2024 Budget - Reflections for Employers
As we all digest the budget delivered by Rachel Reeves and the new Labour government last week, at Ink we are primarily concerned with the impact of these changes on our clients, UK employers. This article is intended to outline the key elements of the budget with a specific focus on the details that will impact those running businesses and employing people.
The new Labour government has firmly stated its intention to alter the economic landscape of the UK by increasing taxes, spending, investment and borrowing.
The increased spending (mostly on the NHS and schools) and investing (mostly infrastructure and energy transition) is paid for in two ways:
Increased taxation on businesses (Employer’s NIC), asset owners (CGT) and those wishing to pass wealth to their children (IHT).
Increased government borrowing achieved by changing the fiscal rules to allow the Chancellor more headroom to borrow to invest.
The Labour manifesto pledge was always to leave the taxes that affect “working people” alone – Income Tax, (Employees’) National Insurance, and VAT (except for private school fees). There was also early signposting that Corporation Tax would remain untouched.
Unfortunately, we don’t operate in a vacuum, and it is inconceivable to believe that increased taxation directly applied to businesses and asset owners, will not ultimately flow through indirectly to working people.
Our main concern is that the budget disincentivises entrepreneurship, which is likely to have the opposite effect on economic growth to the one intended.
Employers
Moving more specifically to our key areas of operation, we offer some initial thoughts and guidance to clients on the key changes that effect employment and employers.
Increase of Employer’s National Insurance
Employer’s National Insurance increased from 13.8% to 15%.
The level of earnings at which NICs are payable decreased from £9,100 to £5,000
The Employment Allowance increases from £5,000 to £10,500. Additionally the £100,000 threshold is being removed.
Effective date: April 2025
Impact analysis: this is a direct cost to employers and will reduce profits or extend losses unless mitigated.
Mitigation: beyond the obvious options in decreasing costs or increasing revenues to offset these changes, employers could look at options that directly reduce the Employer’s NIC bill. We’d suggest that Salary Sacrifice on Workplace Pensions (regular contributions and bonuses), employee holiday purchase, workplace nursery, cycle to work and electric cars are all good options as they reduce the employer NI bill.
Increase to National Minimum and National Living Wage
The minimum rate for over 21s, will rise by 6.7%, from £11.44 to £12.21 an hour. This equates to an annual pay rise for a full-time worker (37.5 hours a week) of over £1,500
For those aged 18 to 20, minimum wage jumps from £8.60 to £10 an hour, a 16.3% increase
Apprentice rates rise from £6.40 to £7.55 an hour, an annual pay rise of over £2,200 for 37.5 hours per week.
Although not an item in the budget, the Real Living Wage has recently been set at £12.60 per hour (£13.85 for London). Given the percentage increase in the National Living Wage we’d expect further increases to the RLW announced next year.
Effective date: April 2025
Impact analysis: this is a direct cost to employers and will reduce profits or extend losses unless mitigated.
Mitigation: we don’t see any obvious mitigation beyond reducing costs (which might include headcount) or increasing revenues to offset.
Pensions brought into the scope of Inheritance Tax (IHT)
Any benefits left in a Defined Contribution (DC) pension on death become subject to IHT at 40%.
Income taken from inherited pensions post age 75 are still taxed at the recipient’s marginal rate. This creates a potential overall tax rate on inherited pensions of closer to 67%.
One clear unanswered question for the employee benefits community is the tax treatment of benefits from Registered Group Life Assurance schemes – these are pension schemes for the purposes of taxation and there is currently a risk that beneficiaries could face a 40% reduction in the value of the benefit. We are seeking clarity on this point through the consultation process.
Effective date: April 2027
Impact analysis: this has no negative cost effects for employers, but for many employees this will be very troubling news, particularly for those who have saved diligently, have large pension pots and would like to pass some of the value to their children if unspent.
Mitigation: we think employers will need to communicate this to employees, with the help of advisers and providers. This is an awareness issue for HR teams but should not undermine the value of a good employer pension scheme as part of the benefits package. Ink offers a range of options in this area from communication packages to webinars and 1:1 meetings.
Business Property Relief and Agricultural Property IHT restrictions
Whilst not strictly an employment issue, a number of Ink clients have already contacted us to ask if there are any mitigations. Put simply, this change removes an automatic assumption that a family business can be passed down the generations without any IHT being paid on its value.
In extreme cases this could result in the breakup of family-owned businesses and the loss of jobs as costs must be saved to pay IHT bills.
IHT relief for unquoted companies, trading partnerships and agricultural businesses will now have IHT relief of 100% on the first £1million of value (currently 100% of the value).
IHT relief will be applied at 50% for values above £1million resulting in an effective tax rate of 20% on inherited assets.
Effective date: April 2026
Impact analysis: there is no immediate impact for employers. Much of the post-budget press has focused on farming families, which is clearly a major issue, but we feel that there is a bigger issue lurking for the many fantastic mid-sized privately owned businesses that make up the bulk of Ink’s client base.
Mitigation: careful, prudent and long-range tax and succession planning will be required for privately owned businesses. One area that Ink could help with is looking at the use of life assurance policies designed to payout on the death of a shareholder and used to pay IHT bills by the surviving family.
Employment rights – Labour’s ‘New Deal’ for workers.
Whilst not an item in the Autumn budget, the sweeping new labour reforms introduced by the government are a further consideration for Ink clients. When taken with the increases to Employer’s National Insurance this can be seen as a major change of political sentiment towards the UK employer.
We would urge you to read again the excellent summary provided by our HR team on these new changes
If you would like to discuss any of the changes made in the budget, or the new employment rights please contact your Account Manager or Account Director at Ink. If you are not currently an Ink client but would like to discuss your circumstances, please contact us at hello@theinkgroup.co.uk or call us on 01858 810200.