Labour’s Chancellor, Rachel Reeves, delivered the government’s first Budget on 30 October 2024, announcing a wide range of tax increases which are forecast to raise a massive £40bn of additional revenue, predominantly from increasing National Insurance Contributions from business.
Alongside the tax changes, the government will amend its accounting rules to enable it to borrow more for investment, particularly for infrastructure and to support the transition to net zero. A Corporation Tax Roadmap has also been announced, which is intended to provide businesses with a clear and predictable tax system to help longer term planning.
With Labour’s manifesto committing the government not to increase taxes on ‘working people,’ the bulk of the new tax burden has inevitably fallen on businesses, though the scale of the increases has caused consternation in some quarters. The Chancellor, who has set out her mission to kickstart growth, has said this is a budget Labour does not want to repeat, though many commentators think further tax rises will be required down the tracks.
Many of the changes will have a significant impact on businesses, key among them a rise in employers’ National Insurance Contributions, which will increase to 15% from April 2025, in a move that is projected to raise around £25 billion. Business rates relief will also be slashed to 40% in what amounts to a double blow for London’s leisure and hospitality sector. The National Minimum Wage is also set to increase to £12.21 for over-21s in April, further increasing costs to business.
With Labour adamant that the £22 billion black hole in the public finances needs to be plugged, and additional revenue raised to bolster investment, increases in tax were inevitable. Companies have said the changes will reduce their ability to hire, offer pay rises or invest more, with the Chancellor forced to concede that her Budget will likely have consequences for workers’ pay.
In practice, businesses are likely to use a range of measures to adjust to the increased taxes, including absorbing costs through profit, raising prices, reducing investment, scaling back hiring, replacing people with AI/technology, and limiting pay rises. Clearly any move that increases the financial burden on business could affect confidence and dampen economic growth, the very thing the government says it is so keen to encourage.
That said, business does now have clarity on the government’s intentions and can plan accordingly.
However, while the Office for Budget Responsibility (OBR) has said the UK economy should achieve modest growth of 2% next year and 1.8% in 2026, such figures hardly represent an economy that is flying high.
As we head deeper into this Parliament, Labour will need the private sector to do the bulk of the heavy lifting where additional investment is required, as households and business will be hard-pressed to absorb further tax rises.
It will be interesting to watch how these changes play out in the economy as business reacts to the dampening effects of the Budget. In the meantime, at least we can whet our whistle with a nice pint in the pub, and pocket that penny saving for a rainy day…
David Little is a Partner at Bishop & Sewell in our Corporate & Commercial team.
If you would like to contact him, please call on either 07968 027343 or, 020 7631 4141 or email: company@bishopandsewell.co.uk.
The above is accurate as at 01 November 2024. The information above may be subject to change.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.
