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

Downward growth revision confirms Q3 slowdown

  • Today's UK GDP data reported that output was flat in Q3, although there are signs amongst the expenditure data that private sector activity has been stronger than the headline reading suggests.

  • The EY ITEM Club expects GDP growth to be solid but unspectacular in 2025. Further real income growth and less consumer caution will support activity. But the fiscal stance will become more restrictive and 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: “A downward revision to Q3 GDP confirmed growth slowed sharply into the second half of the year, falling from a downgraded 0.4% in Q2. But below the surface, the expenditure split continues to paint a more optimistic picture for growth, with household spending and fixed investment still performing well in Q3. There are also question marks over residual seasonality in the data, given that the economy has now apparently lost momentum in Q3 in each of the past three years. Decent consumption growth of 0.5% outstripped household disposable income growth of 0.2%, albeit the household saving ratio remained elevated at 10.1% in Q3. 

“With some Q4 data already in hand, it looks like output will remain modest at the end of this year. The final quarter got off to a poor start with GDP contracting in October, while the S&P Global Purchasing Managers’ Indices (PMIs) pointed to a slowdown in private sector activity. Still, the EY ITEM Club thinks the recent PMIs have been weighed on by weakening corporate sentiment. Meanwhile, retail sales recovered to an extent in November.

“Looking ahead to the new year, the EY ITEM Club expects the UK economy to display solid but unspectacular growth. Decent real income growth and less cautious consumer sentiment should support household spending, while the EY ITEM Club continues to think there are reasons to believe global growth will continue at a good pace. But past interest rate rises will continue to weigh on disposable incomes, as a significant minority of households refinance mortgages to higher interest rates. Meanwhile, fiscal policy is set to become more restrictive.”

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

Changes in market pricing more important than borrowing data

  • Lower debt interest payments mean that public sector net borrowing is now running slightly below last year's level. But if the recent performance continues, borrowing in 2024-2025 as a whole will be more than £3bn above the Office for Budget Responsibility's (OBR) forecast.
  • The bigger risk to the Chancellor's fiscal plans is this week's movements in financial market pricing. If the changes are sustained, the EY ITEM Club calculates they would wipe out more than half of the already-slim headroom the Government has left against its fiscal rules.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Public sector net borrowing was £11.2bn in November, down £3.4bn on a year earlier, as lower Retail Price Index (RPI) inflation reduced the level of debt interest payments. The OBR is yet to publish a month-by-month profile for its borrowing forecast, so it's difficult to judge progress at this stage. However, if the recent performance is extrapolated over the remaining five months of the fiscal year, borrowing will come in at around £131bn, a little above the OBR's Budget forecast.

“This week, the Chancellor announced that the OBR will publish its next set of economic and fiscal forecasts on March 26. Though the Chancellor adopted less restrictive fiscal rules at the Autumn Budget, she still opted to leave a small margin for error of just £10bn. And while there was nothing in today's data to suggest the OBR will take a more pessimistic view on the medium-term outlook for the public finances, this week's movements in market pricing pose a material risk to the fiscal position. At market close on December 19, gilt yields and market expectations for Bank Rate were around 30bps higher than the assumptions that the OBR used in October's Budget forecasts. If sustained, the EY ITEM Club calculates this would wipe more than £5bn off the £10bn headroom that the Chancellor has left.

“Reeves has said there will be no policy changes alongside the forecast update. But even if the OBR continues to judge that policy complies with the fiscal rules at that point, it's likely to be a problem deferred, not resolved. Navigating the spending review without increasing the size of the spending envelope will be challenging, and there will be other obstacles to negotiate, such as the annual decision over whether to return to indexing fuel duty.”

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

Retail sales edged up in November after successive falls

  • Retail sales rose for the first time in three months in November. But given the significant degree of seasonality in the retail data, and this year's later Black Friday, it’s not possible to draw firm conclusions on the strength of pre-Christmas demand until the December data is available.
  • The outlook for retail in 2025 is heavily dependent on the mood of consumers. Spending power has recovered strongly in 2024, but consumers have adopted a cautious approach. Real income gains are likely to be much weaker in 2025, but with signs that confidence is firming, the EY ITEM Club is optimistic that consumers will be more willing to spend.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Retail sales rose by 0.2% month-on-month in November, following two successive falls. On a sectoral basis, there were modest increases in each of the three main sectors – food, non-food, and non-store – which were partly offset by a sharp fall in fuel sales.

“There's a pronounced seasonal pattern to the retail data, with around 21% of total annual sales coming in November and December. This creates significant challenges for the Office for National Statistics (ONS) in seasonally adjusting the data. Those challenges are compounded by the growing importance of Black Friday and Cyber Monday discounting, and the fact these events don't always fall in the same reporting period each year. This year, both dates will be in the December reporting period, although given that many promotions ran for a week or more, a significant proportion of the sales will still have occurred in November. With Black Friday falling later this year, it’s not possible to draw firm conclusions on the current health of the sector’s performance until the December data is available.

“2024 has been a better year for retailers, with sales on track to grow by around 1% after large falls in 2022 and 2023 respectively. However, the scale of the pickup has been underwhelming given the strength of the recovery in spending power, with the EY ITEM Club estimating that real incomes rose by more than 3% in 2024. Prospects for income growth in 2025 are softer, given that inflation is likely to be higher and earnings growth weaker. But given the significant caution of consumers in 2024, and recent evidence that confidence has begun to firm, the EY ITEM Club sees scope for spending growth to run ahead of income gains in 2025, driven by stronger demand for credit and lower levels of saving.”

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

Differing views starting to emerge on the Monetary Policy Committee

  • The Bank of England’s decision to keep Bank Rate unchanged at 4.75% was unsurprising. However, there was more division than expected amongst Monetary Policy Committee (MPC) members, with three favouring a cut in Bank Rate. 
  • There was no clear commitment on how the Bank of England would act when it meets again in February. But the minutes of the meeting did suggest that all camps on the Committee favour further rate cuts, albeit at differing paces. While the timing and extent of future rate cuts will be determined by incoming data in early 2025, for now the EY ITEM Club continues to expect gradual interest rate cuts over the first half of next year.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Coming out of November’s meeting, the clear message from the majority of the MPC was that it would lower interest rates gradually. Given the incoming data has continued to show some continued stickiness in inflationary pressures, today’s decision to keep Bank Rate unchanged at 4.75% does not comes as a surprise. The bigger surprise was the extent to which the Committee was split, with three of the nine members voting in favour of a 25bps cut in Bank Rate. That provides a notable contrast to September’s meeting when Bank Rate was left unchanged by a more unified vote of 8-1 in favour. 

“Since the November MPC meeting, the growth-inflation trade-off has worsened, which appears to have prompted the split on the Committee. The majority of MPC members continue to favour a gradual approach to reducing Bank Rate to ward off sticky inflation. This would allow time to see how the changes to employers’ National Insurance Contributions (NICs), the National Living Wage and trade policy play out in the labour market and across wages and prices. For the minority of the Committee who favoured a rate cut, they had greater and more immediate concerns around weakening growth data.

“The Bank of England provided no clear view on how it would act at its February meeting, instead saying it will observe how the data develops over the start of 2025 before deciding on its next move. Before today’s meeting, the consensus among the MPC was that some economic slack would likely need to develop to sustainably bring inflation back to target.

“Remarks from MPC members in recent weeks suggested that this could be consistent with the Bank of England sustaining the ‘cut hold’ tempo of interest rate reductions it has established through 2025. With the December minutes suggesting that both camps on the MPC still want to reduce interest rates, albeit at a differing pace, and no indication that the consensus around the economic outlook has shifted, the EY ITEM Club continues to expect further but gradual interest rate cuts in the first half of 2025.”

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

Sticky inflation points to gradual rate cuts in 2025

  • UK Consumer Price Index (CPI) inflation picked up again in November, as base effects for core goods and petrol prices pushed up the annual rate. With the drag from falling energy prices now fading, and several upward pressures coming into play, the EY ITEM Club expects inflation to remain above the 2% inflation target in 2025. 
  • Today's data continues to point to a slow normalisation of inflationary pressures. With a hold in Bank Rate tomorrow almost assured, the stickiness still present in the inflation data is more informative of how the Monetary Policy Committee (MPC) is likely to proceed at the start of next year. The EY ITEM Club continues to expect the MPC to cut Bank Rate gradually.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “CPI inflation picked up further above the Bank of England's 2% target, rising to 2.6% in November, up from 2.3% in October. The rise was largely down to a base effect from a weak core goods reading in November 2023 dropping out of the calculation, and a smaller drag from the petrol category, with a modest rise in pump prices in November this year contrasting with a large fall in 2023. Looking past some of these more transient price moves, services inflation, which is particularly sticky, held firm at 5% in November.

“Much of the easy progress on inflation has now been made. The drag from falling energy prices is receding and is likely to disappear altogether by the spring. Similarly, weak core goods readings in late 2023 as supply chains normalised have weighed on core and headline inflation over the past year. But these effects are waning, and core goods inflation is on the rise, with a stronger dollar following the US presidential election outcome adding to the upward pressures. Recent fiscal policy changes will also have an impact, such as businesses passing on some of the cost of higher National Insurance Contributions (NICs). Therefore, while services inflation should gradually slow on the back of easing domestic inflationary pressures, the EY ITEM Club still expects CPI inflation to remain above the 2% target in 2025.

“Even before today's inflation data, there appeared to be little chance of a cut at December’s MPC meeting. Looking further forward, the continued stickiness in services inflation and the increase in core goods price inflation will likely lead the MPC to maintain a gradual pace of Bank Rate cuts in 2025.”

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

Sticky pay growth to keep Bank of England cutting gradually

  • December's labour market data was a mixed bag. On the quantities side, there were still signs of a gradual loosening in conditions. Nonetheless, even looking past base effects, there were signs that pay pressures remain sticky.
  • The chances of a rate cut at Thursday's Monetary Policy Committee (MPC) meeting have always looked slim, and that remains the case after this release. The data also reinforces the likelihood that the MPC will continue to adjust Bank Rate gradually in early 2025.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Wage growth picked up in the three months to October. In part, this reflected base effects caused by a very weak October 2023 reading dropping out of the calculation. But underlying earnings growth also picked up, with private sector regular pay growth reaching 5.6% on a three-month-on-three-month annualised basis. Though it remains weaker than in H1, underlying pay growth is far above 3%-3.5% that the MPC considers to be consistent with inflation returning to the 2% target on a sustained basis. 

“The unemployment rate remained flat at 4.3% in the three months to October. However, the ongoing issues with the Labour Force Survey (LFS) means that the data provides an unreliable steer on labour market conditions. Looking at the wider sweep of indicators, it appears that the labour market eased a little further, but remains tight. Payrolled employees fell by 35,000 in November, while vacancies edged down a little further.

“The message from the majority of the MPC has been that it will reduce Bank Rate gradually unless there's strong evidence that wage and price pressures are easing more quickly than anticipated. The chance of a Bank Rate cut at the Bank of England meeting later this week has always looked very low, and that remains the case after today's data. The consensus on the MPC is that it's likely some economic slack will need to emerge to bring inflation back to target sustainably, so the gradual loosening in labour market conditions is good news in that respect. However, sticky pay growth is likely to keep the MPC cautious around the pace of rate cuts.”

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

December PMI points to a marginal increase in activity

  • The UK flash composite Purchasing Managers’ Index (PMI) held steady in December, continuing to point to only a slight increase in activity. Recent PMI readings have shown a weak mapping into official estimates of economic growth. Nonetheless, the EY ITEM Club continues to expect weaker growth in Q4 2024 than in the first half of the year.
  • The EY ITEM Club does not think that today's PMI will lead the Bank of England to shift from its current ‘cut hold’ tempo. While today's PMI painted a picture of a softening labour market, signs of inflationary pressures persisted. The EY ITEM Club continues to expect the Bank of England to keep Bank Rate unchanged at 4.75% at its meeting later this week.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “December's S&P Global flash survey saw the composite PMI remain in expansionary territory, recording 50.5, unchanged from November. Below the surface, there were diverging trends. On the one hand, the dominant services sector saw a modest rebound after November's 13-month low. On the other hand, the manufacturing sector posted the second consecutive month of reduced output. New work declined in December, with survey respondents reporting weak European demand, thereby limiting new sales of goods.

“The composite PMI is a relatively poor leading indicator of GDP growth, particularly given recent volatility in sectors not covered by the S&P Global surveys. The survey results also tend to be heavily affected by sentiment, and the recent weakening in the PMIs may have been exaggerated by responses from businesses to the increase in employers' National Insurance Contributions (NICs) announced in the Budget. However, given the PMI survey readings across the final quarter of 2024 and October's soft GDP reading, the EY ITEM Club retains its long-held view that growth will be weaker in Q4 2024 than it was in H1.

“Recent activity data has been a little softer than the Monetary Policy Committee (MPC) expected at its November meeting. But while December's PMI survey showed a further fall in employment levels, there were still some signs of inflationary pressure that the Bank of England will need to be wary of. Both input and output price balances accelerated, reaching levels not seen since the first half of this year. The EY ITEM Club continues to expect the Bank of England to keep Bank Rate unchanged at 4.75% at its meeting later this week.”

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

UK GDP falls again in October

  • UK GDP saw a -0.1% contraction in October, a second consecutive monthly fall. The decline was fairly broad, with consumer-facing services, manufacturing and construction all retreating. However, the Office for National Statistics (ONS) acknowledges that the timing of the Autumn Budget may have introduced some additional noise into this month's data.
  • The EY ITEM Club expects GDP growth to be decent but fairly limited in 2025. Further real income growth and less consumer caution are likely to support household spending. However, the lagged impact of interest rate rises and restrictive fiscal policy will likely weigh on growth.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “GDP fell by -0.1% month-on-month in October, below the consensus forecast of +0.1% growth.  For the second consecutive month, the dominant services sector was flat, masking a particularly weak reading in consumer-facing services, which fell by 0.6%. The manufacturing and construction sectors both contracted on the month, falling by 0.6% and 0.4%, respectively.

“A slow start to the final quarter of 2024 suggests that growth in Q4 will likely remain muted. Growth in Q3 slowed to 0.1%. However, the EY ITEM Club thinks the recent loss of growth momentum may be exaggerated by some noise in the data. Indeed, the ONS noted that survey respondents had provided mixed feedback on the impact of the October Budget, but its notable that businesses had seen some demand delayed until after the Budget.

“Looking to the new year, the EY ITEM Club expects solid but fairly limited growth. Higher real incomes and less consumer caution should support household spending, and there are good reasons to believe global growth will continue at a decent pace. But set against that, past interest rate rises will weigh on disposable incomes as some households continue to refinance mortgages at higher interest rates. The recent Budget loosened the purse strings. Nonetheless, fiscal policy is still set to tighten substantially, and further tax rises may be needed for the government to meet its fiscal targets.”

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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