Equity Research; BUDGET REVIEW

October Budget; Pre-announced measures

The government announced some notable Budget measures in advance:-

• Winter fuel payments, to be made only to those getting pension credit or other means tested help. However no payment will be made other than in those circumstances. This will reduce the number of households receiving this benefit from 7.6m households to 1.3m.
• State pension to rise 4.1% from April 2025
• VAT of 20% of private school fees from January 2025
• Energy windfall tax from oil & gas firms to rise to 38% from 35%
• Minimum wage to jump 6.7% to £12.21/ hour from next April for over-21 whilst the 18-20 year old rate will rise to £10/ hr from £8.60/ hr.
• Single bus fare cap of £2 to be increase 50% to £3.

Chancellor Rachel Reeves said she wants to ‘invest, invest, invest’ whilst improving the UK’s public services. Reeves has set aside a massive £11.8bn for the tainted blood scandal and £1.8bn in respect of the Post Office.

However the Budget objective to raise £40bn was at the very top end of forecasts whilst ‘restoring stability’ and ‘rebuilding Britain’.The Chancellor said CPI is forecast by the Office of Budget Responsibility to change from 2.5% in 2024, to 2.6% in 2025, to drop to 2.3% in 2026 and to 2.1% in 2027 and 2028 and to 2% in 2029. Furthermore the budget is to decline from a deficit of £26.2bn in FY25 to £5.2bn in 2027 whilst improving to £9.9bn surplus in 2029.

What has been done today?

1. Capital Gains Tax on the sale of assets, the lower rate will rise from 10% to 18% and the higher rate will rise from 20% to 24%. The rates on second residential homes will remain at 18% and 24%.
2. Stamp Duty: second home stamp duty will increase to 5% from 3% from tonight.
3. Inheritance Tax: inherited pensions will be brought into the IHT assessment from April 2027. The IHT tax thresholds will remain in place with the first £325k tax free.
4. Personal Tax thresholds: from 2028-2029 personal thresholds will be uprated after the current 5 year freeze ends.
5. Corporation Tax the main rate of corporation tax at 25% on taxable profit above £250k will remain the same until the next election.
6. Business Rates the current 75% discount to business rates, due to expire in April 2025 will be replaced by a discount of 40% up to a cap of £110k.
7. Non-Domiciles: the current non-dom regime will end from April 2025 and be replaced with a residency based scheme, and close loopholes on expatriates. This is expected to provide £12.7bn by 2029.
8. Employers National Insurance– this has been increased to 15% up 1.2% with the amount that can be reclaimed reduced from £9,100 to £5,000. This measure will raise £25bn from next April 2025.
9. Air Passenger Duty to rise by £2 per person on an economy flight but by £450 per passenger on a private jet.
10. Pension Tax Relief – the reliefs on pension contributions have been left alone.
11. Fuel Duty- has been left alone, and frozen with no higher taxes in 2025. The recent 5p cut in fuel duty on petrol and duty due to end in April 2025 will be kept for another year.
12. Carried Interest– will rise to 32% from April 2025 with further reforms from April 2026.
13. VAT on public school fees: this measure will raise £1.5bn p.a. and has been proceeding though Parliament. This will start in January 2025.
14. Energy Profit Levy will rise to 38% from 35% with full 100% expense allowance in the first year. The government will remove the 29% investment allowance to protect jobs.
15. Investment: £1bn for investment in aerospace, £2bn for EV manufacturing and up to £520m for life sciences manufacturing plant.
16. Tobacco Duty: taxes to increase by 10% on hand rolled tobacco this year with a flat rate duty on all vaping liquids from 2026. The tobacco duty escalator has returned with taxes to rise by RPI +2% p.a.
17. Reliefs on AIM companies; there will be an effective IHT rate of 20% on inherited AIM company shares.

and new spending….

1. £100bn in capital spending over next 5 years there will be £22.6bn in the day to day funding of NHS and £31bn increase in capital spending in NHS.
2. £5bn into housebuilding to deliver 1.5m new homes with the affordable homes programme to receive £3.1bn.
3. £6.7bn into the Department of Education including £1.4bn top rebuild 500 schools in the greatest need.
4. Defence spending to rise to 2.5% of GDP with an extra £2.9bn spend.

Conclusion

Some Budget measures were either leaked or disclosed prior which spread the media impact. Whilst not making any difference in economic terms the messaging ground had been well prepared. Investors were expecting taxes to rise….by more. One valid complaint was the time the new government took since July to show its hand, which has dampened the UK economy’s ‘animal spirits’. However the Budget is now thankfully out of the way.

The move to leave pension contributions alone has lifted life assurance companies. Many were expecting the reliefs to be changed.

The move to increase taxes on assets and on employers’ national insurance will essentially preserve disposable incomes. Furthermore with corporation tax being held, the UK government has not hit reported EPS in the most obvious way. Most investors will be paying more in terms of capital gains however the 4% hike to 24% is nowhere near the pre-Budget scare of 39%. ISAs have not been hurt in this Budget, another positive.

Overall, I would give Rachel Reeves first Budget a relatively high 8/10 score for delivering an outcome that was not as bad as expected, but also builds confidence that Labour can take appropriate tax measures without causing economic damage.