Britain's first female chancellor, Rachel Reeves, presented her debut budget to parliament on Wednesday, unveiling £40 billion in tax rises and a spending spree to deliver growth.
The only way to drive economic growth is to “invest, invest, invest”, she said. “There are no shortcuts. And to deliver that investment, we must restore economic stability and turn the page on the last 14 years.”
The Chancellor’s plans will see the tax burden reach a historic high, while borrowing increases by an average £32.3 billion a year as spending increases by around £70 billion annually over the next five years.
In a budget so widely trailed that she was admonished by the Deputy Speaker for the number of leaks and prior announcements, Ms Reeves confirmed plans to increase employers’ national insurance contributions and increase capital gains tax, while also making changes to inheritance tax and stamp duty. The non-domiciled status will also be abolished.
The financial markets largely welcomed the budget. “There were fears that stock and bond markets would not react favourably to the announcements today and the loosening of fiscal rules,” said Lindsay James, investment strategist at Quilter Investors. “But for now, gilt yields are down and there is no sign of a repeat of the mini-budget from 2022.”
The FTSE 100 index in London fell 0.7 per cent to its lowest level in two months, but the broader market Mid-250 gained 0.3 per cent.
Setting out the government's investment plans, Ms Reeves said 11 green hydrogen projects would be created across the UK. She confirmed plans to capitalise the National Wealth Fund, “to invest in the industries of the future, from gigafactories, to ports, to green hydrogen”.
“Today, we are confirming multiyear funding commitments for these areas of our economy, including … nearly £1 billion for the aerospace sector to fund vital research and development; over £2 billion for the automotive sector to support our electric vehicle industry and develop our manufacturing base, and up to £520 million for a new Life Sciences Innovative Manufacturing Fund.”
There will be a total increase to the Ministry of Defence's budget of £2.9 billion next year, she said.
Key pledges
- National insurance contributions by employers will rise 1.2 percentage points, from 13.8 per cent to 15 per cent, while the threshold at which employers start paying them will be lowered to £5,000, from £9,100.
- Fuel duty will be frozen for another year, meaning taxes will not be higher at the petrol pumps in 2025. Raising taxes on fuel would be “the wrong choice for working people”, she said.
- The lower rate of capital gains tax (CGT) will increase from 10 per cent to 18 per cent, and the higher rate from 20 per cent to 24 per cent. The rate of CGT on the performance fees that private equity fund managers make when assets are sold, known as “carried interest”, will also rise to 32 per cent.
- The national minimum wage will rise to £12.21 an hour for over-21s in April.
- Non-dom status will be scrapped from April, to be replaced by a residence-based scheme with “internationally competitive arrangements” for temporary residents.
- The inheritance tax threshold is frozen for another two years until 2030, meaning the first £325,000 of an estate can be inherited tax-free. It rises to £500,000 if the estate includes a home passed to direct descendants.
- The rate of air passenger duty for private jets will rise by a further 50 per cent.
- Stamp duty on second homes will rise on Thursday to 5 per cent. “This will support over 130,000 additional transactions from people buying their first home, or moving home, over the next five years,” Ms Reeves pledged.
- VAT will be introduced on private school fees from January. “Ninety-four per cent of children in the UK attend state schools. To provide the highest quality of support and teaching that they deserve, we will introduce VAT on private school fees from January 2025 and we will shortly introduce legislation to remove their business rates relief from April 2025, too,” she said.
- Windfall tax on North Sea oil and gas producers will rise to 38 per cent from 35 per cent, with the levy extended by one year
The Chancellor's plans to raise the national insurance contributions of employers, essentially a payroll tax, caused the most rumblings in the UK's business community.
The chief executive of the Confederation of British Industry (CBI), Rain Newton-Smith, said the move will increase “the burden on business and hit the ability to invest and ultimately make it more expensive to hire people or give pay rises”.
The increase in employers' NI will “hit small companies, the engines of economic growth”, said David von Rosen, international investor, entrepreneur and principal of Vonrosen. It “might disincentivise people with innovative ideas from breaking out and starting their own business”, he told The National.
“Stimulating entrepreneurship is the fastest route to growth for the UK, and I strongly urge the Chancellor to build some protections in for these small business owners. These are the movers and shakers who hold the key to the UK's fortunes, and she'd be wise to protect them,” he added.
The Chancellor, however, maintained that overall her budget was aimed at “restoring stability” and “rebuilding” a Britain that would be attractive to foreign investors. Following Ms Reeves's speech, the UK's Financial Secretary to the Treasury, Spencer Livermore, told The National that restoration was at the heart of the government's mission. “It’s about restoring our public finances and restoring economic stability and political stability.” He said without that stability business would not see the UK as an attractive place to invest.
Ms Reeves also announced changes to the rates of capital gains tax and stamp duty on second homes. The higher rate of capital gains tax (CGT) paid on most assets, such as shares, will increase to 28 per cent from 24 per cent, and the lower rate would move up to 18 per cent from 10 per cent.
“Although it's a rise, this change still keeps the UK's highly competitive spot as the European G7 country with the lowest rate of CGT,” Dr von Rosen told The National. “A position that it's vital for the country to retain if it wants to lure in life-giving foreign investment.”
But the changes to CGT were one of the areas of the budget where analysts had expected much higher rates, so the result was not as bad as many had predicted.
“There will be some measure of relief, especially among landlords and second homeowners who escape hikes altogether,” said Laith Khalaf, head of investment analysis at AJ Bell. “But higher rates of stamp duty for second homes will deter landlords from expanding their empires and may mean second homeowners find it more difficult to sell their properties.”
For expats, perhaps the most noticeable part of the budget was the scrapping of the concept of domicile – the end of the non-dom tax regime, which will replaced with a residence-based scheme with “internationally competitive arrangements” for temporary residents. Ms Reeves said: “If you make Britain your home, you should pay your tax here.”
For Chris Ball, the chief executive of Hoxton Wealth in Dubai, the removal of the non-dom status was positive for expats. “Inheritance tax will be based on where you’re resident as opposed to your domicile,” he told The National. “I think that will be good for expats, because if you’ve been outside the UK for 10 years, that could mean that any non-UK assets are not subject to inheritance tax, which is attractive.”
“Obviously, the devil’s going to be in the detail in all of this and we haven’t seen the actually detail yet,” said Mr Ball. His comments were echoed by analysts.
“We will need to see the detail to see whether this will be enough to satisfy those non-doms who had been considering leaving the UK ahead of the new rules coming into force,” said Anthony Whatling, managing director at Alvarez and Marsal Tax.
In addition to VAT on fees, private school budgets will have to contend with the removal of business rate relief and higher payroll costs from the increase in employers' NI. “For those schools that have to pass on some or all of these increases, many private school families may be faced with double-digit fee increases twice in a single year, potentially forcing children out of private education and putting further pressure on state schools,” said David Gage, head of VAT at the tax advisers Old Mill.
Ms Reeves said the budget “marks an end to short-termism”, adding that the Office for Budgetary Responsibility (OBR) has published a “detailed assessment” of the growth impacts of the government's policies over the next decade.
“The OBR forecast that real GDP growth will be 1.1 per cent in 2024, 2 per cent in 2025, 1.8 per cent in 2026, 1.5 per cent in 2027, 1.5 per cent in 2028 and 1.6 per cent in 2029. And the OBR are clear: this budget will permanently increase the supply capacity of the economy, boosting long-term growth.”
Overall, the Office for Budget Responsibility (OBR) said Ms Reeves’ plan “delivers a large, sustained increase in spending, taxation, and borrowing”, with public spending increases of almost £70 billion a year over the next five years.
Summing up the mood of many, Marco Forgione, director general of the Chartered Institute of Export and International Trade, described the budget as “a mixed bag for UK businesses engaging in international trade”.
