Today’s Blog contains my initial thoughts on Labour’s first budget and what effect the various measures will have on businesses, taxpayers and the country in general.
My first thought was that Rachel Reeves’ 77-minute budget speech was a commanding performance but having said that, my second thought was that her first budget was something of a ‘curate’s egg’, with some positive measures, but with most straight out of Labour’s standard playbook.
Who checks the chancellor’s arithmetic
Yesterday’s Budget was accompanied by a forecast from the OBR (The Office for Budget Responsibility), the government’s independent spending watchdog. This is a public body funded by the UK Treasury and was established to provide independent economic forecasts and independent analysis of the public finances, including the effect of taxes and spending.
In essence the OBR tries to predict whether the government will spend more money than it raises, and whether the UK’s economy will grow or get smaller and what that means for living standards. There will also be analysis from economic think tanks, for example the Institute for Fiscal Studies (IFS), which will study the measures in more detail and create their own report in a few days time.
What did the OBR report say?
The OBR’s report’s executive summary said the state of the economic and fiscal situation has remained largely unchanged since Jeremy Hunt’s budget in March and perhaps more significantly, they failed to support the Chancellor’s claim of a £22billion black hole in the nation’s finances.
The summary says that the Budget delivers a large, sustained increase in spending, borrowing and taxation, with the knock-on GDP growth being that it is forecast to be 1.1% this year, 2.0% in 2025, 1.8% in 2026 before falling back to between 1 and 1½% thereafter. The OBR also forecast that inflation will rise by around 1% as a result of the budget measures.
Regrettably, whilst the Chancellor said many times during her budget speech that the budget was all about growth in the economy, which in turn would drive up GDP and lower borrowings, the OBR’s forecast would suggest that Ms Reeves measures will not achieve this aim.
The budgets key measures
They include:
- Taxation and Business: £40bn in tax rises overall, with capital gains tax increasing to 18% at the lower rate and 24% at the higher rate. Non-dom tax status will be abolished from April 2025, replaced by a residence-based regime. Corporation tax remains unchanged, while business rates will include a 40% relief for businesses in the retail, hospitality, and leisure sectors.
- National Insurance: Employers’ NI contributions will rise by 1.2 percentage points to 15%, with the threshold for employer contributions lowered from £9,100 to £5,000. This will be partly offset for small businesses by an increase in the Employment Allowance from £5,000 to £10,500.
- Income and Support for Households: The National Minimum Wage will rise to £12.21 per hour from April, with a phased increase towards a single adult rate. Carers’ Allowance will also increase to reflect 16 hours of weekly earnings at the minimum wage.
- Capital Gains and Inheritance: Inheritance tax thresholds will be frozen until 2030, and stamp duty on second homes will rise to 5%. A 40% relief on business rates will apply to eligible sectors, while VAT will be added to private school fees starting in January.
- Environmental and Health-Related Levies: A new vaping duty will be introduced from 2026, and Air Passenger Duty will rise by 50% for private jets. Fuel duty to be frozen, but tobacco and alcohol duty rates will increase, but draught beer duty to be cut to reduce the cost of a pint.
- Social Support: The Household Support Fund will receive £1bn in new funding from next year, while £1.8bn has been allocated to Post Office scandal victims, and £11.8bn to those affected by the infected blood scandal.
I will provide more details of the likely impact of the budget measure in the next few days, once I’ve been able to study the underlying data and the longer-term likely impact of the various measures. In the meantime, please visit our website and click on the Tax News button for more updates as and when they’re available.
Accountant’s view
Along with most accountants and indeed most members of the public, I was expecting some tax rises, and I wasn’t disappointed. That being said, in the weeks leading up to the budget, Ms Reeves, Kier Starmer et al, were telling us that this would be a budget to stimulate the economy and boost growth. However, the independent OBR’s report makes it crystal clear that sadly, this is now highly unlikely to happen.
