The Autumn Budget 2024 – A Christmas Carol

Opinion piece authored by Jonathan Franks

As budgets go, it was different. Press coverage and commentary has been so extensive that I questioned the purpose of yet another budget summary. We all know the key measures and I won’t be repeating them. Instead, I shall reflect on what they did compared to what they might have done, and how what they did was, well, questionable.

If a government is going to raise more revenue, and we all knew that this government would do so, it must increase taxes on someone. The Chancellor and the Prime Minister have been pained to point out that they had to make “difficult choices”, and that they would not shy away from them. It is fair to say that whatever they did in this budget, there would have been vocal groups of people shouting that their policy would be disastrous in some way or another. What is unique about this budget is that it bites every hand that feeds us – in some cases, quite literally.

As we head into the festive season, few of us feel that festive. We will all be poorer, in terms of our disposable incomes, but will we be richer ultimately, because the government will spend its tax raids on us wisely, or will government do what every government does, and throw our money into a black hole of stupid decisions? Can we take some comfort, as the government would like us to, that it will all be for the good?

National Insurance

This is not only the headline tax rise, but also the most politically bizarre. The first logical argument used, I expect, was that NICs are so complicated that people’s eyes glaze over, and no-one understands it. Yet everyone can see that if the lower earnings limit (“LEL”) is reduced from £9,700 to £5,000, and the rate of employer’s NICs increases to 15%, then the cost of employing each person earning more than £9,700 per annum rises by 15% of £4,700 or £705 per head. There is a further increase of 1.2% of the wages bill for everyone on earnings over £9,700.

A person on the National Minimum Wages (£11.44 per hour, currently) on a full time (35 hour/week) contract, earns £20,820.80 per annum. The additional NICs are £838.45 per annum. The following little table illustrates the impacts at different levels of salary:

This illustrates that the highest impact comes at the lowest wages – an odd decision for this government. But that impact becomes further exaggerated when we take account of the announced increase in the National Minimum Wage, which will increase the annual wage from £20,820.80 (35 hours assumed) to £22,222.22, an increase of £1,401.80. The employer will have to pay NICs on this, as well as auto-enrolment pension contributions.

Overall, the cost of employing a full-time person on the minimum wage will increase from £22,689.09 (including pension) per annum to £25,322.22, an increase of 11.6%. (I have assumed that the pension contribution limit reduces with the LEL, which is yet to be confirmed.) It is true that corporation tax relief, and for many the increase in the employment allowance, will mitigate some of this burden.

If we strip away the media excitement and opposition rhetoric about manifesto promises and the impact on different interest-groups, it remains the case that for larger companies with higher-paid employees, the cost of the new NIC rates will be roughly equivalent to an inflationary pay increase to staff. Many employers will face a choice between very unhappy staff or increasing their pricing. The latter option may not work as it could result in lower sales volumes.

A less mentioned impact is on part-time workers, who are predominately female. Some 75% of part-time workers are female, and 38% of all women working are part-time. These people will usually have lower pay by virtue of fewer hours worked and will join the many other lower-paid groupings. At present, there is a NIC incentive for splitting jobs of around £1,339 per annum, and this has been effectively reduced to £750 because of the per-employee increase in NICs.

Imagine two people sharing a £40,000 per annum job, each paid £20,000. The table below illustrates how the benefit of the job-share to the employer is now reducing.

There does, however, remain some incentive to the employer for agreeing to job-sharing.

Due to the proportionately higher impact of the NIC changes on the cost of employing lower-paid staff, which, when combined with the 6.7% increase in the National Minimum Wage will increase the cost of employing lower-paid staff by about 11%, we can expect a significant impact on the hospitality and retail sectors. It is a regressive tax increase, which will doubtless push up inflation and result in fewer employees, which in turn will lead to ever poorer service and consumer dissatisfaction.

It is hard to see how the changes to NICs will improve growth, except in the public sector which will be the net beneficiary of the taxes. We may, however, see a resurgence in the popularity of salary sacrifice arrangements intended to remove elements from the NIC regime, but there is room for error in those plans, so caution is the order of the day.

Inheritance Tax

This is the most political of all taxes, and our individual views are often coloured by our individual politics. Some see it as a reasonable thing to tax wealth at the end of a life, when it’s no longer useful to its owner. Others see it as a fundamental unfairness to tax wealth on which tax has already been paid when it was earned.

The reliefs now being limited are Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”). They were introduced to ensure continuity of family-owned farms and businesses when the owner dies, allowing the next generation to inherit without having to sell or break up these assets. Limiting the relief to £1m impacts many such estates and kicks in for those who pass away after April 2026. One solicitor commented to me, “I cannot advise clients to make sure they die before then to avoid this tax, though perhaps that’s why we are now seeing the Assisted Dying Bill timed straight after the budget”.

Many have seen these reliefs as outmoded, and that may be behind the Chancellor’s thinking. Those owners who still hope to survive seven years are likely to move toward making lifetime gifts, either directly to their kin or to a trust, but care needs to be taken as there are many pitfalls, so it must only be done under professional advice.

We can expect considerable scrutiny from HMRC when it comes to IHT returns and lifetime transfers, and this will be especially around gifts where there are reservations as to the rights to use the property gifted.

The immediate impact of these changes is more political than practical, for many. Given that the need for funds is immediate, that IHT can usually be deferred over a long time so that it will not help the country’s finances in the short-term, it is hard to find a reason why the government felt it sensible to introduce this change at this time.

There was also a bombshell to some people who had thought their pension savings would pass to their offspring tax-free on their death. This will have upset many, not least the investment industry, which has been selling pension products as IHT avoidance vehicles since around 2014 when George Osborne announced this bizarre relief. But realistically, is it right that a person should pay no tax on earning their pension contributions, allow them to accumulate tax free and then pass them on to their family tax free? It flies in the face of the purpose of pension funds, so I find it hard to be too sympathetic.

I can, however, predict that we might see a mis-selling scandal as people who were encouraged to transfer defined benefit pensions into personal pension plans in order to benefit from the IHT treatment start to feel they have been misled. I don’t think they have been misled, as long as they understood that tax rules can change, and nothing is certain when planning for long term future tax liabilities.

Again, the decision to remove this relief is more political than practical, and so long as the IHT can be paid out of the pension fund itself, it should encourage people to live better during their lifetimes and not to hold on to their pensions to benefit the next generation, while leaning on the state to pay for their needs in infirmity. Is that a little callous? That depends on your politics, really.

Capital Gains Tax

The increases in capital gains tax (CGT) were rather lower than feared, and the decision to keep business asset disposal relief (BADR) in place, albeit with rising tax rates, is rather welcome.  Rates of CGT are increasing, as we all now know, but they are hardly punitive, and I expect the changes made will not affect people’s behaviour significantly.

As might be expected of a Labour government, Employee Ownership Trusts were not affected in the budget, but we can expect their popularity in succession planning to increase – for those unaware, if done correctly, company shareholders can pass shares to an EOT with no CGT arising, allowing them to potentially realise their investment in a tax-free environment. The rules are complex but talk to your adviser about it if this is relevant.

Yet everything has a consequence. The businesses available for sale will most likely reduce in number and value, hitting the broking and corporate finance industries. Some may applaud that, but again it hardly smacks of a policy for growth.

Also-ran

Of course, we are aware of VAT on school fees, which could not have been more widely announced even before the election, and private schools will also get their business rates relief stopped.  Faced also with the NIC increase and a population with lower disposable income, this is a bad time for schools.

We were also forewarned about the end of the non-dom rules, and the growth element there will be for tax advisers, who will doubtless become very busy looking at the new rules and how they apply to individual clients.

The reduction in business rates relief for the hospitality and retail sectors is yet another inflationary pressure to add to the NICs woes.

And of course, the second-home owners. Not only has the rate of SDLT been increased for them, but the government has also opened the door for local Councils to raise the rate of Council Tax by up to 100% for people’s second homes. The decision to do so is a matter for the local Council, we will be told, but few of them are likely to consider the impact on the local business economy.

In conclusion

This was an expensive budget, but they said it would be, so should we be surprised? The main surprise is that it brings into play regressive taxes, impacting more on lower paid workers than higher paid ones. There were other alternative measures which could have been both seen to be fairer and have had less effect on economic activity, but which may have opened the government up to criticism of not following their election promises. If the Chancellor wants my advice, she knows where to find me.

The government could have avoided some of the popularity fall-out merely by ring-fencing some tax increases for desirable outcomes. Little fuss was made about the short-lived social care levy at 2.5% on all NIC’s, partly because it was ring-fenced, and partly because it did not prejudice one particular group.

A bigger impact could have been made by a simple measure that would have been seen as progressive: removing the Upper Earnings Limit (UEL) at which employee NICs fall to 2%. By increasing the higher-rate tax bracket, they could have tinkered to create a situation where no-one would lose out at salaries up a certain point (which they could have called the level at which “ordinary working people” become “working people”).

Like every budget, there are winners and losers, though I have yet to find any winners. And the losers in this one will mainly be indirectly impacted, through job losses, through restricted pay increases, through reduced or more complex inheritance arrangements. We don’t know exactly who they are yet, and the biggest direct impact will fall squarely on the hospitality sector.

So, if we were to summarise the Autumn Budget 2024, we might say “Bah! Humbug!”