Autumn Budget 2024 impacts owner managed businesses

The Autumn Budget 2024 is having a big impact on owner-managed businesses in terms of tax rises, not least the increase in employers' national insurance contributions.

See our full Autumn Budget summary download (pdf)

Business owners will not have been pleased with measures announced in Rachel Reeves's first Budget as they are bearing the brunt of the taxes she wants to raise.  Whilst there was a manifesto pledge not to raise taxes on working people, the indirect effect of the Budget will be on wage rises and recruitment.

Employers face a triple whammy of rising employment costs in terms of employers' NICs, a new National Minimum Wage and new employment regulations. 

Employers will therefore have to take action to mitigate the impact of these changes through a combination of increasing prices, imposing lower pay rises, awarding fewer promotions and freezing or cutting back on recruitment.

There will also be increased financial pressure on employers to treat workers as not employed but self-employed, and thus be kept off the payroll - creating an increased risk for employers of a costly HMRC payroll audit.

Employers' National Insurance

From 6 April 2025, employers' NICs payable above the Employment Allowance level will increase from 13.8% to 15.0%.  Whilst on paper that is a 1.2% rise, it's an effective rise of almost 9% on the current rate. 

To add to the costs for employers in a way that was not expected, also from 6 April 2025 the employee threshold at which the employers' NICs become payable is lowered by £4,100 from £9,100 to just £5,000. That is a 45% reduction in the threshold.

This threshold change will disproportionately impact employers who employ lower-paid workers, such as in the healthcare and hospitality and leisure sectors.

The employers' NIC rise does make salary sacrifice schemes more attractive, such as for pension contributions. But employers need to bear in mind that with the National Living Wage (NLW) increase from April 2025 (see below) any existing salary sacrifice schemes could be at risk if such schemes reduce salaries below the NLW rates.

Employment Allowance

The Employment Allowance provides relief for employers from employers' National Insurance, subject to certain conditions. It is not available where the sole employee is a director.

The Budget measures include a doubling of this allowance from £5,000 to £10,500 from April 2025.

This softens the blow of the rise in employers' NICs for smaller employers.

For small employers, this doubling of the allowance should mean that they can employ a handful of people on the National Living Wage without having to pay employers' NICs. 

And at the other end of the scale, the Budget has removed the employers' NICs cap of £100,000 to access the Employment Allowance, which means larger employers can benefit too, albeit in a comparatively smaller way.

National Living Wage

As we discuss in our more detailed article, the National Living Wage (NLW) will rise by 6.7% from 1 April 2025 from £11.44 to £12.21 per hour.

In addition, the hourly rate for those aged 18–20 will rise from £8.60 to £10.00.

With the employers' NICs increase on top of the change to the NLW, this will increase the cost of an employee on NLW (working 35 hours per week) to just under £2,270 per employee from April 2025.

Company directors

Sole directors of companies who do not have any other employees cannot access the Employment Allowance, and thus will feel the full impact of their payroll cost.

There were, however, no changes in the rate of tax on dividends. There had been pre-Budget speculation of dividends becoming liable to NICs, although that hasn't happened (yet).

However, the government says it will increase the late payment interest rate charged by HMRC on unpaid tax liabilities by 1.5% from 6 April 2025. In-year increases of the official rate of interest will be reviewed thereafter on a quarterly basis.

This will be particularly important for those directors with large overdrawn directors' loan accounts.

Business rates

Eligible retail, hospitality and leisure (RHL) properties in England will receive 40% relief on their business rates liability for 2025/26 up to a cash cap for a business of £110,000.

The small business multiplier in England will be frozen at 49.9p. The standard multiplier will be uprated by the September 2024 CPI rate to 55.5p. RHL properties will enjoy permanently lower multipliers from 2026/27 paid for by a higher multiplier for properties with rateable values above £500,000. 

This is welcome news for those who will continue to benefit from the relief, as business rates have a disproportionately higher impact on smaller firms.

Capital Gains Tax

With effect from 30 October 2024, the lower rate of CGT increased from 10% to 18% and higher rate from 20% to 24%. 

In addition, the £1m Business Asset Disposal Relief (BADR) lifetime allowance is retained, but with an increasing rate from 10% to 14% from April 2025, and then to 18% from April 2026.

Whilst a rise in the rate of CGT under the relief is disappointing, it was widely expected before the Budget that CGT rates would be aligned with those for income tax and the BADR would be scrapped. Neither of these happened.

There are clearly some planning points here around the BADR CGT rate rising and possible exiting from a business before then, subject to commercial and family considerations. But beware of attempting to crystallise a gain that might be caught by anti-forestalling rules in the legislation. 

Any distribution by a liquidator in a Members' Voluntary Liquidation would need to be made before 6 April 2025 to obtain the 10% BADR CGT rate, so the disposal must fall into this current tax year.

See our subsequent article: Autumn Budget 2024 and its impact on solvent liquidations.

Corporation Tax

As expected, there was no change in the rate of corporation tax, and the Budget confirmed that the Annual Investment Allowance will remain at £1m. This provides certainty for companies budgeting for tax and investment spending.

A welcome Budget publication was that of a corporate tax roadmap.

The roadmap confirms that the corporation tax rate will remain at 25%, and the existing small profits rate and marginal relief thresholds will be retained. It also confirmed that full expensing relief will be kept, as well as R&D relief and the patent box.

Inheritance Tax

From April 2026, Business Property Relief and Agricultural Relief will be capped at a combined £1m. Above that, the rate of relief will be 50%. So there will be a 20% tax on business/farm assets worth over £1m where previously there was no tax.

This raises issues for business owners and farmers as to whether they will have a viable business to pass on to their successors after settling IHT liabilities.

IHT relief at only 50% over the £1m cap will potentially create a significant cash flow challenge for family businesses, having to distribute profits out from the business in the form of taxable dividends to be able to fund the IHT payable.

Business owners will now need to review their succession plans to provide the necessary resilience to ensure their business can cope with an increased IHT liability from April 2026.

Practical solutions could include much earlier planning to move assets out of an individual’s estate and spread across the family, as well as the use of trusts and life insurance. The £1m allowance is available for each individual, but is not transferrable on death, so diversifying ownership becomes an important consideration, subject to the impact of CGT (and holdover relief).

For example, married couples could equalise assets and rewrite their wills to ensure any BPR/APR relief is secured on first death. Passing assets to children also needs to be considered, subject to control issues. Spreading assets over a number of individuals will also have an impact on the valuation of assets

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Overall, the burden of these increases are not as heavy as expected ahead of the Budget, but are nonetheless unwelcome. As some of the measures do not come into force until April 2025, business owners have time to prepare.

If you would like to discuss how these changes affect you and/or your business, please contact your usual Bishop Fleming advisor.

[Gary Mackley-Smith]