After months of speculation, we finally have the details of the first budget from the new labour government. It appears most of the burden will be on business owners, ultra-high net worth individuals and investors, but thankfully not tiny business owners. Before discussing the changes and how they will affect you and your business affairs in detail, here are some thoughts.
It might feel unfair at the moment, and it might hurt financially, however it wasn’t as bad as the media said it was going to be. Over the past few years, you have gone through much tougher stuff with Covid and the cost-of-living crisis, and the resilience you built to help you through those will help you now.
If you are concerned, a good first step is to book a call with us to discuss the impact of this budget on your payroll, profitability, 2025 business plan and cash forecast and eventual exit plans for your business.
Let’s now go into details:
Your wage bill will go up:
On the 29th Oct the government announced the following changes to the National Minimum Wage which will apply from the 1st April 2025:
- National Living Wage (21 and over): up by 77p to £12.21 per hour
- 18-20 Year Old Rate: up by £1.40 to £10.00 per hour
- 16-17 Year Old and Apprentice Rate: up by £1.15 to £7.55 per hour
This means if you employ someone to work 40 hours per week, on the National Living Wage their salary would be £25,396.80. Then you have National Insurance and pension costs on top of that. The increases are in line with the Low Pay Commission’s recommendations.
On top of the rise of the national minimum wage, the government announced changes to Employer National Insurance contributions. Not only are wages rising, but the amount of NI contributions employers pay is also increasing, and the point at which Employer Contributions are due has also decreased. Employer National Insurance Contributions now are set at 15% – up from 13.8%, with the threshold that businesses will now start paying for employees when their salary gets to £5,000 instead of the previous figure of £9,100.
However, the government has cushioned the impact of the increase in Employer National Insurance Contributions by increasing the Employment Allowance from £5,000 to £10,500. This means that most of the micro and small businesses could see a reduction in their Employee NI costs. For example, if your payroll monthly was £10,000 and every employee was above the salary threshold of £5000, then your NIC payments would reduce by over £3000 across the year. So, if you are one of these businesses, you could end up better off!
However, if you are a single director/shareholder company with no other employees, you are not eligible for Employment Allowance. This means that if you take a salary of £12,570 per month, your Employers’ NI contributions will go up in April from £39.90 to £94.63 per month.
Suggested Actions:
- Review your wages: Figure out whose pay needs to go up in line with the national minimum wage and whose pay must also increase to remain fair, given the rise in the lowest-paid team members’ wage.
- Review your costs and business model: Do you need to change how you resource your business? For example, is the balance of contractors vs permanent employees right? Would you be better off as a sole trader rather than trading via a limited company?
- Review your operations to find efficiencies: How can your business use technology or slicker working practices to avoid hiring more permanent employees?
- If in doubt, get in contact with us and we can help you to make a plan.
How will you pay yourself?
In years gone by, dividend tax credits made it far more efficient to pay directors a nominal amount via PAYE then the remainder via dividends. In this budget there was no announced change to basic, higher, or additional rates of income tax, employee NICs or dividend tax rates or credits for 25/26. Therefore basic rate income tax is still 20% vs dividend tax basic rate at 8.75%. Will paying yourself via PAYE or putting more aside into pensions be more tax-efficient in the short and long-term? With Capital Gains Tax rising, the tax you pay when selling your business has gone up which could mean less money in your bank account if or when or if you decide to sell your business.
Capital Gains Tax Increases with immediate effect:
It was predicted that Capital Gains Tax would go up in this budget, and while it did, it was not as much as feared.
- Capital gains tax: lower rate increases from 10% to 18%
- Capital gains tax: higher rate increases from 20 to 24%
Capital Gains Tax rates for Business Asset Disposal Relief (selling your business), and Investors’ Relief (investing in other businesses) will rise gradually to 14% from 6 April 2025 and match the main lower rate of 18% from 6 April 2026. This is to allow business owners time to adjust to the changes.
The lifetime limit for Investors’ Relief will be reduced to £1 million for all qualifying disposals made on or after 30 October 2024, matching the lifetime limit for Business Asset Disposal Relief. These new rates will match the residential property rates, which are not changing.
Going forward, this means that you are going to be more heavily taxed if you sell an asset or come into some money. Whether this means shares, business, property, inheritance, or something else. It also means that getting independent advice on your tax affairs is even more important now than ever. We can help you with this.
Inheritance tax:
The current inheritance tax thresholds are due to be frozen until April 2028, and the government is extending these threshold freezes for a further two years to April 2030.
The government is also removing the opportunity for individuals to use pensions as a vehicle for inheritance tax planning by bringing unspent pots into the scope of inheritance tax from April 2027.
The government will reform agricultural property relief and business property relief from April 2026. In addition to existing nil-rate bands and exemptions, the 100% rate of relief will continue for the first £1million of combined agricultural and business assets to help protect family farms and businesses and will be 50% thereafter. The government will also reduce the rate of business property relief to 50% in all circumstances for shares designated as “not listed” on the markets of a recognised stock exchange, such as AIM.
Business rates:
There is further help for the retail, hospitality, and leisure sectors. Businesses in these sector will enjoy the small business multiplier, which is the amount used to work out your business rates bill, being frozen at 49.9p. Then when the current 75% reduction in rates ends at the end of this tax year, a 40% reduction in business rates up to a £110k cash cap.
Driving and fuel costs:
The 5p temporary cut to fuel duty is being extended into the 25/26 tax year.
Company car tax rates have now been set for until 29/30. It’s still going to be much more tax efficient to have an electric car, but not as much as before.
Fully electric cars BIK % rises to 7% in 28/29. However, the hybrid car BIK in 28/29 rises to 18% and in line with the new company car BIK tax rates for petrol and diesel cars.
Zero emission cars will pay the lowest first year rate at £10 until 2029-30
Immediate changes to stamp duty:
Stamp duty is going up from 3% to 5% for those buying second homes, buy-to-let residential properties and companies purchasing residential properties. However, if the property is worth over £500,000 and being bought by a company then stamp duty will rise to 17% from 15%.
Non-domicile tax regime is being scrapped:
The government is removing the non-dom tax regime from the tax system and replacing it with a new residence-based regime from 6 April 2025.
Individuals who opt-in to the new regime will not pay UK tax on foreign income and gains (FIG) for the first four years of tax residence. From 6 April 2025 the government will introduce a new residence-based system for Inheritance Tax (IHT), ending the use of offshore trusts to shelter assets from IHT, and scrapping the planned 50% reduction in foreign income subject to tax in the first year of the new regime.
Overseas Workday Relief will be retained and reformed, with the relief extended to a four-year period and the need to keep the income offshore removed.
The government is extending the Temporary Repatriation Facility to three years, expanding the scope to offshore structures, and simplifying the mixed fund rules to encourage individuals to spend and invest their FIG in the UK.
For Capital Gains Tax purposes, current and past remittance basis users will be able to rebase personally held foreign assets to 5 April 2017 on a disposal where certain conditions are met.
These changes mean that it pays to get advice on your tax affairs if your income and capital gains come from both inside and outside of the UK. If this is you, please get in touch with us for a conversation with our Tax Manager.
Closing the tax gap:
The government is recruiting an additional 5,000 compliance staff and providing funding for 1,800 debt management staff. This will ensure more of the tax that is owed is paid and that more taxpayers pay outstanding tax due.The government is also investing in modernising IT and data systems to improve HMRC’s productivity and improve taxpayers’ experience of dealing with the tax system, delivering the modern and digital service businesses and individuals expect.
The government is also committed to taking stronger action on tax fraud, including by expanding HMRC’s criminal investigation work and legislating to prevent abuse in non-compliant umbrella companies.
As always, if you have any questions about how this will affect yourself and your business, get in touch with us and we can arrange a meeting to help you plan. Email Katie on katie@1accounts.co.uk or call us on 01440 844986.
