Legislating FGM: a recent conviction for conspiring to commit FGM is a memorable first for the CPS in England and Wales:
November 11, 2024
The budget:
Rachel Reeves’s fiscal budget announcement has drawn attention from a range of sectors. Following massive changes in borrowing levels to fill the gaping black hole of public spending, gilt yields increased, sparking a sell-off for more favourable rates. With the growing government debt issuance, gilt yields hit record highs of 4.55%, up from 3.75%, but have since settled. Forecasts suggested the level of government debt and spending could negatively impact inflation rates and private investment. The Office for Budget Responsibility noted that higher public spending would increase demand and inflation, while higher business taxes could stifle production. However, inflation is under control currently and the Bank of England announced a 0.25% slash to interest rates to 4.75%.
The Chancellor nevertheless kept her promise to keep personal taxes and VAT the same. She also ensured that income tax rates would increase with inflation by 2028. This will ensure that individuals’ growing salaries do not pull them into higher tax brackets and decrease incentives for growth. However, government financing must come from somewhere and if personal taxes remain unchanged, the new labour government will rely on business taxation and debt. Naturally, employers will therefore bear the grunt of government funding, although some suggest that this will hit employees in the long run.
Individual impact:
While personal income tax, National Insurance, and VAT remain unchanged, other personal tax thresholds have seen modification. Most notably, capital gains tax for the sale of shares will increase from 10% to 18%, with the highest rates increasing by 4% to 24%. This could see individuals prolonging capital investments, thus decreasing reinvestment elsewhere. Also, capital gains tax is usually a sought-after method of decreasing expenses of income streams, but, with its growing figures, the benefits look duller. There have also been changes to stamp duty thresholds for house buyers, reversing a previous tax cut to aid individuals onto the property ladder. New thresholds will also see a 50% decrease to £125,000 for buyers to pay stamp duty for house purchases. Helping residential buyers, the tax decreases are likely to facilitate greater activity in private real estate.
The corporate environment has also experienced a shake-up to its taxation scheme. Most notably, carried interest tax, a tax managing partners at private equities houses pay on their percentage of profits, has increased dramatically. The new tax level will be a base rate of 32%. Although this is only a small change for higher earners paying 28% previously, lower earners are seeing a 14% from 18%. This will likely impact the payment structure in private equity houses, with asset managers preferring alternative incentivisation through stock options or growth shares.
Another important feature of the current budget is the non-domestic status tax regulations. This change aligns with the budget’s overall agenda to restrict tax relief sentiments in addition to tax increases. The old tax relief regime is being replaced with the foreign income and gains relief (FIG). Previously, those whose main residency and income were offshore could claim tax relief for 14 in 20 years. This is being scrapped, with FIG only providing relief for the first 4 years of tax residence. Some are concerned this will repel wealthy individuals from settling in the UK, potentially impacting domestic expenditure and investment.
Commercial impact:
National insurance contributions (NIC) from employers are set to rise by £25bn a year. The rates increased from 13.8% to 15% and removed a threshold so businesses earning under £100,000 are included in this change. Reeves also increased the threshold of NIC relief by 100% to £10,550, so more employees require NICs from their employers. The increase of both tax levels and relief thresholds will impact small to medium-sized enterprises most since they usually operate off smaller profit margins. Removing the threshold for NIC contributions means companies operating off small margins will be liable for NIC, potentially destabilising revenue streams. However, this will bite into employee income increases. Businesses attempting to maintain revenue for reinvestment are likely to increase employees’ salaries at a slower rate to compensate for their greater tax contributions.
Despite the sweeping changes made to employers’ NIC, capital gains taxes paid by businesses are set to remain at their current value. Businesses are currently required to pay taxes on profits over £250,000 at 25%. However, SMEs will be burdened with more taxes amid changes to asset disposal regulations. Although previously SMEs had business asset disposal relief, they are now subject to 10% taxes on such sales. This rate is set to increase over the coming years, expected to hit 18% by 2027. To reduce costs, companies may prefer trading in redundant long-term assets instead of auctioning them for cash.
Opinion:
As mentioned, increased taxes and relief thresholds impact individuals and businesses. Therefore, the strategy for maintaining the greatest profits is also likely to change for both. It’s important to consider how the budget will impact the overall economy. If inflation and interest rates are likely to increase, spending will become more expensive for businesses. So far, we have seen positive changes in this respect, but it is worth assessing this next few years while the budget comes into full fledge. Interest rates could impact strategy in structured finance, with lawyers required to facilitate and mirror these changes in drafting agreements. Also, in M&A, acquisitions will be taxed under the new capital gains tax, making it less attractive for those considering a sale. Capital gains tax changes will also increase enquiries from those looking into property transactions and asset disposals. Although law firms may have to alter their strategy to accommodate changes to taxation and the economy, overall, more individuals and businesses will likely need their advice in the face of these changes.
Sources
https://www.ft.com/content/2bbaacb2-7d2d-436a-8ba1-c6aa8fa3226b
https://www.herbertsmithfreehills.com/insights/2024-10/uk-labour-autumn-budget-2024
https://www.theglobaltreasurer.com/2024/10/31/as-the-dust-settles-on-the-uks-autumn-budget/
https://www.ft.com/content/560d6639-a6ff-48c2-b4d0-a5249bbe2c1d
https://www.ft.com/content/8120e2f2-d7e8-4c75-bdce-8cef4680ed20
https://www.ft.com/content/5819326e-9c96-418d-9edb-27fa6d25d6d5
https://www.money.co.uk/business/how-does-the-2024-budget-affect-small-businesses
https://www.bbc.co.uk/news/articles/cdxl1zd07l1o
https://www.traverssmith.com/knowledge/knowledge-container/autumn-budget-2024-non-dom-regime/
https://www.traverssmith.com/knowledge/knowledge-container/autumn-budget-2024-carried-interest
