Reaction to Rachel Reeves’s First Budget: A Challenging Time to Run a Small Business
However, she still managed to surprise me with some of the additional burdens that will be placed on business in the coming years.
Springing a surprise is impressive in itself, as the speech was preceded by a statement to the House from the Chair of Ways and Means, essentially giving the Government a dressing down for having leaked so many of its policies over the last few days and reaffirming the need to make announcements Parliament first. So one might have thought we had heard it all in advance.
Some of the headline numbers were depressing; not just the much vaunted £22 billion “black hole”, but the fact that economic growth is forecast to stay sluggishly below two per cent for the entire forecast period to 2029.
Capital Gains Tax
We were all braced for a rise in CGT, and the real questions were how much and when?
Advisory teams have been rushing through huge numbers of transactions to beat any rise (16 completed at Ensors in the last two weeks!). It turned out that this was the right approach, with the first of the changes applying from today; the main rate of CGT rises from 10 per cent to 18 per cent for basic rate taxpayers and from 20 per cent to 24 per cent for higher and additional rate taxpayers.
The fact this won me a bet with my partner seemed to be the only good news the Chancellor gave out!
The rate change isn’t as bad as it could have been and hopefully this won’t do too much to impact on deal volumes.
The £1 million lifetime limit on Business Asset Disposal Relief is maintained, but from 6 April 2025 the relief will only reduce the rate to 14 per cent instead of the current 10 per cent, and from 6 April 2026 this rises again to 18 per cent. It seems we might be busy again in March.
Employer’s National Insurance and the Minimum Wage
This is the big one. A rise in employer’s NIC was much leaked, and it was no surprise that the rate increases from 13.8 per cent to 15 per cent, applying from April 2025.
However, what was a surprise was a reduction in the secondary threshold (the salary level at which a business starts to pay employer’s NIC) from £9,100 per annum to £5,000 per annum. The threshold change alone will cost a business £615 per employee, assuming that they were already earning above £9,100.
The difference will be felt more strongly in businesses that employ large numbers of lower paid workers, such as hospitality, cleaning, and the care sector.
Coupled with the 6.7 per cent increase in the national living wage, and the gradual aligning of the 18-21 year old rate with the main rate (16 per cent increase), this could have a significant impact on the bottom line of these types of business. Even businesses with higher paid workers will still notice the profit impact.
There is a rise in the Employment Allowance to £10,500 from £5,000, and this will provide welcome support to some of the smallest businesses.
At the same time of course, there will be improvements to workers rights, and businesses will need to make sure that they stay on top of all the changes.
IHT – An End to Intergenerational Farming Business?
I think we knew that major changes to Inheritance Tax were on the cards but perhaps thought that the changes would be more subtle than they have turned out.
In the event, 100 per cent Business Property Relief and Agricultural Property Relief will be restricted to the first £1m of assets, with a 50 per cent relief thereafter, effectively giving a 20 per cent IHT rate for qualifying business and agricultural assets. This will apply from April 2026.
Perhaps this doesn’t immediately sound ‘unfair’ but what impact does it have in practice?
A family trading company might be making £500,000 of pre-tax profits a year (£375,000 post tax). Perhaps, on a multiple of eight, it might be valued at £4m. So, on the death of the main shareholder, £3m would now be liable to IHT at 20 per cent, giving a charge of £600,000.
This tax has to be paid personally, so if the money comes personally a dividend will be required to extract it. Given a top rate of dividend tax of 39.35 per cent, this means a dividend of nearly £1m needs to be paid out of post tax profits to pay the tax.
That will mean nearly three years of profits that have to be extracted, significantly restricting business investment.
But moreover, think about a farming business. Farms tend to have a very low profitability compared to the asset value. A 600-acre farm might be worth c£6m, but might only be yielding £50,000 or so of profits per year, yet the IHT liability could be £1m. It is clear that the IHT can only be paid by a sale of a substantial part of the farm.
Does this spell the end for intergenerational family farming businesses? Maybe, but of course, the measures announced today don’t change the seven year IHT clock on gifts, so taking good advice on advance IHT planning (for those who can afford to gift assets) will become even more important.
The BPR changes will also affect AIM shares, which will enjoy only 50 per cent BPR rather than 100 per cent. The question is whether this will impact on share prices for AIM listed stocks.
Finally, the plans to include pension funds in the estate for IHT will have an impact on those who die holding large undrawn pension funds.
It will be interesting to see whether the Government’s agenda of growth can be delivered as business grapples with the extra burden, and also how much of the extra cost will flow through in additional inflation.
