Keir Starmer warned that this Budget would be ‘painful’ in the weeks leading up to the unveiling of his and Chancellor Rachel Reeves’ first budgetary statement.
Facing a £22 billion black hole in public finances, some pain was perhaps inevitable, and Starmer and Reeves have shown that they are not afraid to be unpopular among UK businesses by firmly shifting that pain on to employers rather than employees.
The Budget headline is, of course, the double modification made to employers’ national insurance contributions. Employers currently pay 13.8% on worker earnings above £175 per week, but by raising the percentage to 15% and lowering the threshold to £96.15 per week, the new Labour government is expected to raise about £25 billion to plug that black hole.
The doubling of the employers’ allowance from £5,000 to £10,500 will ease some of the pain, but with the liability for employers increasing by at least £615 per employee, even with the increase in the allowance, employers will still be out of pocket.
When Starmer pledged not to increase taxes on working people, it was expected that they would navigate this by extending the freeze on income tax thresholds beyond the initially planned 2028.
With the Chancellor hoping to raise £40 billion to avoid real-terms cuts, stealth taxes such as the fiscal drag created by this threshold freeze were expected and it is a welcome surprise that she did not take this step.
However, business owners have been hit again with increases to capital gains tax. The freeze on business asset disposal relief will be welcome, but the announcement that the tax rate on these disposals will rise to 14% in 2025 and 18% in 2027 will make this relief short-lived.
In relation to inheritance tax, those who have previously benefited from business property and agricultural property reliefs will have to deal with the combined limit being restricted to the first £1 million, with anything over that being subject to only 50% relief, creating an effective rate of 20% tax on agricultural and business property on death over the £1 million limit.
Elected with a strong majority and ready to govern for the next five years, it appears Labour has made the calculated bet to introduce unpopular measures in their first Budget in the hopes of evening out the public finances by the end of its mandate.
Starmer did not lie – this is a painful Budget, especially so for employers and business owners. Whether or not his bet pays off remains to be seen.
- Neil Armstrong is tax director at Baker Tilly Mooney Moore
