UK Update: Chancellor announces biggest tax rise in over 30 years

Rachel Reeves, proudly the first female Chancellor, announced the government’s long anticipated Autumn 2024 Budget.

The Chancellor stated her ambition to address the UK’s ongoing economic challenges by raising £40bn in tax and through a strong focus on economic stability, investment and reduced borrowing.

Employer’s NICs hike

More than half of the £40bn take will be raised through a 1.2 percentage point increase to employer’s National Insurance contributions (from 13.8% to 15%) and a lowering of the threshold at which employers pay such contributions from £9,100 to £5,000, each to take effect from April 2025.

The increased costs will be especially challenging for small to medium-sized enterprises, with smaller or limited cashflow, and those with tight margins such as retail and hospitality. Without adjusting or planning adequately for cost, some business may have to re-evaluate their workforce structures or remuneration packages (potentially utilising salary sacrifice arrangements) to effectively mitigate increased payroll costs.

The rise will also affect employees holding non-tax-advantaged share options or discounted enterprise management incentives (EMI) options if their employer has passed on to them the employer’s National Insurance contributions cost.  A top rate (48%) taxpayer in Scotland exercising an option after 6 April 2025 in those circumstances will have an overall effective tax rate of 57.8%.

Capital gains tax rate increases not as bad as feared

The lower rate of capital gains tax has increased from 10% to 18% and the higher rate from 20% to 24% for all disposals made on or after 30 October 2024.  Although capital gains tax rate increases were projected, the increases were not as high as some had expected. The new capital gains tax rates will match the residential property rates, which are not changing.

Although the rise could potentially discourage asset sales or trigger a fall in deal volume for investors and business owners in the short term, the delay of the increased rates for those qualifying for business asset disposal relief – see below – could instead trigger increased activity for owner-managed businesses between now and April 2025, and potentially until April 2026.

Business asset disposal relief (previously known as entrepreneur’s relief) – a welcome retention but a disproportionate rate increase.

The capital gains tax rate applying to disposals qualifying for business asset disposal relief will increase from 10% to 14% from April 2025, and again, to 18%, from April 2026. Whilst the retention of business asset disposal relief indicates a commitment to the government’s support for entrepreneurship, the proposed increase of 80% over two years, compared to a 20% increase in the higher rate of capital gains tax, will disappoint some, particularly as the £1million lifetime limit is not increased.

Carried interest rate rises for fund managers

From April 2025, the rate of capital gains tax applying to carried interest is set to rise from 28% to 32%. There was some concern that a substantial rate increase or wholesale change in the regime could lead to the UK becoming uncompetitive for fund managers. Although the direct impact of the tax rise will reduce the net returns of fund managers, an increase of four percentage points is not as bad as some feared and the fact that the increase takes effect from April 2025 gives time for disposals of interests to benefit from the current rate.

Stamp duty land tax (SDLT)

From 31 October 2024, the higher rates for additional dwellings surcharge on stamp duty land tax in England will increase two percentage points, from 3% to 5%. The increase aims to support first-time home buyers by providing them with a comparative advantage over second home buyers, landlords, and businesses purchasing residential property. Although this will be welcomed by first-time buyers, this places a much steeper cost on property investors and landlords. Scottish buyers should note this is an English tax and it is LBTT they need to consider (and its additional dwelling supplement) rather than SDLT.

By Burness Paull LLP, Scotland, a Transatlantic Law International Affiliated Firm.  

For further information or for any assistance please contact ukscotland@transatlanticlaw.com

Disclaimer: Transatlantic Law International Limited is a UK registered limited liability company providing international business and legal solutions through its own resources and the expertise of over 105 affiliated independent law firms in over 95 countries worldwide. This article is for background information only and provided in the context of the applicable law when published and does not constitute legal advice and cannot be relied on as such for any matter. Legal advice may be provided subject to the retention of Transatlantic Law International Limited’s services and its governing terms and conditions of service. Transatlantic Law International Limited, based at 84 Brook Street, London W1K 5EH, United Kingdom, is registered with Companies House, Reg Nr. 361484, with its registered address at 83 Cambridge Street, London SW1V 4PS, United Kingdom.