The Autumn Budget proved tough for taxpayers

There has been wild press speculation and a sense of real panic from taxpayers about the content of the first Labour Government’s Budget for 14 years.

Rachel Reeves, the UK’s first female Chancellor, has finally put everyone out of their misery and provided clarity about her government’s priorities on tax and public spending. It was not good news for a number of taxpayers, especially for employers.

Employers

As promised, there were no changes to increase income tax, national insurance, corporation tax and VAT - or were there? The answer to this depends on whether you believe that the promise to not raise rates of National Insurance Contributions “NIC” included within the Labour Election Manifesto did not cover employers NIC because the Chancellor announced that employers NIC will rise from 13.8% to 15% from April 2025 with the threshold that employers become liable to pay NIC falling from £9,100 to £5,000 from 6 April 2025. Even though the employer’s allowance for small businesses will increase to £10,500 next year, these NIC changes are expected to generate £23.7 billion in 2025/26, rising to £25.7 billion in 2029/30. These changes and the increase in the national minimum wage by 6.7% will significantly increase the tax burden for employers in 2025 and we will have to wait to see if there is any fallout in the level of investment, recruitment and wage levels.

What does the Budget mean for Scotland?

It was a bit of a mixed bag with some good and not so good news announced in the budget. Firstly there was the welcome announcement that there would be an additional £3.4 billion funding for the Scottish Government, from the Barnett consequentials, who will now have to decide how to best spend this additional funding. The UK government hopes that it will be spent on schools, housing, health, social care and transport. Other good news was funding for a green hydrogen project in East Renfrewshire and for Glasgow’s Innovation Accelerator programme as well as Argyll and Bute benefiting from additional monies to achieve growth in their local area. The Scottish Whisky industry, however, will not be celebrating after increases to alcohol duty.

Aberdeen and the North Sea Oil Industry

Prior to the Budget the government announced in July that the Energy (Oil and Gas) Profits levy “EPL” would be raised from 35% to 38% from 1 November 2024 to bring the total tax rate for oil and gas activities to 78%. Announcements were also made that the levy would apply until 30 March 2030 and that the valuable investment allowances of 29% would no longer apply for qualifying expenditure incurred after 1 November 2024. The Chancellor confirmed in her Budget statement that these preannounced changes will go ahead however when calculating profits charged to EPL the 100% first year allowance will be maintained. The confirmation of the headline 78% tax rate and the removal of the 29% investment allowance will be met with dismay by the Industry who hoped these proposed changes would be reversed. The current high tax regime is damaging the oil and gas industry and curtailing investment expenditure with the resulting impact on jobs in the industry. To increase the attractiveness of operating in the North Sea the industry will hope that further consultation with the UK government in early 2025 will lead to wholesale reform of the tax system to provide a better basis to ensure continued investment and protect jobs.

The Chancellor announced that making Britain a clean energy superpower is one of the five missions of this government, and that Great British Energy will be at the heart of the mission. To kick start Great British Energy there will be £100 million capital funding in 2025-26 for clean energy project development and £25 million to establish Great British Energy as a company, which will be headquartered in Aberdeen.

The oil and gas industry will be facing some serious challenges in the coming years and there will be a need to support the industry and the companies that operate in it as they transition their business models to a cleaner energy future.

Investors

The Chancellor announced an immediate increase in capital gains tax rates from 10%, for basic rate tax payers, to 18% and from 20% to 24% for higher rate tax payers. Trustees and personal representatives will also start to pay capital gains tax at 24%. Residential properties will continue to suffer capital gains tax at 18% or 24% for higher rate taxpayers.

The Business Asset Disposal Relief lifetime limit of £1 million for qualifying gains remains unchanged with a 10% CGT rate applying until 5 April 2025. Thereafter the CGT rate will increase to 14% from 6 April 2025 and 18% from 6 April 2026. These changes will affect entrepreneurs looking to grow and exit their business.

Whilst these tax rises may be less than speculated, they will impact investment decisions going forward and the timing of exits in the short term.

Family wealth and inheritance tax

There were some major announcements regarding inheritance tax which will increase the tax payable on deceased estates. Firstly, unused pension pots will now be included in a deceased estate from 6 April 2027 which could potentially increase the exposure to inheritance tax. AIM shares in the future will also now start to be subject to inheritance tax from 6 April 2026 with 50% relief when previously they were exempt.

Retirement plans will now need to be revisited well in advance of these changes, particularly for those treating their pension pot as the last source of funds to be touched on retirement as it was not subject to IHT. This might change in the future as any remaining pension pot on death could potentially be subject to a 40% tax rate with beneficiaries also subject to tax on any withdrawal from the remaining pension pot. This resulting double tax charge may influence how retirees fund their retirement.

The nil rate band of £325,000 and the residence nil rate band of £175,000 are being maintained until 5 April 2030 however there were announcements of major changes to agricultural property relief and business property relief. The 100% relief will be restricted to £1 million of combined assets with only 50% thereafter. This change will be introduced from 6 April 2026 and will lead to IHT exposure at 20% on business and agricultural assets worth more than £1 million. These changes could have serious implications for farmers and business owners succession plans and planning for these changes will be required well in advance of 6 April 2026.

Increased resources for HMRC

The Chancellor announced a raft of measures to close the tax gap with funding for 5,000 new tax officials and 1,800 debt recovery staff over the next five years, modernisation of HMRC’S IT and data systems, a clampdown on umbrella companies, the appointment of an HMRC compliance Covid corruption officer to recover funds from unentitled businesses, increased interest rates on overdue tax and expanding criminal investigation work. The Chancellor hopes these steps will ensure the government’s ambition that everyone is paying the tax that they owe is met.

The Budget will produce some major tax challenges for several groups of taxpayers which you would expect when £40 billion of tax rises have been announced. It certainly was not a friendly budget for people subject to capital gains tax, inheritance tax, employers and companies operating in the oil and gas sector. The fall out remains to be determined as will the impact on the growth of the UK economy. For those affected, careful tax planning will be required going forward.