Budget hits employers as Reeves raises taxes by £40bn

The chancellor has announced £40bn in tax rises in a Budget that aimed to “restore stability” to public finances.

Rachel Reeves announced that capital gains tax (CGT), employer contributions to national insurance and stamp duty would all rise, but included a few measures to soften the impact on housing and small-to-medium-sized enterprises.

Alluding once again to a “black hole in public finances”, Reeves said that she would publish a “line by line breakdown” of the £22bn shortfall she claims was inherited from the Conservative government.

“The party opposite hid the reality of their spending plans,” she said. 

“They had no plan to improve our public services and they had no plan to put our public finances on a stable footing”.

By contrast, Reeves said Labour was “restoring stability to our public finances and rebuilding our public services” and that, in order to do so, it needed to take “difficult decisions on tax”.

“Working people will not see higher taxes in their payslips as a result of the choices that I am making today,” she said, instead putting the burden on businesses.

“We are asking businesses to contribute more,” she said. “But in the circumstances that I have inherited it is the right choice to make. 

“Successful businesses depend on successful schools, healthy businesses depend on a healthy NHS and a strong economy depends on strong public finances”

Employers’ national insurance contributions will rise by 1.2 percentage points to 15% from April 2025, while the secondary threshold will be reduced from £9,100 a year to £5,000. 

This, Reeves claimed, will raise £25bn a year by the end of the forecast period.

The chancellor, who is the first woman ever to deliver a Budget speech, said it was “particularly important to protect our smallest companies”, announcing that the employment allowance would be increased from £5,000 to £10,500.

She said this would allow a small business to employ the equivalent of four full-time workers on the national living wage without paying any national insurance on their wages.

The National Living Wage itself is to be raised by 6.7% to £12.21 an hour, and the government will phase in a single rate for all adults, with the existing lower rate for younger people gradually increased. 

Meanwhile, the government will reduce the lifetime limit for business asset disposal relief to  £1m to encourage entrepreneurs to invest in their businesses.

The lower rate of CGT will increase from 10% to 18% and the higher rate from 20% to 24%. However the rate of CGT applied to residential property will be maintained at 18% and 24% too.

These measures will raise £2.5bn by the end of the forecast, Reeves said.

The stamp-duty land tax surcharge for second-homes will be raised by 2 percentage points, to 5%. Reeves says this will support over 130,000 additional transactions from people buying their first home, or moving home over the next five years.

Other revenue raising measures include the abolition of non-dom tax status, VAT for private schools, structure rules on inheritance and new duties on vaping and a rise in tobacco duty.

Corporation tax will be capped at 25% for the duration of the parliament and the government will maintain measures including full expensing, the £1m annual investment allowance and current rates of R&D relief.

Eddie Tuttle, director of policy, research and public affairs at CIOB, said higher taxes were “likely to increase financial strains on the SMEs that are so vital to the industry and its supply chain”. 

“Nearly a fifth of UK SMEs operate in construction and the cyclical, boom-bust nature of the sector, as well as recent economic hardships, have created a difficult environment for these businesses,” he said.

“So far in 2024, they have accounted for 20% of business insolvencies and alarmingly, around 11,000 firms have collapsed since 2022.  

“While we understand the need to build up public finances and reorder the fiscal rules to channel greater investment, the impact of increased costs on construction SMEs could be devastating. SMEs play a vital role in the delivery of new homes and infrastructure as well as the repair and maintenance of existing buildings. 

“Increased tax rises without consistent monitoring of the impact they have on the health of crucial sectors, such as construction, run the risk of damaging the pivotal role SMEs play. We urge ongoing government consultation with bodies like CIOB to monitor these impacts on the sector.”