The UK budget announcement brought few surprises but raised serious concerns for businesses and consumers alike, amplifying the challenges faced amid global turbulence. While the absence of significant changes to income tax and national insurance may have reassured some, the focus on pensions, employers, and the agricultural sector has left several industries vulnerable.
One of the most notable changes is the rise in employers’ National Insurance contributions, which have increased from 13.8% to 15%. Compounding this, the threshold at which this rate kicks in has been reduced from £9,100 to £5,000, severely impacting the already-strained hospitality industry. For pubs, restaurants, and hotels, this change could significantly cut profits, especially as these businesses also face a minimum wage hike. Although a 1p reduction on a pint was touted as a supportive measure, it’s unlikely to offset these higher costs.
As financial pressures mount, more businesses are likely to turn to automation, as seen with self-service options at McDonald’s and many supermarkets. Unfortunately, this could lead to job losses, pushing the hospitality sector even closer to a tipping point.
The freeze on personal tax bands until 2028, combined with inflation, will push many middle-income earners into higher tax brackets—a phenomenon known as "fiscal drag." By not adjusting these thresholds, the government effectively increases the tax burden on the middle class without explicit rate hikes, creating more high-rate taxpayers over time.
The capital gains tax rate has increased from 10% to 18% for basic-rate taxpayers and from 20% to 24% for higher-rate taxpayers. While these hikes were less severe than anticipated, they may lead investors to delay selling assets, waiting for more favourable rates. This delay could result in lower-than-expected revenue for the government as individuals seek financial advice on tax mitigation strategies.
In an unexpected move, the budget also introduced inheritance tax obligations on farmland, affecting approximately 75 acres of productive land. This policy threatens domestic food security by potentially reducing local production and raising food prices further. Many expect the farming community to push back vigorously against this change, as it risks driving essential land into the open market.
Changes to pensions may also come as a shock to many. Pensions are now included in estates for inheritance tax purposes, affecting individuals with substantial retirement funds. This shift may increase the use of annuities for a lifetime income. However, with annuity rates currently declining, the timing couldn’t be worse, especially amid high inflation. Those relying on pension drawdowns to pass wealth to family should consult financial advisers to navigate these changes effectively.
On a brighter note, the tax benefits for contributing to pensions remain unchanged. For those considering alternative investments, pensions continue to offer a tax-efficient, long-term savings option compared to property, which has come under further government scrutiny, particularly second homes.
In light of rising taxes and economic pressures, personal financial discipline is essential. Setting up savings accounts with specific purposes—like holidays, renovations, or car services—can help manage finances effectively. Naming accounts adds emotional significance, reducing the temptation to dip into these funds impulsively.
For businesses and individuals alike, tracking income and expenses closely is vital to maintaining financial health.
It’s easy to blame political parties for today’s economic challenges, yet both Labour and Conservative governments have contributed to an escalating national debt, now nearing £3 trillion from £30 billion in 1997. Balancing the books has become a catchphrase, but whether these tax hikes and spending cuts will stabilise markets or simply add to the strain remains to be seen.
The latest budget reflects the government’s bid to manage economic strain, but it places considerable pressure on businesses and taxpayers. The coming months will reveal the full impact of these policies on domestic and global markets.
*Alan Lazenby, Managing Director Lazenby's Financial Services *
