Tag: non-doms

Roger Phillips, Tax Partner at PM+M: Working people will pay the price for today’s Budget, no matter how much the Treasury dresses it up

It’s been 112 days since Labour came to power, and after three months of febrile speculation, Rachel Reeves finally delivered the most hyped-up budget that I can remember in 20 years of being a tax professional. This prolonged period of speculation hasn’t been helpful as the markets, businesses and taxpayers have been crying out for stability and certainty.

Much of the talk in advance of this Budget was around the £22bn black hole, which was there for anyone to see if they had delved into the data which is fairly readily available – and I expect the new government were well aware of this before they penned their manifesto.  As well as dealing with the black hole, it’s clear that this government wants to borrow, spend and grow the economy.

The Chancellor’s change to the way in which her “fiscal rules” operate, combined with the tax rises that we have seen today, should give her the headroom to do this. But this will come at a cost – a cost which, despite assurances, will fall on the category of people who the government have seemingly been unable to define in the days leading up to this Budget – and the people who they said would be protected from tax rises in their manifesto: “working people.”

Costs to business – employer’s NIC

To a degree, the government had tied their own hands in their manifesto by saying that they wouldn’t increase income tax or NIC for working people. The jump in Employer’s NIC to 15% from April 2025 is being spun as Labour having not broken their manifesto commitment, as this cost will be borne by business rather than workers. However, the announcement that threshold at which it gets paid come down from £9,100 per year to £5,000 did come as surprise and will inflict further pain for employers across the UK.

By the letter of the law, this ‘spin’ may be true. The cost will be paid by employers. However, when this is combined with the increased cost burden in the form of a national minimum wage increase, these costs will undoubtedly be felt by employees in the future, either through reduced pay rises, or in the worst of cases, the loss of jobs for those where these increased employment costs are unsustainable by businesses. The pain is likely to be most felt by those in the already squeezed hospitality and retail sectors despite the announced 40% relief on their business rates. The PM intimated that he doesn’t want people to see lower amounts going through people’s payslips and into their bank accounts but, indirectly, it will, no matter how the government dresses this up.

Capital Gains Tax, Inheritance Tax and Pensions

Capital gains tax and inheritance tax are relatively low fund raisers for the government – and paid by relatively few.

The jump in the rates of CGT (the lower rate will rise from 10% to 18%, and the higher rate will go up from 20% to 24%) will not be huge money spinners for the government. The rates have not been equalised with income tax, as some were calling for, which is sensible. However it is disappointing not to see some kind of relief for inflation being introduced for those realising long term gains.

IHT appears to be in line for some relatively radical reform. An extension of the freezing of the IHT thresholds to 2030 will pull more families into IHT. The biggest announcement, on which the Chancellor spent a very short period of time announcing, was that inherited pensions will now be subject to IHT.

Additionally, there will be reform to the BPR and APR rules – effectively placing a cap on those reliefs equivalent to £1m per taxpayer, with anything over and above that being taxed at an effective IHT rate of 20%. Some drastic changes from the current position where pensions can be inherited tax free and shares in family companies attract no IHT on death.

The government claims that there is ‘no return to austerity’, but with a total rise in taxes of £40bn, this is the largest any chancellor has announced since Norman Lamont in 1993. Time as they say will tell.

It’s fair to say that this Budget threw up no great surprises as there was limited scope for any sizeable changes to tax, spending or borrowing. With the spectre of Kwarteng and Truss’ dual legacy still in the air, coupled with it being an election year, the Chancellor simply couldn’t risk being seen as fiscally irresponsible. He had to tread a fine line of giving away something to appease the right in his own party but without spooking the markets.  I don’t think he could have feasibly done much more as unfunded and grandiose tax cuts were – thankfully – off the table.

By choosing the cheaper – and some might say less headline grabbing – option of cutting national insurance by a further 2% rather than slashing income tax, the Chancellor has professed to putting more money in the coffers of millions of working people. The changes should mean that someone who earns £30,000 a year will be around £58 “better off” a month when the national insurance cuts that were announced in the Autumn Statement are factored in. However, when you look at it in the round, it will have little impact as we are all still facing the highest tax burden in recent memory – as he didn’t take the opportunity to increase the personal allowance or tax thresholds – and therefore the effect of fiscal drag will likely outstrip the NIC saving for many.

Cutting income tax would have been significantly more expensive as it benefits both workers and pensioners. The announced cut of 2% in employee NIC will cost about £10 billion a year, whilst a 2p cut in income tax would have cost £13.7 billion a year. I also had concerns that if he did capitulate to the right – and had cut income tax or announced a raft of short-termism, vote grabbing measures – there might have well have been inflationary consequences, so I think he’s made the right call, especially as the government is so constrained by the highest public sector debt levels since the 1960’s, low public spending, weak economic growth and overall tax levels that are beyond the highest level as a share of GDP, since World War II.

The Chancellor has helped some families by way of a long-overdue reform of the high-income child benefit charge tax trap, largely seen as unfair by many – although he decided to shift the issue further up the earnings ladder for the time being, rather than choosing to get rid of it altogether – so this will please some, but not all.

The increase in the VAT registration threshold from £85,000 to £90,000 was long overdue – and anything that acts as a barrier to growth should be addressed. The news will cut taxes for some small businesses in the North West and right across the UK – however, he could have been braver and increased the threshold even further – or alternatively he might have considered a more dramatic reform to the VAT registration rules, as has been called for by some well-respected tax commentators.

There is a fear that the decision to abolish the current ‘non-dom’ status to fund tax cuts for working families could have led to a decline in investment in the UK, as those affected may be more inclined to move to other locations. The abolition of the concept of “domicile” and the introduction of a new residency-based system sounds like a sensible solution – although as ever the devil will be in the detail as to how this will work in practice for those looking to come to the UK – and whether it will have the unintended impact of making taxpaying individuals leave the UK for other shores.

Other tax changes included the scrapping of the furnished holiday let regime – so a tax rise for those who currently benefit from it, and a modest reduction in CGT for higher rate taxpayers where they sell residential property – the rate dropping from 28% to 24%.

In terms of stamp duty, we saw the Chancellor abolish multiple dwellings relief. This was not necessarily the stamp duty change that many in the property sector were hoping for.

This Budget was largely aimed at workers, and it was interesting that there was no real mention of anything for pensioners. Perhaps he is hoping the triple lock guarantee will be enough to win that vote.  In reality, the Budget was always going to be about the election – and making sure nothing was done to rock the country’s current fragile economy.

All in all, he may have achieved that and hopefully the markets will be reassured. I’m sure the Chancellor is now hoping that he has persuaded some voters that the Conservative party isn’t economically, and politically, dead in the water. That will of course, remain to be seen. It will now be interesting to see when the Prime Minister calls for a general election, and whether there will be enough time for the Chancellor to try to win a few more votes with another fiscal event before that.