Increase on Employer’s National Insurance dominates the headlines

Amidst a slew of bad-news headlines, Rachel Reeves, the Chancellor of the Exchequer, delivered her maiden autumn budget to the House of Parliament.

Prior to the announcement, it had been reported that the UK’s long-term borrowing costs had hit a post-election high, and investors had pulled £300m from funds on the smaller markets such as AIM and Aquis.

To combat this, the Chancellor foregrounded that the previous government “did not provide Office for Budget Responsibility (OBR) with all the information available to them.” In doing so the Sunak-led government had created a series of promises that had no money to deliver, a fact hidden from the public as well as the Houses of Parliament. This was the primary cause of a £22bn black hole the Chancellor claimed they found upon rising to power in July. To further her point on the matter, she announced that the OBR have published their own review around the Spring Budget Forecast.

Building off a platform that “the only way to drive growth is invest, invest, invest”, the Chancellor’s aim was to deliver the investment needed to restore economic stability and reverse fourteen years of Conservative leadership.

Covering the full gamut of areas in which the government could encourage influence and affect, Rachel Reeves laid forth her plans for the forecasted period in her autumn budget. We’ve summarised the key business points and the macro-reactions below.

Economic Growth

The OBR have published the five and ten-year forecasts from this budget. The ten-year reporting window will now be de rigueur as part of the new charter for budget responsibility.

Real GDP growth is set to recover from next to zero last year to 1.1% this year, rising to 2% in 2025, and 1.8% in 2026. The Chancellor was keen to stress that they intended to permanently boost supply capacity to ensure long-term economic growth.

Underpinning these aims are seven key pillars:

• Restore economic stability
• Increase investments and build infrastructure
• Ensure all parts of the UK can fulfil their potential
• Skills England
• Industrial strategy to promote SME growth
• Drive innovation
• Maximise the growth benefits of clean energy

In the Labour party manifesto, the Chancellor had set out the fiscal rules but reiterated them in her budget announcement, the key points for business:

• The stability rule will bring the budget into balance and avoid borrowing for day-to-day spending
• Each budget will balance in the third year
• Borrowing in the first six months of 2024 was over the OBR forecast and set to rise to £127bn, the increase in the next cash requirement will however, be lower than the increase in borrowing

A muted reaction was seen when looking at the exchange rate on the news being announced. Several hours later the pound stood at $1.30 against the US dollar and €1.20 when pit against the Euro. Both these figures were roughly in line with morning trading.

Equity markets had a mixed reaction to the news and the budget in general. The FTSE 100 fell steadily throughout the entire day although tying that trend to the budget itself is difficult when a higher than expected US GDP figure was announced on the same day and companies within this exchange are more internationally interested. The FTSE 250, perhaps a better domestic barometer, rose by 0.7% throughout the day.

Capital Gains Tax (CGT)

Undoubtedly one of the most talked about items on the agenda prior to the budget and speculation reached a point where the Prime Minister, Keir Starmer, told Bloomberg TV that fears of a high rate of 39% were “getting to an area which is wide of the mark”.

ProShare’s Murrary Tompsett warned that Save As You Earn (SAYE) schemes would be hit by the raise. “An increase in the amount of tax to be paid, along with the requirement to report gains to HM Revenue and Customs, will further undermine the usefulness of these plans.”

The actual announcement in the autumn budget saw rises but not quite on the extreme scales predicted ahead of time. The lower rate would move from 10% to 18% with the higher rate payable at 24%, a twenty percent increase on previous figures. These rises would come into effect immediately and would perhaps staunch the departures of shareholders of the smaller market stocks. It was also stated that the United Kingdom would still hold the lowest rate of Capital Gains Tax of all the European G7 countries.

The CGT rate applicable to Business Asset disposal relief and Investors’ relief will increase to 14% for disposals made after 6 April 2025 and any disposals made a calendar year later would be taxed at 18%. To encourage business, the lifetime limit disposal relief remained fixed at £1m to foster investment.

Furthermore, the Enterprise Investment and Venture Capital Trust schemes would be extended until 2035, the Chancellor stressed that policies should promote entrepreneurship.

Reaction to the changes was mixed. Paul Taylor, founder of banking technology firm Thought Machine, described the changes as ‘a tax on risk-takers’ whereas Ravi Anand from alternative lender ThinCats praised the Chancellor for walking the line of still incentivising.

Corporate Tax Roadmap

Quoting calls for business certainty levied by the Confederation of British Industry, the British Chambers of Commerce and the Institute of Directors, Reeves highlighted that there would be no changes and thus:

• Corporation tax would remain at 25% for the duration of the parliament
• No movement would be made on full expensing and the £1m annual investment allowance, nor the current rates on research & development to drive innovation throughout the nation’s industry sectors

Carried Interest

In a move that would see a raise of half a billion pounds in tax, the government announced that the taxation rate on carried interest would rise to 32% in 2025. Whilst this would push the country above Germany (28.5%) it would be lower than the 34% levied in France and, more crucially for keeping investment within the UK’s shores, the United States’ rate of 34.7%.

Also included was a note that in further reform for specific rules that would be fairer, simplified and better targeted would come into effect in April 2026.

In framing the changes, there has been a level of acceptance within the Public Equity space. “Today’s announcement will likely be greeted with a mixture of relief and caution by the investment funds industry – relief that the anticipated rise in tax rates was limited to 4% and caution about the impact of more sweeping reforms,” said Peter Morley, tax expert at law firm Pinsent Masons.

Inheritance Tax

Another hotly discussed topic prior to the budget itself, the matter of Inheritance Tax (IHT). Hargreaves Lansdown revealed on the eve of the Autumn budget that their customers had been cashing in shares prior to the announcement as a pre-emptive measure to protect their capital.

The Chancellor announced reforms to agricultural and business property relief from April 2026. The first £1m of combined business and agricultural assets would attract no tax at all. For assets over that threshold, the Inheritance tax would receive a 50% relief (an effective rate of 20%) as the government pledged to protect small-family farms and that 75% of claims would remain unaffected.

In terms of shares listed on the alternative markets, they too would have a 50% rate applied (with the same effective rate of 20%) which will come as the latest piece of bad news for that sector of the market following news of the UK’s AIM market shrinking to its smallest size since its conception.

The Chancellor stated that these changes would raise an additional £2bn into the government’s coffers by the final year of the forecast.

In an unexpected outcome, the FTSE AIM 100 saw a 4% jump from when the market opened with experts linking the rise to a less severe taxation increase than was initially expected.

In response to the news, Hazel Platt from Grant Thornton LLP stated “On one hand the CGT announcements were not as bad as some had been speculating, but IHT reforms in particular represent a substantial step change in the tax landscape, especially for entrepreneurs and business owners…many entrepreneurs will be breathing a sigh of relief that Business Asset Disposal Relief will be maintained, albeit there will be annual stepped changes from 6 April 2025 increasing the rate ultimately to 18% from 6 April 2026.”

Investment plans

With a ‘tax raid’ totalling £40bn from the autumn budget, the Chancellor also explained where we could expect to see spending to take place to encourage the economic growth that Labour have put as a lynchpin to their tenure in government.

They intend to capitalise the National Wealth Fund with investments in gigafactories, ports and green factories. This would help to drive a modern industrial strategy to boost the GDP of the UK economy.

Working in partnership with MAKE UK, Reeves announced investments in sectors with growth potential:

• £1bn for the aerospace industry
• £2bn for the automotive industry in regards to electric vehicles and the manufacturing base needed to make the country a power within the industry
• £520m would be put aside for a new innovative manufacturing fund for the life sciences sector

Alongside these industries, encouragement for the film and television industry would come in additional tax relief for companies in the Visual special effects portion of the sector.

Innovation accelerator programmes would also be set up in Glasgow, Manchester, and the West Midlands as a way to create jobs and stimulate economic inactivity.

Perhaps the biggest ‘winners’ for investment are the building and construction industries. The affordable homes programme would receive £3.1bn to deliver thousands of new homes and increase the supply of affordable housing for the nation. There was also a drive to hire hundreds of planning officers to ensure the increased building capacity could be met.

Cytec Commentary

“The autumn budget contained a number of varied and wide-ranging measures. The investment in infrastructure and public services will hopefully lead to increased productivity and growth in the wider economy, although the timing and extent of this is inevitably uncertain.

The funding of increased public expenditure through significantly increased taxation will no doubt act as a brake on growth, and SME businesses will be particularly impacted by the increases in Employer’s National Insurance. The government has had a difficult path to walk, balancing growth generation with managing expenditure and the level of national debt; only time will tell whether they have that balance right.

From a Cytec perspective, this budget reinforces our ongoing focus on delivering innovative technology solutions to support both ourselves and our clients by improving productivity and mitigating risk, creating efficiencies for our respective organisations.” – Nick Chinn, Chief Executive Officer, Cytec Solutions