Autumn Budget response

Chancellor Rachel Reeves delivered her first Budget on 30 October 2024. The new administration announced significant changes in their inaugural Budget with the Chancellor managing expectations in the lead-up. The majority of the tax rises were anticipated, as was the fact that there would be limited incentives for businesses. 

Read on for analysis of key areas affected by the Autumn Budget.

• Business tax
• Employment tax
• Private tax
• Non-domiciled individuals
• Deals and acquisitions
• Carried interest

Business tax

Hazel Platt Partner, Head of Tax

For businesses, the increase in the main rate of Employer’s National Insurance will have the biggest impact from the Budget in the short-term.

Expectations had been well managed that there would be no room for further business tax incentives to be announced. Instead, the main business tax offer was the confirmation of the previously trailed corporate tax roadmap, aimed at providing businesses with certainty over the future direction.

There was little in the way of surprises for businesses in the roadmap. Its central announcements were reconfirmations to previously made pledges to cap the headline rate of corporation tax (alongside confirmation that the small profits rate will remain) and maintain full expensing, the annual investment allowance and R&D tax relief rates. There was also a commitment that the Patent Box will remain – all policies centered around maintaining the status quo rather than a shake up to business taxation.

Beyond the headline announcements there were several areas signposted where the Government expects to consider changes in the future. 

In the detail were some welcome developments. This included that the Government will continue to explore extending full expensing to assets bought for leasing when fiscal conditions allow and improving tax certainty, with consultations to be released next year on a new process that will give investors in major projects advance certainty about the tax treatment that will apply and potentially widening the use of advanced clearances for R&D tax reliefs.

The roadmap also extends to international corporation tax issues and states that in Spring 2025 the Government will consult further on reforms to the UK’s rules on transfer pricing, permanent establishments, and Diverted Profits Tax – including the potential removal of UK-to-UK transfer pricing and further changes to transfer pricing legislation. This includes potentially lowering the thresholds for exemption and introducing a requirement for multinationals to report cross-border related party transactions to HMRC.

The Budget also signaled the Government's continued commitment to Pillar Two, confirming their intention to legislate for the introduction of the undertaxed profits rule for accounting periods commencing on/after 31 December 2024.

On business rates the Government permanently lowered multipliers for Retail, Hospitality and Leisure properties from 2026-27 and launched a further paper “Transforming Business Rates” exploring more fundamental reform.

For AIM quoted businesses it was announced that Business Property Relief will be restricted to 50% on AIM quoted shares in trading companies which was better than the abolishment that had been feared.

Employment tax

Jonathan Berger Director, Employment Taxes

No changes to Income Tax or employee’s National Insurance rates or thresholds were announced by the Chancellor. 

However, the rate of Employer Class 1 National Insurance will rise from 13.8% to 15% from 6 April 2025 and the point at which Employer Class 1 National Insurance will be payable (the secondary threshold) will be reduced from £9,100 p.a. to £5,000.  

The eligibility threshold for the Employment Allowance of £100,000 will be removed from the same date, and therefore all employers will be able to claim a reduction to their Employer’s Class 1 National Insurance liability of up to £10,500, (increasing from £5,000).  

The changes to employer National Insurance will also be accompanied by increases to the National Minimum Wage (NMW) and National Living Wage rates, with the headline National Living Wage hourly rate rising from £11.44 to £12.21 from 1 April 2025.  

While the increase in the level of the Employment Allowance will be welcomed by smaller businesses, it will quickly be surpassed by rises in National Insurance rates, changes to thresholds and increases in minimum wage rates.  

With HMRC announcing investment to recruit a further 5,000 compliance officers, employment tax and NMW compliance remains of paramount importance. 

The increase in Employer’s National Insurance may encourage some employers to make changes to their benefit packages to help offset some of their increased National Insurance costs.  

While there was talk in recent weeks of introducing Employer’s National Insurance on pension contributions, there was no mention by the Chancellor which is welcomed. This reinforces the case for the introduction of pension salary sacrifice if it is not already offered, particularly given the potential increase in savings for employers, compared to previously.  

In addition to the core changes above,the Government are continuing their focus on non-compliant umbrella companies. From April 2026 agencies and end clients that use umbrella companies to supply workers will be responsible for operating income tax and National Insurance (including employer Class 1 National Insurance) through PAYE.  

The Government are also continuing with their intention to mandate the payrolling of benefits from 6 April 2026 removing the requirement for P11D reporting with income tax as well as Class 1A National Insurance collected via the payroll every pay period, for all benefits other than employer provided accommodation and employment-related loans.  

Many employers will require advice to ensure they are compliant from a systems perspective as well as to aid employee communication. In our experience, adopting payrolling prior to April 2026 can help payroll teams and employees get used to the change in reporting.  

In terms of providing equity incentives to key employees, the increase in capital gains tax rates will impact the net benefits delivered to employees under the UK's tax beneficial share schemes such as Enterprise Management and Company Share Option Schemes. However, these will continue to provide highly tax efficient structures through which to deliver rewards to UK employees in the longer term compared to cash remuneration subject to income tax rates and National Insurance.

Private tax

Dan Hartland Partner, Tax

Well, this has certainly been a long-anticipated Budget from a personal tax perspective.

Some of the changes announced today were well trailed, for example the replacement of the non-domicile tax regime with one that’s residency-based. Albeit Rachel Reeves has clearly tried to balance the severity of these changes with ensuring they don’t reduce tax revenues by encouraging those affected to leave the UK, or not to come in the first place. We, therefore, see certain aspects of the transitional provisions being more generous than anticipated, while other provisions proposed by the previous Government have been scaled back.

Outside of those expected announcements, Labour painted themselves into a corner by committing to not increase the key revenue-raising taxes. Combined with a narrative of dire financial circumstances and the very long period between the General Election and Budget, this created a huge amount of speculation around those ‘unprotected’ taxes, such as capital gains tax (CGT) and inheritance tax (IHT), particularly the impact such changes may have on business owners.

Here we’ve seen the main rate of CGT increasing from 10% to 18% for basic rate taxpayers and from 20% to 24% for others from today, aligning with the existing CGT rates for residential property. The 10% rate under Business Asset Disposal Relief has been retained for the period to 5 April 2025, increasing to 14% from 6 April 2025 and then further to 18% from 6 April 2026. This is more generous than the extremes of CGT speculation that suggested the rates could align more closely with income tax rates of up to 45%.

In contrast, the proposed changes to IHT, with the restriction of Agricultural Property Relief (APR) and Business Property Relief (BPR) to £1 million at 100% and 50% thereafter from 6 April 2026, creates a new and potentially very material risk for family businesses in particular. In these cases the funding of any IHT liability will be unpredictable in terms of timing and will typically need to come from the business itself. This IHT reform should definitely be on the agenda for any privately-held business in the coming months, giving time to consider mitigating actions before these changes come in.

Non-domiciled individuals

Jo-Anne Allen Partner, Global Mobility Services

In the Budget, the Chancellor revealed more detail on Labour’s plans to reform the taxation of non-domiciled individuals.

Beginning 6 April 2025, the new Foreign Income and Gains (FIG) regime will allow for anyone arriving in the UK to exclude their FIGs from UK taxation for the first four years of tax residence (albeit with increased reporting requirements) regardless of their domicile and whether they remit the relevant income to the UK. This is a positive development.

The Chancellor aligned Overseas Workday Relief (OWR) to the four-year length of the new FIG regime and introduced a cap on the annual relief available.

Although a move in the right direction, it’s potentially a missed opportunity to bring our foreign talent tax relief regime closer to that of some of our neighbouring countries and remains largely unusable for those who have UK-based roles.

To qualify for the FIG regime and OWR, individuals must have been UK non-resident for the preceding ten tax years. This places a block on individuals who may have spent time previously in the UK earlier in their careers or as students. Where the exemptions apply, individuals must still quantify and report their worldwide income and gains.

Another key announcement, increasing Employer (but not Employee) National Insurance, will also impact the cost of assignments, and increased capital gains tax (CGT) could doubly affect those now taxable on foreign gains. However, employees and employers are likely to be relieved that pensions tax relief was not further limited.

The focus for employers should now be on understanding the impact of the new regime and additional complexities on their employees and policies.

With the April 2025 deadline confirmed, it is important that employers and employees act quickly to prepare themselves.

Deals and acquisitions

Keely Woodley Head of Deals Advisory & Consulting

A rise in both capital gains tax and the tax rate applied to carried interest had been widely expected at today’s Budget but the level of increase remained a key question. Effective immediately, the Government has announced that capital gains tax (at the highest level) will rise from 20% to 24% and from April 2025, the tax on carried interest from 28% to 32%. 

While any increase in taxation has impact, the level announced today still presents an attractive environment for management incentives and investors and is unlikely to discourage ongoing deal activity.  The revised rate still represents a favourable reward for taking entrepreneurial risk and, indeed, entrepreneurship continues to be encouraged with Business Asset Disposal Relief (BADR) being retained, albeit with the rate increasing over two years to 18%. We therefore expect the impact on M&A to be less severe than anticipated with the announcements ensuring the UK remains an attractive and internationally competitive environment for investors. 

The bigger impact on the deals market will likely come from the increases in Employers’ National Insurance and the national minimum wage, and the subsequent impact on underlying earnings and valuations.

Also highlighted was the Government’s plans to reform carried interest rules to make them "simpler, fairer and better targeted" from April 2026. This gives fund managers sufficient time to fully understand the proposed changes to ensure that both existing and new structures remain compliant with any updated HMRC guidance.

Carried interest

Ami Shah Partner, FS Tax (Alternative Investment Funds)

Delivering on its commitments to make the tax system fairer and raise revenue to fund public services, the Government announced its much anticipated reforms to “close the loopholes” in the tax system with regards to the taxation of carried interest and reform the regime to make it “simpler, fairer and better targeted”.

While no changes are due to apply with immediate effect, the Government announced that:

• From 6 April 2025, the capital gains tax rate applying to carried interest will increase to 32%
• From April 2026, all carried interest will be taxed within the income tax framework, treated as trading profits subject to income tax and Class 4 NI. The new rules will sit alongside the existing disguised investment management fee (DIMF) rules which will be retained and their application will be subject to consultation. The amount of ‘qualifying’ carried interest subject to tax will be subject to a 72.5% multiplier (qualifying meaning carried interest that is not income-based carried interest (IBCI))
• The IBCI rules will also be amended to remove the exclusion for employment related securities
• Consultation will be undertaken on additional qualifying conditions for carried interest including on the average holdings period test for IBCI and minimum co-investment requirement
• Any qualifying carried interest relating to non-UK services will benefit from relief under the new foreign income and gain (FIG) regime

These changes will impact fund managers throughout the private capital industry, which operates carried interest structures in varying forms.

Although the changes are not as punitive as initially feared by the industry, there are fundamental changes to the way in which carried interest will be taxed. The Government has also published the summary of responses and next steps to the recent call for evidence and we will respond to the consultation.

We can help you assess the impact of the upcoming changes, in addition to helping you comply and understand the effect of the new legislation once announced. If you would like to discuss these changes or your structures more generally, please contact me.