National Insurance and Minimum Wage

Employers’ National Insurance

The Chancellor announced a set of changes to employers’ National Insurance (NI) contributions which look set to raise public funds, placing the burden of this on larger businesses while leaving small businesses largely untouched.

The rate of NI contributions is set to increase 1.2% to 15% while the threshold at which employers start making NI contributions is being reduced from £9,100 to £5,000.

Employment Allowance

Meanwhile, the Employment Allowance is being raised from £5,000 to £10,500, and the eligibility requirement that a business must have an NI liability of less than £100,000 has been scrapped. This means that all businesses will be able to reduce their NI liability by £10,500.

The net impact on small business of these measures will therefore be a reduction in their NI liability. It is being reported that 865,000 businesses won’t pay employers’ NI at all next year, and over 1,000,000 will pay the same or less than last year.

Larger businesses will, however, be looking at an increase to NI contributions.  This could have a downstream effect on the employment rate, with the Office for Budget Responsibility suggesting that the increase to NIC could reduce employment by 0.2% (50,000 jobs) by 2029-2030.

Minimum Wage

The chancellor also announced increases to the minimum wages, with the National Minimum Wage set to increase by 6.7% to £12.21 an hour, and an even larger increase for apprenticeships, up 18% to £7.55.

This will further increase the cost of employment for big businesses who are already expecting to pay more in NI contributions and will reduce and in some cases neutralise the savings that smaller businesses were set to enjoy due to the increased Employment Allowance.

The net impact of all these measures on employment rates, profits, and the actual living standards of employees remains to be seen.

Capital Gains Tax

Increased CGT Rates

The government has increased the Capital Gains Tax (CGT) rates. The lower rate of CGT, broadly paid by basic rate income taxpayers has been raised from 10% to 18%, while the higher rate has moved from 20% to 24%. This change applies to disposals made after 30 October 2024, only the second time the rate of CGT has been increased in the middle of a tax year (the other being George Osborne, the then Chancellor, in 2010).

Gradual Increase in Rates for Business Asset Disposal Relief and Investors’ Relief

While CGT is set to increase straight away, the picture for Business Asset Disposal Relief (BADR) is (slightly) better.

The government has opted for a phased approach to CGT changes affecting BADR (formerly Entrepreneurs Relief) and Investors’ Relief (IR). BADR is available to business owners who dispose of “qualifying assets” – usually the whole or part of private trading companies or unincorporated businesses in which the owner is actively engaged.   IR applies to reduce CGT on disposals of shares held for at last three years in unlisted trading companies or the holding companies of trading groups where the owner’s connection is as a shareholder.

Gains up to a lifetime limit of £1 million on qualifying assets and shares will continue to be taxed at 10% through to 5 April 2025. However, the rate will increase to 14% from 6 April 2025 and will further rise to match the main lower CGT rate of 18% from 6 April 2026.

Although the lifetime limit of £1,000,000 on BADR has been maintained, it has been reduced significantly from £10,000,000 in the case of IR to match the earlier reduction to BADR (made by Rishi Sunak as Chancellor).

While the Chancellor says that maintaining the lifetime limit on BADR aims “to encourage entrepreneurs to invest in their businesses”, entrepreneurs will have to gamble on the return on their investments outstripping an 8% increase in the tax rate over the next 18 months. The result may be an increased appetite to sell young businesses ahead of the first increase in April 2025.

Employee Share Ownership Trusts

Employee Share Ownership Trusts (ESOTs) were introduced in 2014 to provide a tax efficient way for business owners to sell their business to their employees – something many aspire to do but come up against the problem that the employees often don’t have much capital.

ESOTs provide a means for an owner to dispose of their shares and receive payment in instalments, financed by the ongoing trade, via the mechanism of the trust and to make the disposal free of CGT. They have proved quite popular, and their relative attractiveness will increase with the rise in the rates of CGT and the reduction in the benefits of Business Asset Disposal Relief.

The changes announced by the Chancellor are varied and will become clearer as legislation is finalised, but the aim is to reduce the perceived scope for abuse of these structures. Restrictions will be added to reduce the ability of owners of businesses to maintain indirect control over the businesses that they have sold, and requirements will be placed on the trustees to ensure that company shares purchased by the trust are not acquired above market value, for example.

Carried Interest

Carried Interest (CI) is a share of profits earned by general partners of private equity and venture capital firms and hedge funds. This has historically been taxed as part of the CGT regime.

The Chancellor has announced that in the short-term CI will remain part of the CGT regime but at an increased rate of 32% from April 2025. However, starting in April 2026 CI will be taxed as income with “qualifying” CI – in simple terms CI from funds which have held their assets for more than 40 months – taxed at 0.725 times the rate at which income tax would ordinarily be applied. This will mean that for additional rate taxpayers who would normally pay 45% income tax, qualifying CI will be taxed at 32.625% – keeping it broadly in line with the short-term increase.