Yesterday’s Autumn Budget is not only significant for its economic implications but also marks a historic moment with Rachel Reeves as the UK’s first female Chancellor of the Exchequer. This milestone reflects a long-awaited shift in a role traditionally dominated by male figures, bringing new perspectives to fiscal policy in one of the most challenging economic periods.
The position of Chancellor, dating back to the 12th century, has evolved from managing the monarch’s finances to overseeing the entire economic and financial strategy of the UK. Traditionally, the Chancellor’s annual budget announcements shape economic policy and significantly influence government spending, taxation, and social welfare. With Reeves at the helm, her budget reflects a blend of new priorities and longstanding fiscal challenges, including tackling inflation, promoting growth, and addressing the evolving needs of UK businesses and households.
The position of Chancellor of the Exchequer has historically been held exclusively by men until 2024, with Rachel Reeves becoming the first female Chancellor. Established as a formal role over 800 years ago, the Chancellor is second only to the Prime Minister in fiscal and economic authority. The Chancellor’s duties have evolved significantly, originally focusing on managing royal finances but now encompassing all national fiscal policy, taxation, and spending. From medieval times through modern governance, over 75 men have held this influential position, shaping the UK’s economic landscape and public policy.
The first Chancellor of the Exchequer is generally recognised as Henry de Blois, who held a similar financial role in the 12th century under King Stephen. However, the official role of Chancellor of the Exchequer, as it’s known today, was formalised later. The role took clearer shape in 1221, when Richard of Ely was appointed as the first person explicitly titled as the “Chancellor of the Exchequer” by King Henry III. The position originated as a key figure in managing royal finances and overseeing the treasury, a function that has evolved to encompass national economic policy and public finances.
Rachel Reeves appointment is a milestone, symbolising progress toward gender diversity at the highest levels of government. Her leadership, with a focus on growth, investment, and economic stability, introduces a fresh perspective to a role that has long been dominated by men.
What Businesses and Individuals Need to Know About Increased Employer National Insurance and Capital Gains Tax Changes
In the Labour government’s recent Autumn Budget announcement, Chancellor Rachel Reeves revealed significant adjustments to employer National Insurance contributions, aiming to raise billions to bolster the economy, support public services, and raise living standards. While businesses are set to absorb the majority of the tax increases, the Chancellor took steps to shield workers’ pay packets from direct impact.
Higher National Insurance Contributions for Employers
One of the most notable changes from the Budget is the rise in employer National Insurance contributions. This increase is expected to generate over £20 billion annually, a substantial boost to the government’s finances, largely accounting for their funding goals. For businesses, this change means higher operating costs, pushing many to re-evaluate budget allocations as they prepare for the year ahead. The Chancellor underscored that this decision was necessary to stimulate investment that supports a healthier economy and improves public services.
Prioritising Fairness by Focusing on Business and Asset Taxes
While personal taxes largely remained untouched, the Budget outlined targeted increases in taxes on businesses and assets. By concentrating tax hikes in these areas, the Chancellor aims to protect working individuals, avoiding changes that could impact their monthly earnings. This approach signals the government’s commitment to driving economic growth without placing undue pressure on individual incomes.
Capital Gains Tax Changes - Less Drastic than Expected
Despite speculation leading up to the announcement, increases in capital gains tax were relatively modest. The changes will likely affect individuals with savings outside tax-protected accounts like ISAs or pensions, but the rise was not as steep as many financial analysts anticipated.
Irene Wolstenholme, Wealth Planning Specialist at RBS, commented on the outcome: “With there being so much speculation in the build-up to the Budget, we now have the details to start understanding the impact these changes will have on personal finances. The rise to employer National Insurance contribution is expected to raise over £20 billion a year, which should account for the majority of what the government wanted to raise. This has meant many of the other speculated changes did not come to fruition.”
A Balanced but Bold Approach to Economic Growth
Overall, the Autumn Budget reflects a balanced approach that targets businesses and assets to generate revenue while prioritising the interests of working individuals. For businesses and investors, adapting to these changes will be essential as they navigate the new fiscal landscape.
As more details unfold, companies and individuals alike will need to strategise to align with the new economic policies. In the meantime, the increased National Insurance contributions and capital gains adjustments signal a clear direction toward reinvestment in the UK’s economy, public services, and, ultimately, the living standards of its citizens.
Employer National Insurance Rise
From April 2025, employer National Insurance contributions (NIC) will see an increase of 1.2%, raising the rate to 15%. Additionally, the secondary threshold (the earnings level at which employers start paying NICs on employee wages) will be lowered from £9,100 to £5,000, impacting employer costs more broadly.
Support for Businesses
To ease financial pressure on smaller businesses, the Employment Allowance, which reduces a business’s National Insurance liability, will double from £5,000 to £10,500. Furthermore, the Budget preserved the annual investment allowance and full expensing measures, supporting continued investment.
Corporation Tax Capped at 25%
As part of Labour’s election commitments, the corporation tax rate will be capped at 25% for the remainder of this parliamentary term. In line with this, the government has introduced a “Corporate Tax Roadmap,” providing businesses with a clearer outlook on corporation tax for the foreseeable future.
Inheritance Tax for Business Owners
Starting in April 2026, a 20% inheritance tax will apply to the portion of unquoted trading businesses valued over £1 million when inherited. For businesses worth under £1 million, 100% relief will continue to be available under business property relief (BPR) and agricultural property relief (APR), helping protect smaller businesses in succession planning.
Capital Gains Tax Increase
Chancellor Rachel Reeves has raised capital gains tax (CGT) rates, with the lower rate moving up from 10% to 18% and the higher rate increasing from 20% to 24%, effective immediately. This change means any investments sold from today onward will be subject to these higher rates.
Inheritance Tax ‘Nil-Rate Band’ Frozen
The inheritance tax (IHT) ‘nil-rate band’ will remain at £325,000 until 2030, meaning this is the threshold that can be inherited or gifted without incurring tax. With inflation, more estates may exceed this fixed limit, leading to increased IHT obligations. Additionally, AIM-listed company shares, which previously received full relief from IHT, will now face an effective 20% rate.
Pensions to Be Subject to Inheritance Tax
Beginning in April 2027, inherited pensions will be included in the scope of inheritance tax, marking a significant shift in how pensions are taxed when passed down.
Increased CGT on Carried Interest
For those in private equity, the capital gains tax on carried interest (profits shared with private equity partners) will rise from 28% to 32% in 2025, with a further increase scheduled for 2026.
VAT on Private School Fees
Starting in January 2025, private school fees will be subject to VAT, with plans for additional legislation to remove their business rates relief by April 2025.
Higher Stamp Duty Surcharge for Second Homes
From October 31, 2024, second homes in England and Wales will face an increased Stamp Duty Land Tax (SDLT) surcharge of 5%, up from 3%. For properties priced above £1.5 million, the maximum SDLT rate will rise from 15% to 17%.
The Bank of England (BoE) has expressed caution regarding the Autumn Budget unveiled by Rachel Reeves, noting that increased government spending and borrowing could complicate its path for interest rate decisions. The BoE, which aims to keep inflation at its 2% target, may need to hold rates higher for longer to counteract potential inflationary pressures from the Budget’s fiscal policies. Economists speculate that the BoE’s response could include further rate hikes or delayed rate cuts, especially if the Budget’s growth-oriented spending sparks inflation or influences bond markets unfavourably. The Bank has been balancing a focus on economic growth with inflation control, and it will carefully monitor these new fiscal measures and their impact on inflationary dynamics in the coming months.
The Bank’s reaction highlights a cautious stance due to the challenges in maintaining financial stability amid heightened borrowing. With the Budget aiming to address growth, public services, and living standards, the BoE will consider these fiscal shifts closely to ensure they align with monetary policy goals without undermining inflation targets. This Budget underscores the Bank’s delicate task of balancing growth support with inflation management amidst evolving economic and fiscal landscapes.
In response, the BoE is likely to maintain its focus on long-term inflation goals and remain vigilant regarding the fiscal policy’s effects on price stability.
The 2024 Autumn Budget is likely to create a mixed outlook for the UK stock market over the next year. The planned corporate tax cap at 25% provides stability, potentially supporting business sentiment, especially in sectors reliant on long-term investment. However, increased employer National Insurance and changes in capital gains tax could strain profitability for some companies, particularly in labour-intensive sectors like retail and hospitality. Additionally, potential inflationary pressures from increased government spending may prompt higher interest rates or delayed cuts by the Bank of England, which could dampen investor sentiment and impact sectors sensitive to borrowing costs, such as real estate and consumer discretionary stocks.
Investors may see short-term volatility as markets adjust to the Budget’s fiscal measures, particularly if the Bank of England takes a cautious stance on rate adjustments. Over the medium term, stocks in defensive sectors like utilities, healthcare, and consumer staples might benefit as investors seek stability amid ongoing fiscal and monetary policy adjustments.
The 2024 Autumn Budget’s impact on the UK currency markets will likely be mixed and may lead to short-term volatility as investors digest its implications. Key factors that could influence the pound’s performance include increased government borrowing, adjustments in taxation, and the potential response of the Bank of England.
Increased Borrowing and Potential Inflationary Pressures
The Budget’s emphasis on increased spending and borrowing to fund growth and public services might spark inflationary concerns among currency traders. Higher government debt could put downward pressure on the pound if markets anticipate that more borrowing will strain the UK’s fiscal position, especially if the new debt is seen as difficult to service without raising interest rates significantly.
Bank of England’s Response
If inflationary pressures increase as a result of the Budget, the Bank of England may respond by holding interest rates higher for longer or potentially raising them further. Higher rates generally make a currency more attractive to investors, as they increase returns on assets denominated in that currency. If the Bank signals a prolonged period of high rates, it could support the pound in the medium term. Conversely, if higher rates strain economic growth, it could create uncertainty, limiting the pound’s potential for long-term gains.
Market Sentiment and Economic Growth Projections
While some budgetary measures, like the corporate tax cap and investment incentives, are intended to support growth, the higher costs for businesses and adjustments to capital gains tax may temper investor confidence in UK assets. If currency traders perceive that these changes might hinder corporate earnings or economic growth, they could adopt a more cautious stance on the pound.
The pound may experience volatility as currency markets assess the long-term fiscal health of the UK under these new measures. Much will depend on how effectively the Bank of England can balance inflation management with support for growth and how foreign investors react to the UK’s fiscal policies relative to other economies.
TAX V GDP
With the UK’s tax burden set to rise to 38% of GDP under the new budget, this would mark one of the highest levels in recent British history, reflecting a shift toward higher public revenue levels not seen since the 1940s post-war era. This increase positions the UK at the upper end of global tax burdens, though it still trails some European countries with even higher tax to GDP ratios.
By comparison, tax burdens across the European Union and OECD nations generally average around 34-41% of GDP. For example, countries like France and Denmark regularly maintain tax burdens above 40% of GDP, funding extensive welfare systems. Germany, too, stands above the UK with about 41%, while Scandinavian countries often exceed 42% due to robust social services funded by higher taxes. On the other end, countries like the United States have historically lower tax burdens, often below 30% of GDP, as a result of different social spending priorities and decentralised tax systems.
For the UK, this budget’s tax increase reflects a strategy to address fiscal needs and economic growth through domestic revenue, which, while high by its historical standards, still places the UK below the highest-taxed countries in Europe. However, this could spark discussions on competitiveness and public investment returns as the UK balances economic growth with public service funding needs in the coming years.
The UK’s budget plan to increase borrowing by an additional 1% of GDP introduces both potential impacts and risks. This approach is intended to support investment and public spending but comes with challenges, particularly given the current economic environment. Here’s how it might play out and how it compares internationally.
Impact on Interest Rates and Inflation
The additional borrowing could lead to higher interest rates. Economic modelling suggests that a 1% increase in GDP level borrowing could raise interest rates by 50-125 basis points, depending on the broader economic climate. Higher rates would increase debt servicing costs, potentially adding £10-14 billion annually to the UK’s debt interest expenses if rates stay elevated. Rising interest costs could lead to reduced spending power in other areas, affecting public services and investments as debt servicing claims a larger share of government finances. Additionally, borrowing at this level may add to inflationary pressures, which the Bank of England might counter by maintaining higher interest rates for longer.
International Comparison
In terms of borrowing levels, the UK is not alone. Advanced economies have seen similar or higher borrowing to GDP ratios, particularly after the COVID-19 pandemic, when borrowing across G7 nations averaged around 4.1% of GDP in 2022. Countries like Japan, Italy, and the United States have historically operated with higher debt levels relative to GDP. However, the UK’s borrowing levels remain substantial and expose it to risks, especially if economic growth underperforms expectations or if inflation persists.
Risks and Long-Term Sustainability
Persistent high borrowing could place the UK in a vulnerable fiscal position, especially if interest rates rise globally. High debt levels reduce fiscal flexibility, limiting the government’s ability to respond to future economic shocks or invest in growth initiatives. Additionally, borrowing for public investment only offsets higher debt levels if it delivers substantial returns that boost GDP, a challenging target in uncertain economic conditions.
As we wrap up this year’s budget breakdown, it’s clear the government has stirred up a recipe with ingredients for growth, cost-cutting, and some inevitable tax hikes. As Rachel Reeves stated, the goal is “a budget that invests in Britain’s potential.” Whether this budget serves as a feast or a mere snack for businesses and households will depend on the Bank of England’s reaction, economic growth, and whether inflation stays in check.
“We must not measure prosperity by the size of our gross national product or our exports, but by the quality of our life and the progress we have made towards the ideals of freedom, equality, and human dignity.” - Harold Wilson
Wilson’s words underscore the budget’s attempt to balance financial growth with investments in public well-being, aligning fiscal policies with broader social ideals.
“There are no easy answers, but there are simple answers. We must have the courage to do what we know is morally right.” - Margaret Thatcher
Though Thatcher was known for fiscal conservatism, this quote resonates with the tough but strategic choices in yesterday’s budget, which seeks to make prudent yet impactful investments.