Breaking Down the UK Budget: What You Need to Know (Economic Echo Vol. 3)

On Wednesday, 30th October, UK Chancellor Rachel Reeves introduced the first Labour UK Budget in 14 years. This annual financial blueprint outlines the government's taxation and spending priorities for the year ahead. The 2024 Budget comes amid growing economic uncertainty, contributing to slower-than-expected growth in the UK’s economy during the third quarter. In this newsletter, we’ll break down the key developments leading up to the Budget, its major announcements, and what they mean for businesses and individuals in the signature Economic Echo way.

The Lead-Up to the Budget

Ahead of the Budget, a key issue was the Labour Party’s claim of a £22 billion fiscal black hole—a gap in government finances caused by rising spending, falling revenues, or both. Essentially, this means the government's deficit—what it spends versus what it earns—was £22 billion higher than expected. Note that a deficit means the government is spending more than it earns in a given year, contributing to increased national debt.

During the election, Chancellor Reeves and Labour committed to avoiding austerity (cutting public spending to reduce the deficit) and major tax hikes. However, upon discovery of the ‘fiscal black hole’, the lack of clarity on how to fill this fiscal gap fed into increased uncertainty on what the new budget may bring. When businesses and individuals face uncertainty, they tend to spend and invest less, which slows (or makes negative) economic growth. This likely contributed to the UK's 0.1% economic growth (the total output of the UK) in the third quarter, much lower than anticipated.

Key Budget Highlights

1. Changes to Employer National Insurance Contributions

• What’s Changing:

  • Employer National Insurance Contributions (NICs) will increase from 13.8% to 15%.

  • The threshold for employers will drop from £9,100 to £5,000.

  • National Insurance Contributions (NICs) are payments made by workers and employers to fund important services like healthcare, pensions, and unemployment benefits. Workers pay a portion of their income, and employers also contribute a percentage of employees' wages to support these social benefits.

Example: A company paying an employee £10,000 annually will now contribute £750 in NICs, up from £124.20. This cost increase will reduce business profits or lead to higher consumer prices, likely increasing unemployment. These changes will generate an additional £29.7Bn by 2029/30.

2. Changes to Capital Gains Tax (CGT)

CGT is the tax you pay on the capital gains made from selling assets like shares or property. Capital gains are the increase in the value of the assets while you own them i.e. investment profits.

• For Basic Rate Taxpayers (earnings between £12,571–£50,270):

  • CGT will increase from 10% to 18% on gains above the tax-free allowance.

• For Higher Rate Taxpayers (earnings above £50,270):

  • CGT remains at 20%, but tax reliefs have changed, meaning some gains will now be taxed at higher rates.

• Business Asset Disposal Relief (BADR) CGT:

  • From April 2025, the CGT rate on business sales will rise from 10% to 14%, and from April 2026, it will increase to 18%.

  Example: If you sell a business for a gain of £1 million after April 2026, you'll pay £180,000 in CGT instead of £100,000.

• Investors’ Relief CGT:

  • Investors’ relief enables individuals who are invested in non-listed companies — not on the FTSE 100 or FTSE 250 — to benefit from a lower CGT of 10% for their first £10 million in capital gains

  • The allowance for this lower tax allowance has been reduced from £10 million to £1 million for any transactions made on or after 30th October 2024

  • The lower CGT under investor relief will also be increased in the future from 10% to 14% post the 6th of April 2025 and 18% post the 6th of April 2026.

  Example: An individual realises a £3 million capital gain by selling shares in a qualifying non-listed company after 6th April 2026. If they have not made any previous qualifying capital gains (i.e., they still have their full £1 million lifetime allowance):

  • The first £1 million of gains will be taxed at 18% (the updated investors’ relief rate).

  • The remaining £2 million will be taxed at the standard CGT rate (currently 20% for higher-rate taxpayers).

3. Changes to Inheritance Tax (IHT)

Inheritance Tax is paid on the estate of someone who has passed away. Key changes to IHT include:

• Extension of the IHT Threshold Freeze:

  The threshold at which IHT is applied will remain frozen until 2030. Currently, individuals can pass on £325,000 before being taxed at 40%. The extended freeze means that inflation, the yearly increase in prices, will carry more individuals outside the tax free threshold.

• Capping Business and Agricultural Reliefs:

  From April 2026, Business Relief and Agricultural Relief will be capped at £1 million. Any value above this will be taxed at 20%.

  Example: A family business worth £3 million will only be able to pass on £1 million tax-free; the remaining £2 million will be taxed.

• AIM Shares Subject to Inheritance Tax:

  From April 2026, shares listed on the Alternative Investment Market (AIM) will be subject to 20% inheritance tax—a significant change for investors as previously this was 0%.

• Pension Wealth and IHT:

  Starting in April 2027, pension wealth will become subject to inheritance tax (IHT). This means that any unused pension funds or death benefits left behind in a pension pot when someone passes away will now be considered part of their estate for IHT purposes.

  For example:

  • If someone passes away and leaves behind £500,000 in unused pension savings, this amount will now be added to the value of their estate.

  • If their total estate (including property, savings, and other assets) exceeds the IHT threshold (currently £325,000 for most people, or £500,000 if the residence nil-rate band applies), the pension wealth will be taxed at the standard IHT rate of 40% on the portion above the threshold.

4. Other Key Tax Changes

• Stamp Duty on Additional Homes:

  Starting 31 October 2024, stamp duty on second homes and buy-to-let properties will increase from 3% to 5%. Stamp duty is a tax levied on single property purchases or documents. This will slightly increase costs for people looking to invest in multiple properties as a long-term cash-generating business. Not only will this increase tax revenue for the government to redistribute, but it may help alleviate the pressure on the housing market.

• Non-Domicile Tax Regime Overhaul:

  Non-domicile refers to UK residents who have their permanent home outside the UK. From April 2026, the UK will introduce a residence-based tax system, replacing the non-domicile system. This change may increase taxes on individuals with overseas income or assets who live in the UK.

• VAT on Private School Fees:

  Starting January 2025, private school fees will be subject to VAT. This will lead to 20% higher fees for parents, a significant amount, particularly for those with multiple children.

Public Spending and Fiscal Rules

The UK government currently spends £1,189 billion annually (2023), funding essential areas such as pensions, the NHS, education, the military, infrastructure, and even debt interest payments.

The latest Budget announces plans to increase public spending by £69.5 billion per year starting in 2025/26—an increase equivalent to 2.2% of GDP (the total value of goods and services produced per year). About two-thirds of this additional funding will go towards day-to-day expenses, such as running public services, while the remaining one-third will be invested in long-term projects like improving transport, building homes, and boosting research and development (R&D).

Spending on public services is set for a significant boost, with a 4.8% increase planned for 2024/25 alone. This is the largest real-term increase since the 2000 spending review. Capital spending, meanwhile, will focus on maintaining public investment at 2.5% of GDP over the next five years, avoiding a previously planned reduction.

To balance these plans, the Chancellor has introduced new fiscal rules to promote stability and ensure long-term economic responsibility while supporting growth. These rules are designed to keep government borrowing sustainable and protect future public finances.

Impact on the Economy

The 2024 UK Budget introduces several measures to stabilise the economy, boost investment in key sectors, and ensure long-term fiscal responsibility. Increased public spending in housing, transport, and research & development aims to stimulate economic growth and improve public services. However, higher taxes on businesses and investments, such as increased National Insurance and higher Capital Gains Tax, will reduce business profitability and discourage investment, potentially slowing down economic growth in the short term. These effects are already being felt, as the UK has recorded two consecutive negative months for total output, and unemployment is increasing at the fastest rate since 2021, likely due to businesses preparing for higher costs.

The rise in business tax burdens will lead to higher costs, which might trickle down to consumers through increased prices, slowing consumption and investment. The government’s push to fill the £22 billion fiscal gap without austerity could add further uncertainty, affecting confidence in the economy.

In addition, the UK already has the second-highest annual exodus of millionaires (millionaires that leave the country), behind only China. These tax increases will only add fuel to this fire, which might have longer-term consequences for the UK, especially in attracting investment.

Impact on Consumers

The budget may lead to higher living costs for consumers in several areas. The increase in National Insurance for employers could raise prices for goods and services, while the higher stamp duty on second homes and tax on private school fees will make housing and education more expensive. Changes to inheritance tax and pension wealth may significantly affect those planning to pass on assets to their heirs.

However, the increase in public spending is likely to bring long-term benefits, such as improvements to public services, infrastructure, and housing. This may enhance quality of life and create job opportunities, but the immediate impact may involve higher costs in several areas.

Conclusion

The 2024 UK Budget strikes a delicate balance between addressing immediate fiscal challenges and investing in long-term economic growth. While businesses and households may feel the pinch from higher taxes and reduced reliefs, the emphasis on infrastructure and public services could yield substantial benefits in the years ahead. Short-term discomfort is expected, particularly with rising housing, education, and inheritance planning costs, but these measures aim to lay the groundwork for a more resilient economy in the future.

At Echonomics, we believe staying informed on how policy changes shape your financial landscape is essential. Have any thoughts on this edition? Let us know—your feedback helps us refine the Economic Echo experience.

Stay curious,

Harry & Reika

Co-founders, Echonomics