant rhetoric surrounding this budget has been that it is a budget for growth and that it will not impact ‘working people’. However, analysis by the Office of Budgetary Responsibility (OBR) and the Institute for Fiscal Studies (IFS) would suggest otherwise.
The OBR has stated that the massive increase in employers NI will actually constrain growth, increase inflation, and require interest rates to remain higher for longer. All of this will have a very direct impact on the ‘working person’, and everybody else, as it will mean that mortgages, business loans and all other debt is more expensive, and the economy continues to struggle.
These are the largest tax rises ever seen in a single budget and tax will now represent 38.2% of GDP which will make it the highest level ever in the UK. The government will borrow an extra £30 billion each year and, whilst much of this was expected, nevertheless gilt yields (what interest rate the government must pay on its debt) rose on news of the budget, making all government debt more expensive to service.
As to growth, the OBR stated that growth would be marginally higher initially but, based on this budget, in the final year of this parliament it would actually be lower than previously forecast. So, the traditional Labour tax and spend budget may not even deliver any sustained growth either.
But when the increased employers NI, continuous large rises in the minimum wage, and the large changes to workers rights are taken together, the OBR and the IFS are in agreement that this will lead directly to businesses reducing future pay rises and either making redundancies or, at the very least, lead to SMEs and other businesses recruiting fewer staff in the future – all of which will have a very major impact on those in work and those seeking employment.
There is no doubt that government services need to improve, and this takes money, but this massive tax and spend Halloween frightener not only seems to have missed its growth ambitions but it will have a very detrimental impact on SMEs, entrepreneurs, and the working person at all levels.
31st October 2024
Read my original article in Elite Business Magazine: https://elitebusinessmagazine.co.uk/analysis/politics/item/was-labours-halloween-budget-better-or-worse-than-smes-expected
in British English
VERB
