That could have been a lot worse: thoughts on Rachel Reeves’ first budget as chancellor

Last Wednesday new Chancellor, Rachel Reeves, delivered her first budget and the first Labour Party budget for 14 years.  Speculation as to the taxation, borrowing and spending measures that would be in the budget had been much discussed in the prior election campaign and had been the subject of febrile speculation ever since Labour came to power in July.  Our Managing Partner Henry Humphreys gave his personal thoughts on LinkedIn in the hours after the budget was delivered, and those are now reproduced in the same form below.

“1. That could have been a lot worse.  Predictions in various quarters were that it would be.  Not everyone is patient enough to wait for the detail.  In M&A and PE circles, the fear was that capital gains tax would go up to the marginal rate of income tax (45%).  It hasn’t and the UK remains competitive compared to certain of the major EU jurisdictions in particular (30% flat rate in France; 26.375% in Germany; Nordics in the 30%s).  The large gap between the marginal rates of income tax and capital gains tax continues and to that extent entrepreneurs are rewarded for taking the risk required to build businesses.

2. The rate of tax on that £1 million lifetime allowance for entrepreneurs (currently 10%) is going up in 2025 (14% / an extra £40k on the full million) and again in 2026 (18%, so £80k extra on today’s rate).  So, the allowance is to be chipped away a bit, but it’s still up to a million quid at that lower rate.  You don’t get that as an employee paying income tax.

3. UK plc’s slow growth rate is alarming (and unsurprising) and Covid era prices are here to stay*.  Until growth improves, governments are going to keep needing to raise taxes to pay the bills.  Reeves and Starmer have – as announced in advance – changed the borrowing rules (and the way in which debt appears on the UK balance sheet) so as to invest.  But there was almost nothing on the key threshold question of how they are going to spark growth in the economy, with the spending measures focused on patching up our neglected NHS and schools.  What seems impossible to discuss at a political level is that there is the most unique treasure trove of data within the NHS that could be anonymized and monetised for the public good – nowhere else in the world does this exist, and yet as a nation we seem unable to take advantage or to even discuss the point (having years ago somewhat blindly handed over our – non-anonymised – personal data to the big tech companies anyway).

4. The increase in employers’ national insurance from 13.8% to 15% will hurt employers but is doing a lot of work amongst the tax raising measures in this budget aiming to fill that black hole in the UK’s P&L.  With AI at perhaps the tipping point of going mainstream in most businesses’ tech stack, perhaps this is the point at which the tide of near 100% employment starts to recede.

5. There are no changes to the SEIS, EIS and VCT regimes.  Holdings of qualifying shares are now proportionately more valuable since there is still no capital gains tax at all on disposals made after the three year holding period.  Sadly, founders of tech companies usually hold too many shares upon issuance to qualify (more than 30%) and yet the cruel irony is that many will be diluted down well below that percentage by the time they get to exit.” 

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice and is not to be relied upon.  Much of the above will no doubt fall out of date and conflict with future law and practice one day.  None of the above should be relied upon.  Always seek your own independent professional advice.

Humphreys Law

* The first sentence of point 3 was amended on 5.11.24 as the OBR forecasts are for real growth, which is adjusted for inflation.