Further Analysis of Labour’s first budget

Now that the dust has settled  on Labour’s first budget in nearly 15 years, the Treasury have released the detailed data behind the headlines, which not only clarifies many of her announcements, but also reveals a number of smaller tax changes that didn’t make it into the Chancellor’s speech.

The list of changes ranges from reliefs for retiring business owners to Increases in the Carer’s Allowance earnings limit. I will not address all of the changes in today’s Blog, especially if they are very minor, of a technical nature or only affect a very small minority. But first, what has the Government’s watchdog said?

The OBR have now spoken
Richard Hughes, the head of the OBR (The Office for Budget Responsibility), spoke publicly for the first time last Thursday and stated that Rachel Reeves’ much touted £22billion ‘black hole’ did not exist. He said that they had found that Rishi Sunak’s government had understated next year’s spending by £9.6billion, but that this was for technical reasons and this sum was in fact covered by Jeremy Hunt’s £10billion fiscal headroom reserve.

He then agreed with the Chancellor, that the budget would give a lift to economic output but cautioned that this would only be a short-term boost, with the average rate of growth over the next five years largely unchanged. He also commented that the budget delivered one of the largest increases in spending, tax and borrowing of any single fiscal event in history, and that this was likely to crowd out both business activity and business investment. He said that the result would mean living standards would go down by about 1% in the last year of its five-year forecast, presumably the last year before the next general election.

The double whammy on employment costs
The increase of 1.2% in employers’ national insurance (NI) was hardly a surprise as the Chancellor had hinted for weeks that a rise of between 1m and 2% was on the cards. The pain was softened for micro businesses (10 or fewer employees) with a £5,500 increase in the employment allowance.

Unfortunately, for every other business, especially those in the hospitality and care sectors, the 6.7% rise in the National Living Wage Rate to £12.21 per hour from 6th April 2025, together with the NI rise is likely to force many businesses to close and because of the extra costs, force many Councils into special measures. 

Dear Rachel also announced exemptions for the NHS from many of her tax measures, including the rise in National Insurance, but clearly forgot about the other providers of care for the sick and elderly. This unprotected group includes GP surgeries, pharmacists, dentists, care homes and even hospices, with all of them hit by the huge rise in employers’ costs, principally on NI.

Whilst the employment allowance has increased from £5,000 to £10,500, which will help small businesses, for the vast majority of businesses, the allowance hardly scratches the surface, especially those in the hospitality and retail sectors. Their choice will be whether to absorb the increased costs, pass it on to customers, scale back on wages and/or recruitment, or the nuclear option of closing their doors.

To make matters worse, the increase in the National Living Wage will add to the pressures that employers face. The changes to capital gains tax (CGT) and inheritance tax (IHT) were again widely trailed (in principle, if not in detail). The restrictions on business property relief and agricultural property relief will create issues for many family businesses especially family farms.

Business rates relief to be slashed
The business rates relief has been extended,  but it will not be as generous. The relief will be cut by nearly 50% from 75% to 40%.subject to a cap of £110,000, from 1st April 2025. Ms Reeves also pledged to deliver a “fairer business rates system” from  1st April 2026, with lower business rates multipliers for retail, hospitality and leisure properties.

Double-cab pickups are to be classed as cars
Buried deep in the Budget report was a change in the tax treatment of double-cab pick-ups. The news comes after a U-turn on the same decision in February, where HMRC announced double-cab pickups were to be classed as cars for income tax and VAT purposes; only to reverse that decision days  later. (See Tax News Double Cab Tax Dilemma posted on 29th February, this year).

Now only eight months later, the dizzying double-cab roundabout has had another tyre-squealing U-turn  with Rachel Reeves’ decision to change the taxation of double-cab pickups back to being cars, whether or not they are clearly set-up to carry heavy payloads of one tonne plus. This means, no reclaim of VAT on the purchase, plus punitive benefit-in-kind charges if anyone dares to drive a pickup home.

BADR & IR to be less generous
BADR (Business Asset Disposal Relief) and IR (Investors’ Relief) have been reduced wef 1st April 2025, with the lower tax band of both reliefs rising from 10% to 14%, and then to 18% from 6th April 2026, as opposed to the current tax rate of 10%. The Chancellor also confirmed that the lifetime limit for BADR will remain at £1million, but the  lifetime limit for IR will be reduced to £1million

Capital Gains Tax (CGT) to be hiked
The Chancellor did not provide a great deal of detail when announcing the rises in CGT rates, so I’ve set out below the various changes in chart form. However, she refused to say what would happen from April 2026, when many accountants and economists expect her to raise rates again. 

HMRC given a cash injection
The Chancellor also announced that £1.5bn would be given to the tax office over the next five years to fund an additional 5,000 compliances officers (investigation inspectors) who will be tasked to raise an additional £2.7bn in tax per year by 2029/30. She is also giving HMRC £262m to fund 1,800 debt collectors to raise £2bn annually by 2029/30. 

Another £166m will be invested to modernise HMRC’s debt management systems and credit agency data to better target enquiries. A further pot of around £70m will be spent on strengthening HMRC’s counter-fraud capability, including a bigger pot of cash to reward informants. Other smaller sums will be made available to digitise and modernise HMRC’s digital services.

Accountant’s view
When going through the fine print of the budget notes, the only item that surprised me was the latest change to the taxation of double-cab pick-ups. This is just the latest kick in the teeth for farmers and the construction industry. I also saw in the notes her intention to increase university tuition fees annually by the rate of inflation from April 2025, something else that wasn’t in Labour’s manifesto!

In truth, I didn’t shed many tears when Rishi’s government was kicked out, largely because they had become paralysed by infighting, following the Liz Truss debacle. So, when Labour came in,  I was genuinely optimistic that someone with genuine credentials for the job of Chancellor, was now in control of the country’s finances. Unfortunately, her first budget appears to be more of a tax and spend budget, than one targeting greater productivity and growth, but fingers crossed, she’ll get it right next time.