As The Dust Settles On The UK's Autumn Budget...

The UK Autumn Budget 2024 stirred a mixed response from financial markets, reflecting both cautious optimism and heightened concern over fiscal sustainability.

As Chancellor Rachel Reeves unveiled her plans, including a considerable rise in government borrowing to fund public investment, the markets reacted swiftly. The FTSE 100 initially rose as plans were announced, which included more spending and increased borrowing, but it eventually dipped, partly due to weak results from firms like GSK.

Conversely, the mid-cap FTSE 250, which is more representative of domestic UK economic health, saw a modest gain following Reeves’ speech. Meanwhile, smaller companies on the AIM index rallied by over 4%, influenced by partial tax relief changes on AIM-listed shares, which had raised concerns of potential sell-off

Bond markets reacted with volatility; gilt yields, which measure the cost of government borrowing, fluctuated but ultimately settled at a five-month high of 4.36% after Reeves confirmed that borrowing would increase to support public investment. The heightened yield reflects investor concerns about the UK’s fiscal position amid anticipated gilt issuance of nearly £297 billion for 2024-25, the second-highest on record. Economists noted that while markets had anticipated many of the measures, higher debt levels could lead to further price adjustments as borrowing costs rise.

What does all this mean? 

For corporate treasurers, the most pertinent aspect of the UK Autumn Budget 2024 is the significant increase in borrowing and its impact on gilt yields and overall market stability. The budget projects nearly £297 billion in gilt issuance for the 2024-25 fiscal year, the second-highest in UK history. This substantial borrowing will likely keep yields elevated, which means higher financing costs for government debt—a scenario that could influence corporate bond yields and borrowing costs in general​.

Treasurers should also watch for potential implications of the yield fluctuations and widening spread between UK gilts and German bunds, which indicate a rising risk premium on UK debt. This volatility could affect corporate debt issuance, especially if rising government borrowing crowds out private sector demand. Furthermore, the mid-cap FTSE 250’s positive reaction suggests that domestic-focused businesses might see a short-term boost, though sustained fiscal pressure could increase the cost of capital in the long run.

What are banks saying? 

JP MORGAN

The Autumn Budget 2024 under the new Labour government has positioned inheritance tax (IHT) as a potential tool to address the UK’s fiscal deficit without resorting to increases in Income Tax, National Insurance, or VAT. With an estimated fiscal gap of £40 billion, the Labour government aims to generate revenue through IHT reforms, particularly given the significant generational wealth transfer currently underway, projected to reach $84 trillion globally by 2045​

JP Morgan notes that potential changes could target reliefs like Business Property Relief (BPR) and Agricultural Property Relief (APR), potentially capping each at £500,000 per person. This approach would impact high-value estates, many of which benefit disproportionately from these reliefs, resulting in lower effective tax rates. Additionally, there’s speculation on extending the time limit for Potentially Exempt Transfers and potentially including pension assets in taxable estates, which could significantly increase IHT revenues.

For high-net-worth individuals, JP Morgan suggests strategies such as early gifting, investments in IHT-efficient assets, and philanthropic giving, which can reduce IHT liabilities while also meeting personal or family objectives.

We are currently witnessing the single greatest wealth transition in history, with an estimated $84.4 trillion being transferred globally from the baby boomer generation to their heirs by 2045. For the 2024/25 tax year, it has been estimated that IHT will raise £7.5 billion representing a mere 0.7 percent of Government revenues

BREWER DOLPHIN

In its analysis of the Autumn Budget 2024, RBC Brewin Dolphin highlighted the Labour government’s measures to bridge a £22 billion fiscal gap, aiming to raise approximately £40 billion while relaxing borrowing limits to support growth-oriented investments. Key tax changes included the rise in Capital Gains Tax (CGT) rates and an extension of inheritance tax (IHT) to pension assets from 2027, a move that will likely affect estate planning. Additionally, the freezing of income tax bands and ISA allowances means fiscal drag will pull more individuals into higher tax brackets over time.

Guy Foster, RBC Brewin Dolphin’s Chief Strategist, noted the budget’s “generous” nature due to higher public spending compared to new taxes raised, resulting in a forecasted tax burden at record GDP levels by 2026. The budget is expected to place a heavier burden on businesses, particularly through increased National Insurance contributions, with much of this cost likely passed on to employees in the form of slower wage growth.

Employees making use of salary sacrifice arrangements, such as cycle to work, childcare vouchers, pension payments and ultra-low emission cars will continue to benefit themselves from income tax and NI savings, and their companies will benefit more than previously. As a result, these arrangements have become more attractive for companies who may wish to promote the benefits to their workforces.

Foster remarked that while the budget’s immediate market impact was modest, with a slight strengthening of the pound and AIM index growth, its long-term implications for the UK’s economic trajectory remain cautious but positive.

HSBC

HSBC’s analysis of the Autumn Budget 2024 highlights several key measures, notably impacting personal finances and business costs. Among these, increases in National Insurance (NI) and Capital Gains Tax (CGT) rates stand out, with employer NI contributions set to rise from 13.8% to 15% by April 2025 and CGT rates climbing to 18% for basic rate taxpayers and 24% for higher rate taxpayers. The budget’s effects on individuals extend to frozen inheritance tax (IHT) thresholds, now set until 2030, alongside the introduction of IHT on pensions from 2027, which will affect many estates previously shielded from this tax​.

For businesses, there are both reliefs and added burdens. The Employment Allowance will increase to £10,500, exempting many small businesses from NI contributions next year. Conversely, businesses in sectors like education and property face added costs with the introduction of VAT on private school fees from January 2025 and a higher stamp duty surcharge on second homes. Other impactful measures include a freeze on fuel duty and a modest increase in air passenger duty, affecting both consumers and transport costs in the longer term.

HSBC underscores how these fiscal changes reflect a careful balancing act by Chancellor Rachel Reeves, aiming to raise revenue without imposing direct tax increases on working individuals, though businesses and higher-income individuals bear a notable share of the fiscal load.

BARCLAYS

Barclays’ analysis of the UK Autumn Budget 2024 underscores a strong focus on wealth holders and businesses, driven by Labour’s aim to raise £40 billion. This budget marks a pivot toward higher taxes, especially through capital gains tax (CGT) increases (from 10% to 18% at the lower rate and 20% to 24% at the higher rate) and tighter inheritance tax (IHT) policies. For instance, IHT relief on AIM-listed shares will be reduced by 50% starting in 2026, and pensions will be subject to IHT from 2027, a shift expected to reshape estate planning for high-net-worth individuals​

Inheritance tax (IHT) is one of the more emotive tax topics but its scale is small. It is believed that less than 5% of estates in the UK currently pay it. That said, Labour has decided it is a lever worth pulling, albeit in a relatively passive way. The Chancellor announced her decision to extend the existing IHT threshold freeze by two years, until 2030. It means that as the value of estates rises over time, by default so too will the IHT receipts going into the government’s coffers.

Barclays also highlights significant impacts on businesses, with employer National Insurance contributions rising by 1.2% to 15% from April 2025, and second-home owners facing a stamp duty surcharge hike. The Labour government has kept fuel duty frozen, yet private jets and private schools will now see increased taxation, with VAT added to private school fees from January 2025.

The Wealth Advisory team at Barclays emphasizes that proactive and diversified financial planning remains essential, especially under this tax-heavy budget aimed at covering a substantial fiscal deficit.

ING