With the media full of speculation about how the government might look to correct the ‘£22billion black hole’ they claim to have inherited, many of the business owners we work with are keen to know what might be coming.
The government are seemingly going to extremes to pre-warn and stress that it’s not going to be good news when the budget comes on 30th October. (Although that tone seems to have been softened for Rachel Reeves’ speech for the party conference where she said that “there will be no return to austerity”.
So, what do we actually know?
There have been many various new reports on what might be coming, but let’s start with what we do know:
Business tax roadmap
The government have said they will release a ‘business tax roadmap’ to give owners some certainty. At the time of writing ,this has not been realised but was promised to be provided within the first 6 months of government. The clock is ticking….
Corporation tax
Labour had said during campaigning that they would not raise corporation tax (‘company tax’) over 25% during the next parliament.
VAT on school fees
VAT will need to be added to private school fees from 1st January 2025. The government have already had to create some anti avoidance rules, as clever thinkers were looking to ‘prepay in advance’ for annual school fees before the change. Sadly, that opportunity has been ended with strict rules. Also, whilst the government hoped that some independent schools would absorb the VAT costs, that does not seem to be the case.
Furnished holiday lets
The ‘furnished holiday let’ (FHL) rules are being abolished (in the main) from April 2025. This stops the use of several tax benefits for certain property letting businesses.
Income tax, national insurance and the rate of VAT
The Labour government promised it would not increase income tax, national insurance or the rate of VAT.
Non-dom status
The government are abolishing ‘non-dom’ status, but this is unlikely to affect most small business owners.
What could the government actually do?
There are various measures that are rumoured to have been discussed, especially around ‘Big Asks from the wealthy’ that the government has signalled for the October budget. These speculations have been covered by the major media outlets, including the Financial Times. So, we’ve done a round-up of the major rumours, and added some thoughts of our own:
Capital Gains Tax (CGT)
There is often the perception in the media that the lower rate of tax due on capital gains ‘income’ is a system that’s abused by the ‘mega rich’ to ‘pay no tax’. It’s true the CGT tax rates are lower, and if you could fund your lifestyle through income that is taxed at capital gains tax rates, you would pay a lower percentage of tax overall. However, the reality is far from this.
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- It’s actually difficult to arrange ‘income’ to be taxed in this way. For most people it would be also impossible to fully arrange this to fund your lifestyle consistently.
- Currently capital gains tax is taxing the increase in value of something you’ve bought. This is usually an investment such as a rental property, shares or crypto. You’ve already used taxed money to buy it, and then you are taxed again on the ‘gain’. This gain has no adjustment for natural inflation either, so it’s not as great as it often looks.
- Our tax rates in the UK aren’t particularly low in terms of capital gains tax either, being between 10% – 28%. It varies greatly across the world too. Whilst there are some Nordic countries at 37 – 42%, there are at least 15 countries who pay nothing on Capital Gains. These aren’t just the standard stereotypical ‘tax havens’; they include countries like Belgium. So, to remain competitively internationally, this might be a tough change.
- Capital Gains Tax doesn’t actually raise that much tax as a percentage of the countries overall tax take. However, it could be politically easy pickings due to perception.
A new ‘Wealth Tax’
There are various groups who campaign for the introduction of a ‘Wealth Tax’, but it seems unlikely that this would result in a positive outcome for the country. In countries that have tried this (such as Spain) it did not work out and raised little money.
Loss of Pension Tax Relief
Currently when you make payments personally into a pension, you receive tax relief. Your pension pot usually gets topped up with 20% that you would normally pay in tax . If you pay the higher rates of tax, you are often able to claim further tax back to account for this.
There are concerns that this could be a target for budget savings despite its ‘anti retirement’ angle. It is only recently that the lifetime cap was removed (a limit of the amount you could put in without a tax charge). So, it would seem a sharp u-turn if they were to alter this. They could however make some cap on the relief, for example, restricting it to 20%.
Tweaks to Inheritance Tax (IHT)
There are suggestions that tweaks could be made to further tax property or pensions on death. However, there are no firm rumours or specifics at this time.
What we fear from a small business owner point of view
An increased burden in Employers National Insurance
Remember that large national insurance cut individuals received fairly recently? Well, employers did not feature in those rate cuts. Employers still pay 13.8% (over a threshold) on top of what they pay their teams, and begin to pay this National Insurance earlier than individuals have to.
Whilst for small employers there is some relief from this bill in terms of Employers Allowance, we do worry about increases to the headline rate. The previous government has shown a real lack of understanding of the financial impact of NI changes on a small business employer vs that of a large employer. Politically, it’s an easy target.
A large increase in minimum wages
Whilst most people would agree that more money for everyone is a good thing, it isn’t necessarily good for the small business employer. In our experience, there is a real practical challenge for a small business with having a large minimum wage increase forced upon it.
It tends not to be an issue with those paid at or around the new minimum, but it’s the upward, knock-on effect on the pay ‘brackets’ above that causes the challenge. On top of this, an increase in wages results in an increase in Employers National Insurance and pension contributions.
Changes to dividend tax rates
The government (in our opinion) has done a lot to equalise dividend income tax rates with the equivalent rates paid on salary. So, if you combine all the taxes/national insurance paid on a given level of income, they are a lot closer together.
However, in many cases dividends can still be a tax efficient way to withdraw money from limited companies. If the government decides to go further and change the rates again, this will be a real cost to almost all small businesses.
Removing the lower rates of corporation tax
Currently companies earning profits (for example) of under £50,000 per year pay the ‘old’ corporation tax rate of 19%. There is a staggered rate between £50,001 and £250,000 profits, before you eventually reach a 25% tax rate.
We worry that the government could just remove the lower, staggered rates, creating yet another direct hit to a small business. Politically, the general public won’t be up in arms about corporates paying more tax, but it could come back to bite them…
What should I do now?
It’s difficult to give a solid answer, so we won’t!😃
Usually when tax rules are announced, there is some notice given, and you can then make choices. However, this isn’t always the case, and Rachel Reeves is certainly keeping the potentially devilish details firmly under wraps.
One thing that always remains true is to speak to your financial advisor and/or accountant before taking any action. Don’t be tempted by the rumour mill (or social media) to take a knee jerk response that could negatively impact your situation.
As regards to the Budget on Weds 30th October, we will be covering it as always across our YouTube channel, Podcast and here on the blog.
Stay tuned!