How Rachel Reeves’ Budget Could Impact Your Business and Key Actions to Take
Rachel Reeves’ recent budget introduces significant tax changes impacting small and medium businesses. Here’s what you need to know and the steps to take.
💰Employers’ national insurance rising from 13.8% to 15%, with a lower salary threshold offset by an increased employee allowance.
💰 Business asset disposal relief will phase out from 10% to 18% by April 2026.
💰 Capital gains tax will rise from 10% to 18% for basic taxpayers and 20% to 24% for higher taxpayers.
💰 VAT will be introduced on private school fees
💰 HMRC will receive extra funding for tax avoidance investigations.
A message from our founder Joan Adams…
“Despite these challenges, opportunities do exist for entrepreneurs to capitalise on timely asset sales and strategic investments”
🧰 Employers’ National Insurance and Employment Allowance
Employer NIC rates have increased, but there’s also a rise in the employment allowance, partially offsetting the impact. Overall, not a big impact on SME employers, as increased Employers’ NIC is partly offset by the increased Employment Allowance and corporation tax relief. This mainly impacts large employers. In summary:
- Secondary threshold falls from £9,100 to £5,000 from 06.04.2025
- Rates increases from 13.8% to 15% (incl. Class 1A and Class 1B)
- Employment Allowance up from £5,000 to £10,500
Tax Tip: Explore the Employment Allowance, especially smaller businesses, as many could benefit from these changes despite rising NIC rates. From 06.04.2025, sole director companies to consider employing an additional person (even for 1 tax month) post 06.04.2025 to be eligible for the Employment Allowance and offset any increase in Employers’ NIC. You could access £5,000 of allowance at a cost of £416.66!
🧰 Capital Gains Tax (CGT) and Business Asset Disposal Relief
The CGT rate has risen from 10% to 18% for basic rate taxpayers on gains from 30 October 2024. With higher rate taxpayers rising from 20% to 24%.
Business asset disposal relief (BADR) was widely expected to be abolished. This provided for a 10% CGT rate on disposals of certain business assets, subject to a lifetime limit of £1m. However, that has not happened, and the lifetime limit has remained at £1m. The 10% rate however will increase to 14% in April 2025 and to 18% from April 2026 – essentially phasing out this relief.
Tax Tip: Anyone with planned asset disposals should review timing with their advisor to potentially minimise exposure to the tax rate Increase in April 2025. This could be the difference between paying 10% or 14% on your capital gain.
🧰 Dividend Tax Rate increase remains on the Horizon
While not yet confirmed, potential increases to dividend tax rates was not ruled out.
Tax Tip: Invest in effective tax planning prior to 05.04.2025. Review remuneration packages where dividends are the primary income source for a possible rise in rates, which may be outlined in future statements.
🧰 Private School VAT
VAT will now apply to private school fees, impacting both families and schools. For clients with children in private education, the additional VAT burden may prompt a review of tax-efficient education planning strategies.
🧰 Double-Cab Pickup Vehicles
From 01.04.2024 a double cab pick-up with a payload of one tonne or more is to be treated as a car. This reclassification of double-cab pickups from commercial vehicles to cars significantly changes their tax treatment.
Where Double-Cab Pickup Vehicles have been leased, purchased or ordered before 06.04.2025, they will be able to rely on previous Benefit in Kind tax treatment until the earlier of disposal, lease expiry or 05.04.2029.
Tax Tip: Where you are planning to buy or lease these vehicles, I suggest completing purchases before April 2025 to retain favourable tax treatment, as vehicles bought after this date will be taxed similarly to passenger cars.
🧰 Non-Dom Regime and “Foreign Income and Gains” (FIG) Rules
Changes to the non-dom tax regime now limit tax-free foreign income and gains to the first four years of UK residence.
Tax Tip: For internationally mobile clients, assess residency timelines, as foreign income may face UK tax after four years. Providing early guidance can mitigate tax risks and prevent unexpected liabilities.
🧰 High-Income Child Benefit Charge Adjustments
From April 2025, clients can report the high-income child benefit charge through PAYE, eliminating the need for self-assessment. This change simplifies reporting for affected families and eases the administrative burden of tax filing.
🧰 Pension Death Benefits
The Chancellor confirmed the movement of pensions into an inherent taxable position. From April 2027, pensions will form part of your IHT calculation.
Qualifying pension funds are currently not subject to IHT and can be passed on death outside of the taxable estate. From April 2027, the fund passes to a surviving spouse or civil partner then they will still inherit the fund free of IHT. However, where the fund passes other than to a spouse or civil partner it will be subject to IHT, unless within the usual nil rate band. This will particularly impact unmarried couples where the survivor will receive the pension fund on the death of their partner.
Tax Tip: Lifetime pension planning will be important, and particular care should be taken to review pension wishes on death. Have regular reviews with an accountant or advisor, particularly with items like pension IHT inclusion, which may require updates to long-term plans.
🧰 Private School VAT
VAT will now apply to private school fees, impacting both families and schools. For clients with children in private education, the additional VAT burden may prompt a review of tax-efficient education planning strategies.
Tax Tip: Review the timing of school-related expenses to plan and ease this impact on cash flow and tax payments.
🧰 Close Company Shareholders
With immediate effect under s455 of the CTA 2010, director loan schemes in close companies now have stricter rules to prevent avoidance. Meaning loans cannot continue to be passed around associated companies without being settled by the director.
Tax Tip: Review the balance of any director loan accounts within a close company group structure and plan how to satisfy the loan and avoid incurring a S455 tax charge.
🧰 HMRC gets extra funding for Tax Avoidance
HMRC is getting more funding for tax avoidance investigations, leading to more inspections and penalties. We note the purpose is for “Tax Avoidance” which is legal.
What that means to you in the small business world, is there’s going to be more investigations and inspections. There’s also a corresponding increase on the charges and the interest rates that you pay if your tax is late, so if you’re in trouble, it’s going to put you in a weaker position.
Conclusion
Rachel Reeves’ budget brings major changes across tax areas. To maximise your tax efficiency, stay proactive, and work closely with your accountant. If you need assistance navigating these changes, contact us for a consultation to tailor your strategy and make the most of emerging opportunities.
Remember, a tax bill is actually a good thing and represents the success of your business. The key action for business owners is to get educated on tax planning and business optimisation strategies so you can take advantage of opportunities that will arise from the changes in the budget.
If you have any questions, or would like some personalised guidance, get in touch. As with everything in tax, if we plan ahead, we can optimise your position.