Next week sees the first ever budget presented to the House of Commons by a female Chancellor of the Exchequer. More importantly, Rachel Reeves will be setting out the Labour Government鈥檚 fiscal plans for the next five years, and much depends not only on the measures themselves but also on how they are perceived by businesses, consumers, and the financial markets.
With an estimated funding gap of 拢40bn and promises to increase investment in the public sector, there will be increases in tax to fill this hole. While there was a promise not to raise the headline rates of income tax, National Insurance and VAT, there is certainly an expectation that the freeze on income tax thresholds will be extended, as it will bring in an extra estimated 拢7bn in tax as more people enter the higher 40% tax bracket over time.
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For business, the government has indicated that corporation tax will not be raised beyond the current 25% for the rest of this parliament. However, businesses will not get away with avoiding higher taxes over the next few years. In fact, it would be right to say that one of the biggest concerns expressed by businesses over the forthcoming budget is the expected increase in employer National Insurance contributions.
While the Labour Government has pledged to leave personal levels of National Insurance untouched, minister after minister have made it clear that they do not consider employers鈥 contributions to fall under their election promises. Again, it is another easy way to raise money, with the government鈥檚 own analysis suggesting that a 1% increase in employers鈥 contributions would result in 拢8.5bn in 2025/26 and more in the following years.
However, there could be consequences in doing this, and reflecting what many business leaders have been thinking about these potential changes, Stuart Machin, chief executive of Marks and Spencer, hit the nail firmly when writing in The Times this week. He noted that the plans to increase National Insurance, a tax with no link to profit, 鈥渋sn鈥檛 the hard decision, it鈥檚 the easy way out. It might improve the public finances in the short term, but it makes economic recovery harder and hits our customers and colleagues still struggling with the cost of living.鈥
Given that the mantra of the new government is about growth, this is an odd way to go about it, given that higher payroll costs could lead some businesses to reconsider hiring plans or potentially pass costs onto consumers. It may also disproportionately hit some sectors, such as hospitality and retail, that are still struggling to recover after being massively impacted by the Covid pandemic.
The government has also indicated that while it will not raise taxes on 鈥榳orking people,鈥 there is much speculation that the focus will be on targeting tax on assets, and it is widely expected that capital gains tax (CGT) rates are expected to rise. However, the challenge is that much of the income from capital gains is paid by a small number of wealthy individuals, with the Institute for Fiscal Studies estimating that two-thirds of the 拢15bn raised in 2022 was from 12,000 people realising average gains of 拢4m.
Whilst there is scope for a higher rate to generate billions of pounds of additional tax through a higher rate of CGT, if this was raised to higher levels than people were willing to pay, such millionaires could change their approach to investments and disposals, and according to experts, the final result could be lower amounts raised through this tax.
In addition, a growing number of entrepreneurs have expressed concern that the Chancellor may eliminate entrepreneurs鈥 relief (now business asset disposal relief), which allows founders to pay a tax rate of only 10% on qualifying gains, up to a maximum of 拢1m of gains in their lifetime. They argue that it was crafted to fairly reward the risks taken by individuals who create businesses, jobs, and community value long before personal profit, and that removing this relief would devalue these efforts and make the 海角视频 less attractive for business development.
On the positive side, the Chancellor has already indicated that she will change her fiscal rules to unlock billions for the economy. By potentially shifting the focus to a broader measure of debt that includes government assets and liabilities, this could create an additional 拢50bn for investment, although there have been no indications yet as to where that funding will go to boost the economy.
There will also be expectations, given that it was in the recent Labour manifesto, that the Chancellor will use the budget to announce a long-overdue reform of business rates to level the playing field between high-street businesses and online retailers. This would be welcomed by many small businesses that have been struggling recently, with the vacancy rate for high-street shops now hitting 14%, the highest since the pandemic.
Despite this, it is probably not going to be a positive budget for the business community, and while it would be good to see the Treasury avoid any measures that will negatively affect the ability of the private sector to fully contribute to the economy, I very much doubt that will happen. As a result, it is highly probable that measures such as changes in employers鈥 National Insurance and tax relief for entrepreneurs will unfortunately put the brakes on the economic growth which is the primary aim of this new Labour Government.
And while the budget is always about setting out in detail the changes to tax and fiscal policy, it is also about establishing a positive narrative, which can make all the difference to the confidence of businesses across the 海角视频 to invest, create jobs, and improve the lives of those who work for them. That, more than anything else, is the real challenge facing the Chancellor next Wednesday.
