Reaction to Rachel Reeves’s First Budget: A Challenging Time to Run a Small Business

When Rachel Reeves stood up this afternoon to deliver her first Budget, it marked the first UK Budget for a female Chancellor, and the first for a Labour Chancellor for 14 years. Of course, we were already braced for bad news for business, with the much leaked rise in the rate of NIC. However, the Chancellor still managed to surprise with the additional burden that will be placed on business in the coming years.

Springing a surprise is impressive in itself, as the speech was preceded by a statement to the House from the Chair of Ways and Means, essentially giving the Government a dressing down for having leaked so many of its policies over the last few days, and reaffirming the need to make announcements Parliament first. So one might have thought we had heard it all in advance.

Some of the headline numbers were depressing; not just the much vaunted £22bn “black hole”, but the fact that economic growth is forecast to stay sluggishly below 2% for the entire forecast period to 2029.

Capital Gains Tax

We were all braced for a rise in CGT, and the real question was how much and when?

Advisory teams have been rushing through huge numbers of transactions to beat any rise (16 completed at Ensors in the last two weeks!). It turned out that this was the right approach, with the first of the changes applying from today; the main rate of CGT rises from 10% to 18% for basic rate taxpayers, and from 20% to 24% for higher and additional rate taxpayers.

The fact this won me a bet with my partner seemed to be the only good news the Chancellor gave out!

The rate change isn’t as bad as it could have been, and hopefully this won’t do too much to impact on deal volumes.

The £1m lifetime limit on Business Asset Disposal Relief is maintained, but from 6 April 2025 the relief will only reduce the rate to 14% instead of the current 10%, and from 6 April 2026 this rises again to 18%. It seems we might be busy again in March…

Employer’s National Insurance and the Minimum Wage

This is the big one. A rise in employer’s NIC was much leaked, and it was no surprise that the rate increases from 13.8% to 15%, applying from April 2025.

However, what was a surprise was a reduction in the secondary threshold (the salary level at which a business starts to pay employer’s NIC) from £9,100 per annum to £5,000 per annum. The threshold change alone will cost a business £615 per employee, assuming that they were already earning above £9,100.

The difference will be felt more strongly in businesses that employ large numbers of lower paid workers, such as hospitality, cleaning, and the care sector. Coupled with the 6.7% increase in the national living wage, and the gradual aligning of the 18-21 year old rate with the main rate (16% increase), this could have a significant impact on the bottom line of these types of business. Even businesses with higher paid workers will still notice the profit impact.

There is a rise in the Employment Allowance to £10,500 from £5,000, and this will provide welcome support to some of the smallest businesses.

At the same time of course, there will be improvements to workers rights, and businesses will need to make sure that they stay on top of all the changes.

IHT – An End to Intergenerational Farming Business?

I think we knew that major changes to Inheritance Tax were on the cards, but perhaps thought that the changes would be more subtle than they have turned out.

In the event, 100% Business Property Relief and Agricultural Property Relief will be restricted to the first £1m of assets, with a 50% relief thereafter, effectively giving a 20% IHT rate for qualifying business and agricultural assets. This will apply from April 2026.

Perhaps this doesn’t immediately sound “unfair”? But what impact does it have in practice?

A family trading company might be making £500,000 of pre-tax profits a year (£375,000 post tax). Perhaps, on a multiple of eight, it might be valued at £4m. So, on the death of the main shareholder, £3m would now be liable to IHT at 20%, giving a charge of £600,000. This tax has to be paid personally, so if the money comes personally a dividend will be required to extract it. Given a top rate of dividend tax of 39.35%, this means a dividend of nearly £1m needs to be paid out of post tax profits to pay the tax. That will mean nearly three years of profits that have to be extracted, restricting business investment significantly.

But moreover, think about a farming business. Farms tend to have a very low profitability compared to the asset value. A 600 acre farm might be worth c£6m, but might only be yielding £50,000 or so of profits per year, yet the IHT liability could be £1m. It is clear that the IHT can only be paid by a sale of a substantial part of the farm.

Does this spell the end for intergenerational family farming businesses? Maybe, but of course, the measures announced today don’t change the seven year IHT clock on gifts, so taking good advice on advance IHT planning (for those who can afford to gift assets) will become even more important.

The BPR changes will also affect AIM shares, which will enjoy only 50% BPR rather than 100%. The question is whether this will impact on share prices for AIM listed stocks?

Finally, the plans to include pension funds in the estate for IHT will have an impact on those who die holding large undrawn pension funds.

It will be interesting to see whether the Government’s agenda of growth can be delivered as business grapples with the extra burden, and also how much of the extra cost will flow through in additional inflation.