By the Hazlewoods tax team.

In the first Labour Budget for 14 years, there was much trepidation as to the level of tax increases, despite the manifesto pledge not to increase national insurance, income tax, VAT and corporation tax. As it turned out, the Chancellor, Rachel Reeves, announced measures to raise an additional £40 billion in tax per year, by the end of the five-year forecast period, which is a frightening figure, in keeping with the time of year.

Due to the manifesto pledge, the Government was limited in the areas it could attack, but where they could, they most definitely did.

Capital gains tax

Capital gains tax, which was always going to increase, went from the current 10% rate for basic rate taxpayers and 20% for higher and additional rate taxpayers, to 18% and 24% respectively, matching the current rates on residential property gains, which remained unaltered.

There were also fears over the abolition of business asset disposal relief, although it survived at £1 million of lifetime gains, but with the rate increasing from its current 10%, to 14% from April 2025 and 18% in April 2026. The maximum benefit, therefore, from 2026 will be £60,000, as opposed to the current £100,000.

Individuals who receive carried interest (mainly private equity investors), saw the rate increased from 28% to 32% from 6 April 2025, but with the intention of aligning it to income tax rates from 6 April 2026.

It is well understood that capital gains tax is a 'voluntary' tax; if you don't sell, you don't pay, so it will be interesting to see if the increase in rates cause a behavioural change, with individuals holding out for a hopeful reduction at some point in the future, which would then cause a reduction to the receipts for the Exchequer.

Employers' national insurance

The biggest revenue raiser was the increase in employers' national insurance, from 13.8% to 15% from 6 April 2025 and the reduction of the threshold at which employers pay it, from £9,100 to £5,000. Smaller businesses were given some relief by an increase in the employment allowance from £5,000 to £10,500, removing those with, potentially, up to four employees, from incurring a liability. This measure will generate an additional £20 billion per year by the end of the five-year forecast period.

Whilst not a direct tax on 'working people', the consequence of such a measure is likely to be an impact on future salary increases. So, ultimately, it may well be a tax on those people Labour vowed to protect.

Inheritance tax

Inheritance tax was also attacked, with business property relief and agricultural property relief limited to 100% of £1 million, with the remainder only qualifying for relief at 50%, whilst investment in AIM listed shares and other alternative markets will only be eligible for 50% relief.

Whether this measure impacts the ability for family companies and farms to be passed on through the generations, without placing an undue financial pressure on the family or businesses in question, remains to be seen. Given this measure only raises £500 million, it is hardly a significant revenue raiser, but could severely hurt an important part of the UK economy.

Pensions

Pensions, which have been exempt from inheritance tax since April 2015, are to be brought back into the tax net from April 2027. This was the only announcement affecting pensions, whereas prior to the Budget, there was nervousness about the 25% tax free lump sum and tax relief on pension contributions, along with national insurance on employer pension contributions, so perhaps it should be considered we got off lightly.

Stamp duty

Stamp duty land tax did not escape either, with the surcharge for additional dwellings increasing from 3% to 5% in England and Northern Ireland. It will be interesting to see whether Wales and Scotland follow suit, although the additional rates in those devolved nations are already at up to 4% and 6% respectively.

VAT on school fees

VAT on school fees from January 2025 was confirmed, as was the abolition of the non-domicile tax regime from April 2025. The concern with these measures will be the potential for private schools to reclaim significant amounts of VAT for expenditure incurred before registration, along with the potential emigration of those impacted by the non domicile changes. Given the policy costings indicate a peak for the non domicile abolition of £5.9 billion in 2027/28, which then drops to £85 million by the end of the five-year forecast, it would appear as though the Government is well aware of this risk.

Corporation tax is 'as you were' with the maximum 25% rate confirmed until the end of parliament, whilst the annual investment allowance and full expensing regime will both be maintained.

With revenue raised, where is it all going?

Well, firstly, the Chancellor had to plug the £22 billion black hole, which the above has certainly done, and then some. The next job was to 'invest, invest, invest.'

Housing, schools, the NHS, transport, increased funding to devolved nations, social care, local authorities; you name it, they're investing. Some of which will come from the surplus generated by the tax raising measures, others through the introduction of their new 'investment rule' allowing them to borrow by recognising the value of the investment, as well as the cost, giving a net financial debt figure. It wasn't all about the spend, cost efficiency targets were to be set across the public sector to generate more to go into the pot.

There is no doubt that the UK's public services are in dire need of a boost and if the allocation of monies are spent wisely, and services are improved as a result, most will accept the tax rises as being a necessary evil.

For too long, however, tax rises have not resulted in improved public services. UK taxpayers are already suffering the highest tax burden for 80 years and this is only set to increase. Individuals and businesses are tired of not getting value for money, so whilst the Government are saying it is not a quick fix, the overwhelming desire for improvement will no doubt mean the UK public will not have an endless supply of patience before they will want to see some results.

Can Labour deliver, or will the increased tax cost actually result in a negative impact on the UK's growth? We will all be hoping they can but will continue to fear the worst.

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