While the rise in employers’ NIC has grabbed the headlines, the stability afforded by a commitment to maintaining corporation tax at 25% is seen as a more positive move by the new Labour chancellor Rachel Reeves.
Paul Falvey, BDO tax partner, said: “The corporate tax roadmap… does provide some predictability, with confirmation that the headline rate of corporation tax will be capped at 25% for the duration of this parliament. There is also a commitment to maintain full expensing and the £1m annual investment allowance. Businesses should also benefit from infrastructure improvements, planning changes and public service investments.”
The ACT’s chief executive Annette Spencer agreed, saying: “Treasurers (the financial risk managers in any organisation) prefer to work in an environment where there is as much certainty as possible, especially around funding availability and access to talent, and today’s announcements – if they are supported by achievable goals – are a positive step to facilitating this.”
Spencer added that she welcomed recent commitments made to consult on a new industrial strategy. “This should encourage investment and help treasurers address funding new rounds of capital expenditure,” she said.
But Spencer warned of the “unintended consequences” of the increase in NIC. Starting in April 2025, the rate of employer NICs will increase from 13.8% to 15%, and the earnings threshold at which NICs apply will drop from £9,100 to £5,000. To mitigate some of the financial strain on smaller employers, the Employment Allowance (offsetting employer NICs) will increase to £10,500, applicable to a broader range of businesses without the current threshold restrictions. For treasurers, this change will necessitate more careful workforce and payroll cost planning, as labour costs will rise considerably from these changes.
“Such changes will likely cause disruption among the business community – and be particularly challenging for smaller companies who, given their pivotal role in many supply chains, are key to the long-term success of the economy,” Spencer said. “These smaller businesses are already managing tighter working capital alongside higher funding costs, and we hope that the unintended consequences of today’s announcement are not the final straw.”
Treasurers will also be keenly watching financial market reaction, as this could have an impact on the cost of future fundraising and investment strategies. Following the budget speech, gilt yields rose sharply as financial markets appeared concerned over the scale of the extra borrowing, that some of it will fund current spending rather than investment, and the narrow headroom it leaves, according to Oxford Economics.
“These valid concerns suggest spreads may remain elevated, but we don’t expect them to widen,” reported Andrew Goodwin, chief UK economist at Oxford Economics. “The government will still tighten fiscal policy and has replaced implausibly tight spending assumptions with tax hikes, which we think is a more credible plan. Shorter timeframes for the fiscal rules should bolster that credibility.”
Repricing at the shorter end of the curve means markets now expect fewer interest rate cuts next year, Goodwin added. “This is a response to the Office for Budget Responsibility’s view that the package will offer a sizeable boost to growth next year. But we think the OBR is too optimistic on the growth impact.”
Philip Smith is editor of The Treasurer
