There was concern in the business community about what would emerge on Oct. 30 from the first UK Budget from a Labour government in 14 years, particularly as the political ground had been laid for “painful” choices. That concern proved warranted in some sectors—at least in the short term—but the picture is perhaps more mixed for the long term.

The Chancellor of the Exchequer Rachel Reeves chose to address the UK government’s financial deficit issues head on, announcing significant tax increases to “fix the foundations of our economy.” It will still take many years for the government to balance its books, but if that brings stability to the UK economy, businesses should see benefits in the long term—although for some it may be a struggle to survive long enough to see them.

The increase in employer’s national insurance contributions (social security contributions) will increase the costs of employment for all businesses, but the sector impact will be more pronounced. The previous government provided heavy support for businesses in the retail, hospitality, and leisure sectors during the Covid-19 pandemic. That is gradually being withdrawn, and these sectors will face the most risk from the increased employer’s NIC costs.

In addition, the increase in the national minimum wage will also impact businesses from next April. The care sector will be hit particularly hard by these measures.

The chancellor didn’t make employer pension contributions subject to NIC, so the use of salary sacrifice for pension contributions arrangements can be expected to increase. However, these are marginal gains and it wouldn’t be surprising to see another shake out of businesses, particularly in hospitality, retail, and healthcare. The immediate post-Christmas period will be a key crunch point for hospitality and retail as they enter their period of lowest cash generation.

There has been much post-budget comment about the chancellor’s stated aims for boosting economic growth, citing anemic growth forecasts from the Office for Budget Responsibility based on the budget measures. The chancellor appears to be banking on growth in the industrial, advanced manufacturing, and zero-carbon sectors through greater long-term investment and infrastructure changes to facilitate these sectors, which have the potential for future high growth.

Corporate tax roadmap. The publication of the corporate tax roadmap for this parliament is a sensible measure. Businesses can now be reassured that their UK tax rate will remain 25%, capital allowances full expensing will be available, and rates of relief for research and development and under the patent box won’t change.

The roadmap also flags that the UK’s rules for intangible fixed assets won’t change and that an audio-visual expenditure credit for film and high-end TV producers and a video game expenditure credit will continue.

While there will potentially be changes to the transfer pricing rules, it is helpful to know these are coming, and that the UK will continue to implement the OECD’s Pillar One and Two rules with simplifications where possible.

“Predictability” on business taxes in design and implementation is critical as the government intends to foster long-term investment by international businesses in the UK.

Capital gains tax policy. Britain also needs to remain a great place for mid-sized and smaller businesses to grow and develop if economic growth is to become a reality. Capital gains tax policy is a key component in being seen to encourage and reward value creation.

Although a widely expected increase in capital gains tax took effect from Budget Day, it was relatively modest—the main rate increased to 24% from 20%. However, the proposed downgrading of business asset disposal relief over the next few years will be expensive for small business owners selling up. Many more owners might consider the merits of selling to their existing team through an employee ownership trust.

Once business owners adapt to the new tax rates, normal business will likely resume, with buying and selling decisions being based on economic fundamentals.

The changes to the taxation of private equity carried interest are initially modest with the CGT rate also rising by 4% to 32%. Even when it is taxed as income from April 2026, the effective rate will be 34.075%. These changes may not trigger the “flight” of private equity managers from the UK that some had anticipated.

Inheritance tax and agricultural relief. The changes to inheritance tax business relief and agricultural relief have alarmed business owners. From April 2026, only the first £1 million ($1.3 million) of assets will be 100% exempt from IHT, with half the excess being taxable at 40%.

The longer-term impact may be to force businesses to be sold to prevent them from being broken up to fund an IHT liability. This will have a disproportionate effect on businesses for which there isn’t an obvious exit—essentially those that are more valuable than the new limits but are too small or don’t meet the financial criteria for private equity or trade buyers.

The impact of changes to agricultural relief on farmers has already provoked significant comment in the wider agricultural community. It is difficult to discern the government’s policy stance on food and farming from this measure. The change could have a significant impact on food security, the environment, and the future ownership structure and financing of the industry. These factors are only beginning to be considered.

What isn’t debatable is that business owners and farmers will now have to put more thought into their succession or exit plans and at an earlier stage if they want to achieve a tax-efficient transfer of their business to the next generation.

Finally, most of the measures announced in the budget could have an inflationary impact on the economy—only time will tell how big the impact will be and how long it will last.

“Short-term pain for long-term gain” was the overall theme the chancellor pitched for the budget. Received wisdom on the long-term benefits of growing business investment offers hope that she will be proven right—provided the “pain” she is inflicting directly and indirectly really is short term.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Paul Falvey is tax partner with BDO, focused on international businesses and corporate transactions including acquisitions and disposals, restructuring, and international tax planning.

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