In the lead up to the 2024 budget there was a considerable amount of speculation around increases to National Insurance and Capital Gains Tax. Commentary suggested an attack on business owners was incoming. So how did it really play out?
The budget held on October 2024 was the first Labour Budget since 2010 and the first held by a female Chancellor. In the speech Rachel Reeves spent a considerable amount of time discussing what had been inherited from the previous government but also the impact their plans would have into the future. Whilst those forecasts suggest growth, it was by a fine margin.
Few would argue that the UK public services are in need of investment. With the budget seeking to raise £40 billion in additional taxes, will it be enough and will the growth be realised?
Impact on Employers
Many of the headlines will go to the impact on employers and rightly so. However, it’s not as doom and gloom as the pre-Budget reports. Whilst there will be a significant impact for many employers, around 50% will see no impact or will actually be better off under the new scheme.
Employers NI
Employers National Insurance will now be charged at a rate of 15% (up from 13.8%) from April 2025. Further, the threshold at which it will be charged is dropping from £9,100 per year to £5,000.
What does that mean? Employers NI is a cost to the business, it is calculated on the Gross Salary of each employee. Therefore from April 2025, an employee on a salary of £30,000 will cost an additional £866 a year.
As a one off this is a considerable burden but for teams in excess of 20, the cost will raise questions over whether that next hire can take place as the budget will need to be reasigned to meet these taxes.
Employment Allowance
To soften the blow for the smaller employers the Employment Allowance will increase from £5,000 to £10,500, also in April 2025.
Not mentioned in the speach, a vital extension of this change will be the removal of the PAYE cap of £100,000. This is where employers who paid more than £100,000 in PAYE and NI a year became ineligible for the Employment Allowance.
This is significant as losing the allowance would create a cliff edge for scaling businesses, something that would clearly have hampered growth and so a sensible move.
What does that mean? Our calculations suggest that, based on average salaries across a team of £30,000, teams of up to 8 full time employees will not see an increase in Employers NI costs next year. Smaller teams will actually be better off.
National Minimum Wage
Announced the day before the budget, the National Minimum wage for those aged 21+ will increase to £12.21 per hour.
An equivalent 40 hour per week contract therefore gives an annual salary of over £25,000.
Those aged 18-20 see the biggest bump as they will now be paid £10 per hour.
The government announced they will be moving to a single rate over a number of years so expect that 18-20 rate to jump again next year.
What does that mean? Whilst we all agree that a minimum wage can help protect employees, there will be concern that it will make it harder for school and university leavers to get that first role if the gap on pay to a more experienced alternative has narrowed.
Salary Sacrifice
There have been no changes to Salary Sacrifice schemes but all employers should consider where they may be able to switch to such schemes given that they save on Employers NI. A key area being Workplace Pensions.
Given that the impact of employers is so significant we’ve recorded a quick video below to talk through the key points above.
Take home pay
The Labour manifesto promised not to change VAT, Income Tax or National Insurance. In recent weeks it was clarified that it meant Employees National Insurance and the promise was to protect the income of workers.
In this Labour delivered on their promise and there is no change to VAT, Income Tax or Employees National Insurance.
However, they have also continued to trend of freezing the Personal Allowance for Income Tax and the Basic and Higher rate thresholds. Given inflation this results in a loss of spending power as the tax free income received will not stretch as far as it would have a year ago.
There was a promise that from April 2028, the thresholds would begin to rise agian, in line with inflation at that time.
Capital Gains Tax
Pre-budget this was one of the hot topics for discussion with stories leaked to the press of hikes in Capital Gain Tax and the removal of Business Asset Disposal Relief.
Whilst not as significant as the press leaks suggested, CGT has risen from 10% to 18% for basic rate and 20% to 24% for higher rate.
Business Asset Disposal Relief remains, keeping it’s lifetime limit of £1million but the rate will increase from 10% to 14% in April 2025 and then 18% in April 2026.
What does this mean? There is a lot of suggestion that this will impact investment by entrepreneurs in the UK and whilst this is possible, similar tax changes in the past have come with similar stories and yet the UK remains a fantastic place to start a business. More practically, for those who may be considering selling their business in the next three to five years, it may pay to look at accelerating those plans.
Corporation Tax
Corporation Tax rates remain the same (19% on profits below £50,000 and 25% over £250,000) and there was a promise from the Chancellor not to increase corporation tax beyond 25%.
The Annual Investment Allowance remains available on capital purchases of up to £1million a year. This means eligible assets receive full tax relief in the year of purchase.
Reasearch & Developement rates and thresholds also remain unchanged.
Inheritence Tax
Inheritance Tax has seen a threshold freeze at £325,000 extended from 2028 to 2030.
Unspent, inherited pensions which were currently ignored for IHT will now form part of the estate and chargeable to IHT from April 2027.
Business Property Relief, a key IHT relief is being adjusted from April 2026. Currently 100% relief is available on shares in private companies but this will now be limited to the first £1million, with 50% relief given to anything after that.
Share held in stock on the AIM stock market will also lose the current 100% relief and instead receive 50% relief.
Other highlights
- VAT on private school fees has been confirmed.
- Stamp duty on second properties will increase from 2% to 5%.
- Uplift to VFX tax relief of 5% and generative AI exclusion dropped.
- Interest rates on unpaid taxes to increase.
What can you do next?
- Review your 2025 budget/forecast to see how your plans may be affected by the Employers NI changes
- Check current work place pension schemes to see if a switch to a salary sacrifce scheme may benefit you
- If you are currently excluded from Employment Allowance, set a reminder to update your payroll software and apply in April 2025
- Review current employment contracts for anyone who may fall below the new Minimum Wage
- Consider timing of asset sales
- Review IHT positon
At Raedan we’re keen to help business owners navigate these changes and would love to speak with anyone who needs support.
Please do reach out if you feel you need help with any of the above.
