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15 Nov 2024 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

GDP growth underwhelmed in Q3

  • UK GDP fell modestly in September, as lower output in the manufacturing and other services sectors offset a small rise in consumer-facing services. September's decline left GDP up 0.1% quarter-on-quarter in Q3, a significant step down from the above-trend growth rates seen in H1 2024.
  • The EY ITEM Club expects GDP growth to be steady rather than spectacular in 2025. Policy changes in the recent Budget suggest the fiscal stance will be less restrictive than under the previous government's plans, while further gains in real incomes should support consumer spending. However, the lagged passthrough of past interest rate rises will continue to weigh on the growth outlook.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “GDP fell by 0.1% month-on-month in September, which was below expectations. At the sectoral level, the story was one of several offsetting forces. A fall in manufacturing output continued the recent volatility in that sector, outweighing a very modest rise in construction activity. Meanwhile, services sector activity was flat as an unusually weak outturn in the information and communications sector offset the gain from some of August's anomalies unwinding. The EY ITEM Club suspects that the fall in communications output will prove to be a blip.

“September's outturn meant quarter-on-quarter GDP growth slowed to just 0.1% in Q3, from 0.5% in Q2. However, the first cut of the expenditure data was more reassuring, with strong contributions from household consumption, investment and government spending.

“Looking ahead, the EY ITEM Club expects the economy to grow at a solid, albeit unspectacular pace in 2025, but this is likely to mask some offsetting forces. Measures announced in the Chancellor's Autumn Budget suggest fiscal policy will be less restrictive than under the previous government's plans, while the effects from looser US fiscal policy should also act as a modest tailwind. Firm real income growth, together with some dis-saving, should support stronger consumer spending to an extent. However, tight financial conditions will continue to weigh on disposable incomes as the lagged impact of past interest rate rises continues to emerge.”

07 Nov 2024 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Bank of England continuing to take a gradual approach to rate cuts

  • The Bank of England’s 25bps cut in Bank Rate to 4.75% in November is a sign that the majority of the Monetary Policy Committee (MPC) is gaining more confidence that inflation is becoming less sticky.
  • The MPC is not done and will likely continue to cut Bank Rate further from here. However, while the MPC stopped short of setting out the exact pace of future cuts, any future adjustment will be gradual.
  • The MPC did not explicitly rule in or rule out a cut in Bank Rate at its December meeting, but the EY ITEM Club thinks that stronger growth and inflation forecasts will likely give the Committee cause to be cautious.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “The MPC took the decision to reduce Bank Rate to 4.75% today, while indicating that future Bank Rate cuts will continue to be gradual, as the EY ITEM Club expected. The MPC stopped short of offering any guidance as to how they will act in December.

“In its first meeting since the Autumn Budget, the broad tone from Governor Andrew Bailey and the majority of the MPC was similar to recent communications. Confidence amongst most of the Committee is gradually growing that inflation stickiness is slowly easing and that future reductions in Bank Rate will likely be appropriate. However, the MPC stopped short of giving an exact path for the pace of rate cuts. 

“On balance, the EY ITEM Club expects that the MPC may want to leave Bank Rate unchanged at 4.75% in December. Indeed, the Bank of England’s updated projections show stronger growth and inflation over 2025, which will likely give MPC members reason to be cautious when considering how quickly to reduce Bank Rate further. On the back of the Autumn Budget, the Bank of England’s 2025 growth forecast has been revised up to 1.5%, from 1.0% in August. At the same time, the inflation projection has been raised to 2.7% at the end of 2025, up from 2.2% three months ago. 

“However, with that said, over the last few months inflation has fallen quicker than the MPC expected. If that pattern is repeated over the next few weeks, there is a chance that the MPC may have more confidence that inflation stickiness is falling back. Therefore, another cut in December cannot be ruled out entirely.

“The MPC has been clear that further interest rate cuts will be gradual, and its medium-term inflation projection suggests that Bank Rate cuts into 2025 might be appropriate. The Bank of England’s medium-term inflation projection suggests that if interest rates were to fall back to around 3.5-3.75% over the next year or so and remain there, inflation would stabilise around, or a little below, the 2.0% target.” 

07 Nov 2024 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Halifax house price data shows recent momentum continued into October

  • House prices increased for the fourth consecutive month in October. The Halifax estimate of average house prices has now reached a record high, overtaking the previous peak reached in June 2022. 
  • The EY ITEM Club expects that the Bank of England will cut Bank Rate by 25bps later today, and will lower interest rates gradually into 2025. The EY ITEM Club continues to expect a modest improvement in the housing market as interest rates edge down.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “The Halifax house price index ticked up by 0.2% in October, continuing recent momentum. The Halifax average house price estimate has now risen for each of the last four months, and has grown by 3.9% over the 12 months to October. Following recent gains, house prices have now made up all the ground lost since mid-2022’s previous peak, with Halifax estimating that the average house price in October reached a new record high of £293,999. 

“The recent momentum in the Halifax house price data has been matched by the recent data on housing market activity, which saw a pickup over the summer and into September as the prospect and then the delivery of the Bank of England’s first cut in interest rates boosted mortgage demand. However, following the Budget and markets taking a more hawkish view of the future path of US interest rates, financial market swap rates have risen in recent weeks. With the Bank of England’s Monetary Policy Committee (MPC) due to set out its latest thinking at today’s November meeting, the outlook for swap rates remains uncertain. However, if the recent increase in swap rates persists and feeds into mortgage rates, it could dampen the recovery in housing market activity.

“The EY ITEM Club does not think that the recent Budget has taken interest rate cuts off the table, and expects the Bank of England to cut Bank Rate by 25bps later today. But the EY ITEM Club expects that the Bank of England will tread cautiously as it lowers Bank Rate further through 2025. Even then, while interest rates may be falling, they will remain above the levels seen before the pandemic, while housing valuations remain quite high. All told, the EY ITEM Club continues to expect a gradual improvement in the housing market over the next year or so.”

06 Nov 2024 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Construction activity remains solid at the start of Q4

  • October’s construction Purchasing Managers’ Index (PMI) pointed to another month of solid performance in the sector with improvements in domestic economic conditions continuing to support demand.
  • The construction sector looks likely to support economic activity into the final quarter of the year. Nonetheless, the EY ITEM Club expects the UK economy to slow to around trend growth rates towards the end of this year.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “October’s S&P Global construction PMI came in at 54.3 in October, a step down from the 57.2 recorded in September. However, the EY ITEM Club cautions against reading too much into the drop off. September’s reading was a 29-month high, and the October survey continues to point to healthy growth in the sector, outperforming the average over the first half of this year. Activity continued to grow in two of the three main sub-sectors (civil engineering and commercial work), with a slight decline in house building, where the PMI came in at 49.4.

“So far, the construction sector has performed well through most of 2024, with respondents to the survey reporting that activity has increased for eight consecutive months. With the Bank of England almost certain to cut Bank Rate by 25bps tomorrow, and further interest rate reductions into 2025 likely, conditions look to be in place for continued growth in the sector. Indeed, survey respondents reported that the pipeline of new work remains decent, although uncertainty around the Autumn Budget weighed on demand in October. 

“Overall, the broad trend is that the construction sector looks set to support growth into the final quarter of the year. But looking at the UK economy as a whole, GDP growth is likely to come in around trend rates in late-2024, with yesterday’s composite PMI outturn for October representing the softest reading of the year so far.” 

5 Nov 2024 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Composite PMI consistent with trend growth in late 2024

  • Although the UK composite Purchasing Managers’ Index (PMI) fell again in October, the EY ITEM Club doesn't view this as a major cause for concern. The data can be noisy from month-to-month and pre-Budget uncertainty appears to have temporarily weighed on the index. Moreover, signs of softer momentum in the economy are consistent with the EY ITEM Club’s view that quarterly GDP growth has slowed to trend rates in H2 2024.
  • The prices balance rose from September's 43-month low, as firms passed on some of the impact of stronger wage pressures to customers. But the EY ITEM Club thinks the Monetary Policy Committee (MPC) is almost certain to cut Bank Rate by 25bps at its meeting later this week.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “October's final S&P Global survey pointed to a slower pace of services activity growth than in September, with the PMI slipping to 52.0, down from 52.4. Alongside slightly softer activity growth, there was a smaller rise in domestic new orders and a first reduction in employment for 10 months. 

 “Given October's earlier manufacturing survey reported much weaker growth in output, the composite PMI fell to 51.8, down from 52.6 in September. The composite PMI has fallen two months running, but the EY ITEM Club doesn't see this as a major cause for concern. The data can be quite volatile, while the survey's compilers reported that uncertainty in the lead-up to the Budget was delaying spending decisions. Furthermore, although today's composite PMI outturn is the softest reading in 2024 so far, it is still in keeping with the EY ITEM Club’s view that quarterly GDP growth is likely to come in around trend rates in late 2024.

 “The survey reported that stronger wage pressures pushed up input cost inflation, and businesses reflected this in higher output prices. But in both cases, the increases were coming after multi-year lows in September. The EY ITEM Club thinks that the MPC is almost certain to cut Bank Rate by 25bps at this week’s meeting, but expects that the Bank of England will stop short of giving a clear steer on the exact pace of rate cuts beyond November as it monitors how the changes in the Budget and lower-than-expected inflation play out."

1 Nov 2024 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

MPC set to stick to the plan and cut Bank Rate

  • The EY ITEM Club expects the Monetary Policy Committee (MPC) to cut Bank Rate to 4.75% at November’s MPC meeting.
  • The Bank of England will signal its growing confidence that inflation persistence is easing. But it will continue to emphasise the need to keep Bank Rate restrictive without committing to an exact pace of cuts.
  • Following the Budget, the Bank of England’s near-term growth forecast will be lifted materially. Meanwhile, the medium-term inflation forecast will be slightly higher than in August, but it is still likely to be a little below 2%.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “The EY ITEM Club doesn’t think the Budget included anything that would derail a cut in Bank Rate at November’s MPC meeting, and expects a 25bps cut to 4.75%. 

“At its September meeting, the Bank of England’s guidance set the stage for another reduction in Bank Rate. Since then, key barometers of inflation’s stickiness – services inflation and pay growth – have continued to fall back more quickly than the MPC had previously forecast. On balance, these positive developments should give most of the MPC the confidence to dial back Bank Rate a little further. 

More cuts to come, but timing is hard to predict

“The MPC has much to consider when thinking about where interest rates will head beyond November. On the one hand, inflation has been lower than it anticipated, and with a fall in oil prices, the Bank of England’s updated inflation forecast will be lower over the next year or so. On the other hand, the Budget has loosened the purse strings and will likely lead to an uplift in the Bank of England’s 2025 growth forecast.

“The EY ITEM Club does not think that the net effect of these developments will prevent future interest rate cuts. At its November meeting, the MPC will probably continue to indicate that it is more confident inflation persistence is easing, but that Bank Rate will have to remain restrictive for some time and that future rate cuts will likely be gradual. 

“However, the EY ITEM Club does think that the Bank of England will stop short of giving a clear steer on the exact pace of rate cuts beyond November as it monitors how the changes in the Budget and lower-than-expected inflation play out.

“The Bank of England’s important medium-term inflation forecasts will likely be revised up on the back of the fiscal stimulus in the Budget and market expectations, taken before the Budget, for Bank Rate that are lower than they were in August. Nonetheless, it seems likely that the MPC’s updated forecast will still show inflation a little below the 2% target in two and three years’ time, signalling that the MPC expects Bank Rate to settle slightly below the roughly 3.50-3.75% end point underlying its updated forecast.”

1 Nov 2024 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Manufacturing PMI slipped below 50 in October

  • The UK manufacturing Purchasing Managers’ Index (PMI) fell in October, with the reading suggesting a stabilisation in activity. But the survey has a poor record of tracking official output data, and the EY ITEM Club still thinks the outlook for the manufacturing sector is positive, if fairly soft.
  • Easing cost pressures, despite continued supply chain stresses, support the EY ITEM Club’s view that the Bank of England will cut Bank Rate by 25bps at its meeting next week.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “October's final S&P Global manufacturing survey confirmed a stabilisation in activity, with the PMI falling to 49.9 in October, down from 51.5 in September. October was the first sub-50 reading for the PMI since April. Softening activity reflected weakening demand from both home and abroad. S&P Global reported that the Budget led some manufacturers to hold off committing to new contracts, while the demand for manufactured exports from the US, Europe and China eased. 

“It's difficult to take a clean steer from these figures given the volatility from month-to-month in the S&P Global PMI estimates and the relatively weak mapping to the Office for National Statistics (ONS) output data in recent years. But despite this month's weak reading, there looks to be some scope for a gradual upturn in the manufacturing sector. Global growth will likely be stable, but modest, while healthy real income growth may support producers of domestic consumer goods.

“Survey respondents continued to report stressed supply chains, but there were nonetheless some positive signs on the costs front, with a substantial decline in the balance for input costs. And while cost increases continue to be passed through to final prices, price rises slowed across all three of the major industry sub-groups. Signs that price pressures continue to ease support the EY ITEM Club’s view that the Bank of England will cut Bank Rate by 25bps next week.”

1 Nov 2024 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

House price growth slowed moderately in October, says Nationwide

  • House price growth slowed moderately in October. However, month-to-month movements in house prices can be volatile, and when considering the last 12 months as a whole, house prices have risen by 2.4% overall. 

  • The  EY ITEM Club does not think that the Autumn Budget has derailed the prospect of interest rate cuts, but it remains likely that the Bank of England will be cautious in lowering Bank Rate. The EY ITEM Club continues to expect a gradual improvement in the housing market as interest rates are slowly pared back but remain high by pre-pandemic standards. 

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “House prices increased by 0.1% month-on-month in October according to Nationwide, slowing somewhat from the 0.6% month-on-month growth recorded in September. However, from month-to-month, house price data can be volatile. Looking over the last 12 months, house price growth slowed moderately to 2.4% in October, down from 3.2% in September.

“The housing market has been resilient in recent months as the Bank of England promised and then delivered an interest rate cut. Mortgage rates fell over the summer and into autumn, spurring an increase in mortgage activity. However, following the fiscal loosening in the Budget and markets adopting a more hawkish view of the outlook for US interest rates, financial market swaps rates have risen. The upcoming US election and next week’s Monetary Policy Committee (MPC) meeting mean the near-term outlook for swap rates remains uncertain. But if the recent increase in swap rates is sustained and passes into mortgage rates, it could dampen the recovery in housing market activity.

“Ultimately, the EY ITEM Club does not think that this week’s Budget will derail interest rate cuts, although the Bank of England will likely tread cautiously in lowering Bank Rate through 2025, in line with the EY ITEM Club’s prediction. But while interest rates may be falling, they will likely remain elevated compared to pre-pandemic levels, while housing valuations remain quite high. Overall, the EY ITEM Club expects this to lead to a gradual improvement in the housing market over the next year or so.” 

31 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on Real Estate sector: Autumn Budget 2024 

Russell Gardner, EY UK Head of Real Estate, comments on the Real Estate announcements in the Chancellor’s Autumn Budget:

“The housebuilding industry will welcome the Chancellor’s pledge to hire more planning officers to help ‘get Britian building again’. However, question marks remain over where those recruits are coming from. The industry may also wonder why assistance will be restricted to support ‘small housebuilders’ given the volume of houses that need to be built.

“The real estate industry thrives on stability and clarity on tax policy, so is likely to welcome details of the new corporate tax road map. This will hopefully provide the reassurance and confidence they need to plan for the future accordingly.

“The increased rate of the Stamp Duty Land Tax surcharge on second homes is a continuation of the policies of the last few years to tax those, mainly overseas buyers, owning but only occasionally using UK houses and apartments. This, in combination with today's changes to non-domicile rules, is likely to impact the London residential market more than other parts of the UK.” 

30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on UK tax-to-GDP ratio: Autumn Budget 2024 

Chris Sanger, EY’s UK Tax Policy Leader, comments on the UK tax-to-GDP ratio following the Chancellor’s Autumn Budget:

“The OBR's latest forecast paints a striking picture, with the UK's tax-to-GDP ratio set to hit an all-time high of 38.2% by 2029-30, largely due to the tax increases announced in the Autumn Budget. Whilst increases in this measure, without any commensurate increase in spending, heralds a more inefficient system, it’s one that could represent good value or “an investment” if it actually delivers better services. Whether this increased tax-to-GDP ratio will be good value or inefficient will only really be known by the end of this Parliament.”

30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on the lack of pension related tax announcements: Budget 2024 

Paul Kitson, EY UK Pensions Consulting leader, comments on the lack of pension related tax announcements in the Chancellor’s Autumn Budget: 

“Despite speculation, National Insurance on employer pension contributions wasn’t introduced in today’s Budget, which will be very welcome news for the pensions sector. However, the introduction of inheritance tax on unspent pensions pots which the Chancellor did announce, will temper the good news, as it risks dampening the appeal of pensions as a savings vehicle – especially for higher earners. 

“While drastic change to pensions didn’t materialise in today’s Budget, all eyes will now be on the Mansion House Speech.” 

30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on e-invoicing: Budget 2024 

Chris Taylor, EY Indirect Tax Partner and E-invoicing Lead, EY, said:

“The introduction of e-invoicing in the UK is a crucial step towards a digital VAT system fit for the future, and so the consultation on e-invoicing, due to be published in early 2025, will be eagerly awaited. From a VAT digitalisation perspective, the UK is running to catch up, and e-invoicing has the prospect of reinforcing the other measures that the Government announced today targeted on closing the tax gap.

“The benefit of coming late to e-invoicing is that the UK can learn from the experience of other countries, tailoring the approaches that have been successful elsewhere to the UK’s bespoke environment. The publication of the consultation should provide enough opportunities for businesses to share the good, the bad and the ugly of e-invoicing implementation experience elsewhere with the Government.”

30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on non-dom changes: Autumn Budget 2024

Sarah Farrow, EY UK Private Client Services Partner, comments on changes to the non-domicile rules announced in the Chancellor’s Autumn Budget:

“The replacement of the non-domicile regime with a four-year foreign income and gains (FIG) regime has been widely discussed since it was first announced in the previous Government’s Spring Budget. There will be relief in the non-domicile community that the Chancellor has softened the Government’s position on some of the key points that were of most concern.

“Some aspects of the new regime will appeal to existing non-domiciled individuals, but for many the FIG regime will significantly increase their UK tax liability. For expats looking to return to the UK and individuals considering a short visit, the new regime will make the UK more attractive as they will be able to use their foreign income and gains here without being taxed on it for the first four years.

“However, those intending to visit for shorter periods to benefit from the four-year regime may be less likely to invest in the UK than the existing non-domicile population. Some high net worth individuals, with an eye on investments that typically require a longer period to mature, may decide to channel their substantial financial commitments to other countries, particularly those where nom-domicile regimes can extend up to ten years.

“Extending the Overseas Workday Relief from three to four years improves on the previous regime's taxation of employment income. This offers additional stability and strengthens the UK’s competitiveness as a place to locate business headquarters and other operations, although it does not match the five years offered by markets such as the Netherlands, France, Denmark, Spain and Italy.”

Nicholas Yassukovich, EY UK Financial Services Partner, adds:

“The non-domicile tax regime has been a key driver in attracting senior international financial services talent to the UK, especially in the banking and asset management sectors.

"Although it is softer than many expected, the new four-year foreign income and gains (FIG) regime will increase the tax burden on non-domiciled individuals and could act as a disincentive to financial services workers relocating to the UK.

"The extension of relief on employment income from three to four years will be welcomed, but is not yet in line with the five years offered by key financial hubs such as Amsterdam, Paris, Luxembourg, Madrid and Milan.”

30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on measures to boost the UK visual effects sector: Budget 2024 

Anna Fry, Partner and UK TMT Tax Market Leader, EY, comments on measures to boost the UK visual effects sector announced at the Chancellor’s Autumn Budget: 

“Today’s announcement confirms that UK visual effects costs in film and high-end programmes will receive a 5% increase in Audio-Visual Expenditure Credit and can be outside of the 80% cap on qualifying expenditure. This broadly aligns with the previous government’s proposals announced in the Spring Budget and will be well-received by the sector.

“Although there are some caveats, such as the additional tax credit generally being available only after productions are completed, this measure highlights the strong political support for the UK film industry, which has grown significantly since production incentives were introduced.

“This Government has been keen to show its support for the UK creative industries with it recognised as one of the eight key growth sectors identified in the Industrial Strategy Green Paper published earlier this month.”

30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on the corporate tax road map: Budget 2024 

Chris Sanger, EY’s UK Tax Policy Leader, comments on the corporate tax road map announced at the Chancellor’s Autumn Budget:

“The publication of the corporate tax road map was an opportunity for the Government to set out clearly the direction of its policy for business – and on the face of it, it has. The document talks about enhancing predictability, stability and certainty, which it seeks to do by providing confirmation that certain elements won’t change. It also addresses some of the calls for reform, announcing six areas of consultation. Overall, the intent is to improve the operation, accessibility, and targeting of the system and improve the ‘customer experience.’

“The road map is positioned alongside the Industrial Strategy and the upcoming Spending Review, implying that this could be a living document that can be built upon as Labour policy develops. Overall, it does provide some clear paths to the future and will offer some additional certainty to investors, but it would be good if it could be seen as the first stage of the discussion. There is an opportunity - perhaps as part of the future consultations - for the Government to commit to further areas of principle. This could then bring even greater predictability and, with it, greater investment into the UK, by both domestic and international companies.”

30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on VAT on private school fees: Budget 2024 

Carolyn Norfolk, EY Indirect Tax Partner and Education Lead, comments on VAT on private school fees:

“While the Budget included further details around the introduction of VAT on private school fees, it is likely that many providers will still find it challenging to fully get to grips with the new rules by the effective date of 1 January 2025. The new regime involves a variety of complexities and, perhaps equally challenging, will come into force part way through the school year.

“Many providers faced with delivering the change may have hoped that the Chancellor would have announced a delay to the implementation date to allow more time to review the final legislation and obtain clarity from HMRC over areas of uncertainty.”  

30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on personal tax and CGT: Autumn Budget 2024

Sarah Farrow, EY Private Client Services Partner, comments on the personal tax measures announced in the Chancellor’s Autumn Budget:

“For UK workers whose earnings stem solely from wages or salaries, the Budget held few immediate surprises for their personal finances. The Chancellor had committed to not increase current income tax and employee national insurance rates and, while the decision to not extend the freezes on personal allowance and higher rate tax bands will be welcomed by many taxpayers, they’ll need to wait until 2028 to see the difference in their take-home pay.”

Changes to Capital Gains Tax

“Following the speculation in the run up to the Budget, today’s announced increase to the main Capital Gains Tax rate may feel relatively light in comparison. The Chancellor may hope that this achieves the best of both worlds, generating an initial pre-Budget boost to Exchequer receipts with some selling assets in anticipation of a steeper hike, while the eventual, more modest, four percentage point rise is tolerable enough to avoid many holding onto assets in the future as they wait for a drop in the rate. 

“In contrast to the Treasury’s own data forecast, that a ten percentage point increase in Capital Gains Tax rates would cost an estimated £1.4bn by the end of 2027, the increases introduced today are estimated to raise £2.5bn per annum by the end of the Parliament. It appears the Chancellor agreed that a smaller adjustment would offer better revenue-raising opportunities.”

30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on the retail sector: Autumn Budget 2024 

Andy Jones, Partner, Retail Indirect Tax Leader at EY UK, comments on the retail measures announced in the Chancellor’s Autumn Budget:

“For retailers, the bottom line is that today’s Budget will likely result in increased cost pressures amid what is already a challenging backdrop. A particularly significant headline, as expected, is the proposed increase in the national minimum wage and National Insurance Contributions (NICs) for employers. Whilst good news for workers, this will impact retailers during a time of already-intense cost pressures.

“Moreover, whilst the announcement to ease the removal of the business rate discount will be welcome news for some businesses, it will still be an increase on the amounts paid today. That said, many may be hopeful that it is a first indication of the new Government’s approach to taxation and an indication that further reliefs that may come in the future. Therefore, overall, whilst the freeze on fuel duty and the reduction in Alcohol Duty rates for draught products will be welcomed, the Budget will likely lead to increased inflationary pressures for retailers and likely price rises for consumers.”

Chris Sanger, EY’s tax policy leader, added:

“Business Rates is an area that governments have struggled with for at least the last decade. This is a tax that is paid regardless of whether a business is in the red or the black - whether there are profits to fund this tax or not. We have seen the tax rate increase from the low 40s to the high 50s, marking a big increase in the costs for those firms using real estate. 

“Today’s announcement of a permanently lower sector multiplier for retail, hospitality and leisure will be recognising the fact that such businesses pay a far higher proportion of the business rates bill than their share of the economy. The fact that this will be paid for by those with larger properties is likely to be less welcome, building even greater bias into the tax system. The future consultation will provide the opportunity for this and other distortions of the business rates system to be debated and hopefully addressed.”

30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on GGT on carried interest: Budget 2024 

Sonia Rai, EY Partner, comments on carried interest:

“Today’s announcement reinforces the Chancellor’s commitment to focusing on growth and ensuring the UK remains a competitive place to do business. Sustaining the carried interest regime will be intended to stabilise an industry which is heavily dependent on talent and entrepreneurship brought to the UK by internationally mobile fund executives.

“The 32% rate of capital gains tax (CGT) from April 2025 on carried interest preserves the UK as a hub for private capital investment and should prevent the immediate departure of fund managers from the UK.

“The industry wider reforms, due to come into force from April 2026, aim to keep the effective rate on carried interest at around 34%, despite it being under the income tax regime.

“The impact of the carried interest reforms on the UK's long-term competitiveness - along with the abolition of the non-dom tax status and the inheritance tax announcement - is yet to be seen, but the worst fears arising from what was originally touted have clearly been lessened.”

 

30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY Comments: A challenging Autumn Budget for many UK businesses

Laura Mair, EY UK&I Managing Partner for Tax and Law, comments on the business-focused measures announced in the Autumn Budget:

"From a business perspective, this was a typical post-election Budget, focused more on tightening belts than loosening purse strings and, while investment was a key theme in the Chancellor's speech, some of these measures will represent a challenge for many UK companies.

“The 1.2 percentage point increase in Employer National Insurance Contributions, and the reduction in the threshold at which these are paid to £5,000, is estimated to raise an additional £23bn a year, making up more than half of the fresh tax take announced by the Chancellor. While an increase to NI allowances will offer some protection for small businesses, this remains a substantial increase in costs for larger firms. Much of this will be shouldered initially by labour-intensive industries where staffing is often the greatest expense, such as those in hospitality, rather than capital-intensive companies, which rely more on assets like machinery or intellectual property.

"Businesses typically respond to such tax increases by restricting pay rises and new hiring, delaying investment or raising prices to pass on the cost. Any of those actions, repeated at scale, risks having a dampening effect on UK growth. The challenge for the Chancellor will be how to balance the necessary task of revenue raising whilst also accelerating growth.

"The Business Tax Roadmap is intended to offer much-needed predictability over how corporation tax will develop across the lifespan of major investments, and the commitment to maintain Full Expensing, the Annual Investment Allowance and R&D reliefs will be welcome mark of policy stability for many. However, there is room to enhance the UK tax system's attractiveness to investors. EY's annual Attractiveness Survey has repeatedly shown* that, while the UK's regulatory environment, strong domestic market and availability of capital are highly appealing to global investors, its tax environment is regarded less favourably. There is work to be done here and both businesses and investors will hope the Chancellor continues to follow tradition in her future Budgets by unveiling incentives and tax cuts to promote further investment and growth.”

*UK Attractiveness Survey 2024 - 400 global investment decision-makers were asked which factors are the most important when choosing to invest in the UK:

  • 50% said legal and regulatory environment (e.g. laws for AI, sustainability, data protection etc)
  • 48% said liquidity of financial markets and availability of capital
  • 33% said strength of domestic market
  • 10% said tax environment
30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on the Autumn Budget 2024

Chris Sanger, UK Tax Policy Leader at EY, comments on the Chancellor’s Autumn Budget:

 “Today’s Budget, coming just one day before Halloween, was packed with both frights and treats. With 70 policy decisions, the 168-page red book delivered a whole plethora of announcements, many of which were only touched on in the 77 minute speech. The Budget was replete with tax rises, spending changes and some targeted giveaways. With so many changes, it seems that tax simplification is a policy that will have to wait its turn.

 “Some of the measures were indeed well trailed, if not pre-announced. A rise in employers’ national insurance by 1.2%, together with a reduction in the level at which such NICs is paid, will raise almost two-thirds of the total £40bn target revenue. This hit to the cost of employing workers will be felt first by employers, but is likely to flow into lower pay rises and more constrained recruitment in the future. Categorised by the Treasury as a cost of employment, the Chancellor will be hoping that how the money is used will outweigh the drag on the economy.

 “The other foreshadowed change on capital gains will raise a further £2.5bn, simplifying the rate bands and taking the 20% tax rate up to the 24% rate that applies to property. Somewhat smaller than had been feared, the speculation itself will already have brought money into the Exchequer. On carried interest, the Government is moving this from capital gains into income tax, but taxing it at a lower rate, broadly equivalent to 34%.

 “There were strong measures on inheritance tax, with the extension to include pensions as well as only partial relief for agricultural and other businesses, and shares listed on the Alternative Investment Market. The effect of these changes will take time to be seen.

 “The treats were few and far between. One treat was somewhat invisible – a further freeze in the fuel duty and retention of the 5p cut, costing over £3bn against what was in the forecast but not in the minds of many taxpayers. Other such invisible treats were discussions of taxes considered and then ruled out.

 “The Chancellor has also invested heavily into HMRC and tackling the tax gap, with 5,000 new staff and imposing new obligations on recruitment agents delivering an extra £6.5bn per annum - a huge part of the targeted £40bn.

 “Many will be hoping that, having had the shock from this Budget, the future years will be filled far more with far more treats.”

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