On 30th October 2024, the Chancellor announced £40bn in tax rises to stabilise public finances, increase public service spending and boost capital investment for long-term growth. While a focus on investment and growth will be positively received by professional service businesses, the immediate priority will be for firms to understand how these tax rises will affect their margins.
For most firms, employment costs are its largest expense typically comprising between 25% and 50% of the cost base. The increase in employer’s national insurance to 15% from April 2025 will significantly impact this. With wage inflation in recent years this additional cost will directly affect firms’ profit and may encourage firms to look at different strategies to protect their margins. Those businesses that have been able to recover increased costs through their charges may have limited headroom to further pass on charge rate increases. Firms may therefore need to look at different strategies to protect margins including:
With capital gains tax rates only increasing by a few percentage points, there remains a significant rate differential between income tax and capital gains tax. This may spark renewed interest in long-term incentive structures and equity arrangements for employees to manage the impact of increased cost.
Improving productively within a firm’s business will remain a priority and for those investing in technology and AI solutions, the protection of R&D reliefs, capital allowance full expensing and the existing Annual Investment Allowance will be welcome although many reliefs will only be available to those incurring spend in a company.
For LLPs, the absence of targeted measures will be welcome after recent changes to Basis Period Reform and scrutiny of the tax position of LLP members. The relative tax differential of operating through a company vs LLP is a common area of reflection for professional service firms with increased costs of employment enhancing the relative tax benefits of self employed LLP members.
The Budget provided some detail of the direction of travel for business taxation. For example, commitments have been made regarding tax thresholds and the corporate tax roadmap provides helpful clarity regarding corporation tax. Continuing the themes of previous budgets to reduce tax avoidance, the Chancellor announced investment for HMRC to improve processes and compliance, recruit more Inspectors and requiring tax advisors interacting with HMRC on behalf of clients to register from April 2026.
As firms return to managing tax compliance and Basis Period Reform, accurately estimating tax liabilities becomes crucial for managing working capital. From April, the late payment interest rate will increase by 1.5%, making precise estimates for provisional returns even more important. The government reaffirmed its commitment to Making Tax Digital for income tax self assessment by the end of the parliament for those with income exceeding £20,000. This will soon become a key consideration for firms’ tax compliance teams.
In summary, while the Budget announced tax rises largely in line with those speculated, the increased costs of employment will be directly felt by professional service businesses and strategic decisions will need to be taken in the coming months on how best to manage the cost.
For details of the full measures including individual measures affecting partners please refer to our Autumn Budget Hub: