Given it was the first Labour Budget for 14 years, it was perhaps unsurprising that the Chancellor, Rachel Reeves, spoke for 80 minutes. There was a lot of concern, in advance of her statement, over potential tax increases. As it turned out, the concerns were not unfounded, with a projected increased tax take of £40 billion.
There was a lot of talk in the lead up to the Budget about Capital Gains Tax rate increases, resulting in a significant amount of activity to crystallise gains prior to her announcement.
Capital Gains Tax rates increased on 30 October, from 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers to 18% and 24%, respectively, matching the current rates applicable for residential property gains, which remain unaltered.
There were fears over the abolition of business asset disposal relief, although it survived at £1 million of lifetime gains, but with the rate increasing from its current 10%, to 14% from April 2025 and 18% in April 2026.
Individuals who receive carried interest (mainly private equity investors), saw the rate increased from 28% to 32% from 6 April 2025, with the intention of aligning it to income tax rates from 6 April 2026.
The biggest revenue raiser was the increase in employers’ National Insurance, from 13.8% to 15% from 6 April 2025 and reducing the threshold at which employers pay it, from £9,100 to £5,000. Smaller businesses were given some relief by an increase in the employment allowance from £5,000 to £10,500, removing those with, potentially, up to four employees, from incurring a liability. This measure will generate an additional £20 billion per year by the end of the five-year forecast period.
Whilst not a direct tax on ‘working people’, the consequence of such a measure is likely to be an impact on future salary increases, so, ultimately, it may well be a tax on those people Labour vowed to protect.
Inheritance Tax was also targeted, with business property relief limited to 100% of £1 million, with the remainder only qualifying for relief at 50%, whilst investment in AIM listed shares and other alternative markets will only be eligible for 50% relief.
Pensions, which have been exempt from Inheritance Tax since April 2015, are to be brought back into the tax net from April 2027. This was the only announcement affecting pensions, whereas prior to the Budget, there was nervousness about the 25% tax free lump sum and tax relief on pension contributions, along with National Insurance on employer pension contributions.
Stamp Duty Land Tax did not escape either, with the surcharge for additional dwellings increasing from 3% to 5% in England and Northern Ireland. It will be interesting to see whether Wales and Scotland follow suit, although the additional rates there are already at up to 4% and 6% respectively.
VAT on school fees from January 2025 was confirmed, as was the abolition of the non-domicile tax regime from April 2025.
Corporation Tax is ‘as you were’ with the maximum 25% rate confirmed until the end of parliament, whilst the annual investment allowance and full expensing regime will both be maintained.
Whilst none of the changes ended up being particularly surprising given the intense speculation leading up to the Budget, all law firms and law firm owners will be impacted to some degree by the changes. We are always here to help if you would like to discuss your personal circumstances.
Interest and VAT partial exemption update
Readers may recall that, in our February 2024 Legal Focus, we highlighted a potentially unwelcome consequence of client money interest whereby the earning of high levels of interest might no longer be classed as incidental, resulting in VAT partial exemption rules and a limitation on the ability to fully reclaim input VAT on expenditure.
We noted that the majority of firms should have nothing to worry about given it is not usual for firms to expend large amounts of time and resource on the act of actually earning the interest, and interest is an incidental (albeit sizeable) consequence of handling a client matter.
We have recently assisted a client in dealing with an enquiry on this topic and we were pleased to note that, based on the firm’s specific circumstances, HMRC ultimately agreed with our assessment and confirmed that interest income should be excluded from partial exemption.
Whilst we feel that most firms will naturally find themselves in this position, it is important that firms consider their own situation carefully and take advice where necessary as this can be a complex area.
