Published 23/02/2024
Our experts share valuable insights on what we might see announced in the Spring Budget across key areas of focus: tax, the economic landscape, and public sector.
As we approach the general election, the upcoming Spring Budget is a highly anticipated event, with many eager to learn what policy measures the Chancellor will announce.
While there may be less immediate attention given to businesses because they cannot vote, the Chancellor will likely emphasise the importance of boosting employment and growth to build a stronger economy. That’s why businesses need to stay informed about the Budget's implications, as it will impact operations and opportunities for growth in the coming months.
With the Spring Budget due to be a pivotal event in the run-up to the general election, both the Chancellor and PM have signalled their ambition to cut taxes. However, as the Chancellor himself has caveated, the possibility of tax cuts will hinge on economic and fiscal forecasts.
These forecasts are an evolving picture, with the Office for Budget Responsibility (OBR) still to provide the Chancellor with more forecast rounds ahead of the day itself, leading to much speculation over whether the Spring Budget will deliver tax cuts.
So, what potential tax cuts could we see, and what other tax announcements may be in store when the Chancellor stands up at approximately midday next Wednesday? And how could a general election, and potential change in government, impact these?
In a probable election year, more so than ever, the Budget is anticipated to be a political event, and what the Budget means for individuals' finances – voters - is expected to take centre stage. For this reason, if there's scope for tax cuts, I predict that these are predominantly focused towards reducing the tax burden for individuals.
With speculation that there is limited fiscal headroom for tax cuts, as we approach the day itself there are rumours that tax cuts may be funded by revenue raising measures elsewhere. The list is growing daily of rumoured revenue raising measures which may be announced, from non-dom reform to changes to the taxation of furnished holiday lets.
If the fiscal position allows, the most widely anticipated area for cuts is either a 1 to 2p cut to income tax or further cuts to National Insurance (in addition to the cuts announced in the Autumn Statement). Cutting income tax would enable Rishi Sunak to make a start towards delivering on his 2022 leadership campaign pledge to cut the basic rate of income tax from 20p to 16p by the end of the next Parliament. Though a National Insurance cut may be preferred as it’s cheaper, given income tax applies to a wider number of income sources (including pension income), and it would enable the Government to carry on their Autumn Statement narrative of “rewarding work”.
Neither Labour nor the Liberal Democrats have indicated that they're planning to increase income tax or National Insurance contributions, in fact last autumn the Liberal Democrats dropped their long-standing pledge to increase income tax by 1p. However, if there are substantial cuts in this Spring Budget, it’s possible the other parties may need to consider if these are sustainable, taking into account the state of the public finances and their spending plans.
There has also been increasing interest in how the UK’s tax system could distort behaviour and disincentivise work. Our current tax system can result in marginal rates well above the headline rate, including when the High-Income Child Benefit Charge kicks in at £50,000, as well as the tapering of the Personal Allowance and reduction in childcare support at £100,000. There's been increasing interest in this area recently, and the Financial Secretary to the Treasury noted that the Government is trying to smooth out anomalies, though he’s indicated these are long-standing features of the UK tax system and that it’s unlikely these would be removed entirely.
SDLT is also a likely contender for tax cuts. With the zero-rate band for residential property due to revert to its permanent threshold of £125,000 from 1 April 2025, one option for the Chancellor would be to make the extension permanent to £250,000 to assist homebuyers.
It would be amiss not to include the potential cut or complete removal of IHT within the predictions, given how heavily it was rumoured in the run-up to the Autumn Statement – though in the end, the Statement passed without so much as a mention. Coined the 'UK’s most hated tax', cutting it would create a clear distinguishing line between Conservative and Labour tax policy, with Sir Keir Starmer having previously stated he's “fundamentally opposed” to cutting it. Though in recognition that the pot for tax cuts will only be so big, I have less certainty the Chancellor would prioritise cutting a tax that HMRC statistics show fewer than 4% of estates paid in 2020–21 over income tax or National Insurance.
It’s possible that if there was political appetite for the Conservatives to introduce such a cut, this announcement may instead be held back and made as a manifesto pledge.
Last year’s Autumn Statement wasn't short of big-ticket announcements aimed at unlocking business investment to improve UK productivity, most notably full expensing becoming a permanent feature of the UK’s business tax landscape. My prediction is that the Spring Budget will be a quieter affair on tax cuts for businesses as the Chancellor focuses on what the Budget means for those that will have a vote….individuals!
That’s not to say there won’t be any tax policy changes for businesses. Growth will focus heavily on the narrative in delivering sustainable tax cuts and parties across the political spectrum have acknowledged that businesses are a key part of delivering that growth.
Last year’s Autumn Statement wasn't short of big-ticket announcements aimed at unlocking business investment to improve UK productivity, most notably full expensing becoming a permanent feature of the UK’s corporate tax landscape, alongside a further shake-up of the UK’s R&D tax regime with the introduction of a merged scheme.
This Spring Budget is expected to be a quieter affair on this front. On R&D, at last year’s Autumn Statement, the Government confirmed its wide-reaching R&D tax review - which has been ongoing since 2021 - has now concluded.
On Capital Allowances, the Government is currently consulting on extending full expensing to assets held for leasing. This consultation is focused on identifying a solution that supports the leasing sector in accessing the benefits of full expensing while managing the risks of abuse and error. The Government has committed to publishing draft legislation for technical consultation in 2024. While we may see an update on progress, I predict that the Chancellor will wait for this technical consultation to take place first to ensure there's a viable solution before a final policy decision is made.
We expect the Budget narrative to focus on growing the economy, and if personal tax cuts are introduced, this has the potential to have a knock-on impact on the labour market. Income tax or National Insurance cuts will boost take-home pay, potentially encourage people to re-enter the workforce or take on more hours. Smoothing out cliff edges within the tax system could also reduce the disincentive for employees to take on extra hours when they hit certain income thresholds.
As part of the policy of supporting individuals back into work (following a period of absence due to ill health), last year, the Government consulted on how the tax system can support employers to increase occupational health provision for their employees (accompanied by a wider consultation on the role of non-fiscal levers). While we saw a response on the non-fiscal leavers last year there could be an update on tax incentives, the most likely option from a tax perspective would be widening the current benefit in kind exemption in respect of certain employer-provided medical benefits.
Over the last 12 months, the Government has also consulted on two areas of employee ownership where we could see further updates and policy changes announced. This includes the 2023 call for evidence on non-discretionary tax-advantaged employee share schemes covering Save As You Earn (SAYE) and the Share Incentive Plans (SIP) and the 2023 consultation on Employee Ownership Trusts.
One area where we're expecting an update is on whether the Government will re-introduce VAT-free shopping for overseas visitors. It’s been widely reported that the Chancellor has asked the OBR to carry out a cost/benefit analysis of the policy, with the results expected to be published alongside the Spring Budget. If the Government decides to re-introduce this measure, it could have a positive impact on retail, particularly luxury goods, and knock on impacts for wider tourism.
Recent fiscal events have been light on environmental tax announcements, and the calls from businesses and wider stakeholders to set out how the Government could holistically use the tax system to support the net zero transition have received little traction to date.
The Government has confirmed they will introduce a UK Carbon Border Adjustment Mechanism by 2027, with a consultation on its delivery due this year. The Government could choose to use the Spring Budget as a platform to release the consultation, which will impact businesses with global supply chains importing a number of different physical products into the UK.
We may also see updates on other areas of environmental tax policy, most notably following the 2023 Plastic Packaging Tax (PPT) on introducing new methods of measurement to determine the recycled content of packaging. This could bring welcome developments for businesses that use chemically recycled plastics who currently are often unable to obtain the necessary proof to consider their recycled plastic outside the scope of PPT.
Fiscal events often don't go by without measures aimed at tackling the tax gap (the difference between the amount of tax that should, in theory, be paid to HMRC against actual receipts). Over the last year, the Government has consulted on a number of policy areas to reduce the tax gap, for which we are awaiting their response; from tackling non-compliance in the umbrella company market to charities compliance measures to the use and effectiveness of Employee Ownership Trusts (albeit this consultation was much wider than just anti-avoidance measures).
At the beginning of February, Labour set out a mini business tax manifesto of sorts providing an indication of the future UK business tax landscape if they were to form the next Government. Announcements included capping the headline rate of corporation tax at 25% for the duration of the next Parliament, maintaining full expensing and the Annual Investment Allowance and publishing a business tax roadmap within six months – all under the theme of providing businesses with certainty to encourage investing in the UK.
Providing businesses with certainty was a key pillar for making full expensing permanent at last year’s Autumn Statement, however there has been little appetite to date from the Conservative Government to produce a wider business tax roadmap in recent years. Though the importance of certainty for businesses when making investment decisions isn't to be underestimated, this would be a welcome development if the Government set out their plans for the future UK business tax landscape.
The upcoming Spring Budget holds significant sway as businesses and policymakers anticipate its announcements.
Lately, businesses have seen a notable resurgence in confidence, reflected in the latest Business Outlook Tracker results:
The increase in business optimism likely stems from improved economic performance and increased confidence that this performance will continue.
So – as falling inflation results in less steep input cost rises and optimism that the economy will start to grow lead to expectations around aggregate demand (AD) and sales, there will be an assumption that interest rates will begin to fall, which decreases the cost of funding.
Businesses not only seek improved economic performance but also crave certainty in economic conditions. Uncertainty introduces costs and challenges in planning and decision-making.
So, uncertainty can lead to difficulty in formulating a business plan, uncertainty around the return on investment, uncertainty to lenders, and pushing up lending costs. All of these can reduce the levels of investment that businesses make.
Despite a technical recession, the economy shows signs of resilience, with GDP expected to grow – and some sectors are being less hit by the cost of living crisis and falls in AD than others. Plus, inflation is continuing to fall – it was at 4% in January and should be back at the Bank of England’s target of 2% during spring. Interest rates have peaked and should fall during 2024.
Key economic indicators are following an upward trend, and the Bank of England seems to have been working in lockstep with the Government - taking it slowly and steadily, gradually reducing inflation without knocking us too far into recession.
This approach should continue, and it won’t be too long now before inflation is back at the 2% Bank of England target and interest rates fall to more normal levels - although it won’t be the near-zero rates that we became used to.
The burning question on everyone's mind is whether this renewed optimism is sustainable.
Our analysis shows that businesses think it is going to last. The Business Outlook Tracker showed increased investment across all areas monitored. The areas that are expected to have the biggest increases in investment are:
At least a third of businesses are proposing to invest more in each area – and 45% propose to invest more in skills development and 43% in technology. These are long-term investments that further demonstrate business confidence.
Against this backdrop of optimism, the Spring Budget offers a platform for transformative policy interventions. Businesses told us they're looking for the Government to focus on:
Specifically, in relation to tax policies, they would like to see tax incentives for employers to invest in skills, net zero-related tax incentives, and the simplification of the UK business tax system.
While the Government is constrained in what it can 'give away' – public finances are always tight during times of lower economic performance when tax revenues are lowest and need for public expenditure is greatest. Economic performance is better than predicted, and so the Government appears to have a little more to play with than maybe it expected.
November’s Autumn Statement already outlined definite changes coming this year: cuts to National Insurance, rises to the minimum and living wage, and a triple-lock boost to the state pension.
However, the areas that businesses have highlighted that they would like to see more Government support are also those areas that the Government may look to focus on because they align with Government priorities and previously announced policies.
Spending on infrastructure aligns well with the levelling-up agenda, and the Government has already made announcements about scaling back HS2 and using some of that funding for regional transport schemes. There is also talk about the Government banning mid-contract price increases on broadband – which would please businesses as it increases their certainty.
R&D is always a Government favourite. The UK’s productivity has lagged behind many countries for some years and Government knows that any policies or tax incentives to increase R&D will likely translate into higher productivity and economic growth.
The Government has been focussing on skills, including policies to get the economically inactive back into employment. For example, the last Budget focussed on reforms to childcare and pensions and those sectors with skills or recruitment challenges, such as the care and hospitality sector. These targeted policies to increase the size and skills of the workforce are likely to come through in the Budget.
A potential across-the-board reduction in National Insurance or income tax might also encourage people to re-enter the workforce or want to work more, which will also be a boost for companies in those sectors that have been struggling to attract talent. However, if tax thresholds remain frozen, then this might not have a massive impact.
Looking beyond the Budget's immediate impact, it's crucial to consider the importance of political stability and global resilience.
The upcoming election may introduce some uncertainty, but the alignment of political agendas towards fiscal prudence is a positive sign. Continuity and coherence in policymaking are indispensable for nurturing economic optimism.
The Spring Budget has the potential to be a transformative event that sets the UK on a path towards sustained growth and prosperity. It's, therefore, crucial that policymakers remain focused on delivering policies that foster growth and stability while also prioritising political stability and global resilience.
As the Government prepares to announce the Spring Budget, it's essential to recognise how the economic landscape affects public spending decisions.
With our public services edging towards a critical juncture, several key factors influence how the Government may take a cautious approach to Budget allocations.
One of the foremost considerations shaping Budget deliberations is the prevailing economic slowdown. This slowdown, characterised by lower consumer spending and reduced business investment, directly affects the treasury's income, thereby limiting the scope for expansive public spending.
Amid the imperative to fortify public services, the Government remains steadfast in its commitment to fiscal prudence and debt management. Increasing national debt, exacerbated by emergency spending measures in recent years, underscores the importance of maintaining a trajectory towards fiscal responsibility. Balancing the imperative for increased public spending with the imperative for debt containment presents a challenge for policymakers.
Compounding these challenges are inflationary pressures, which threaten to erode the real value of Government expenditures. In the face of such headwinds, policymakers are tasked with implementing measures to stabilise the economy while mitigating the adverse effects of inflation on public finances. The imperative to prioritise long-term economic stability over short-term expenditure increases underscores the complexity of the decisions at hand.
Although the Government must be deeply aware of the current strains on public services, the forthcoming Budget may not offer immediate respite. Instead, it's likely to signal a continuation of austerity measures, placing additional strains on an already burdened system and future Governments.
It’s likely that further rumours will surface between now and the Spring Budget. Sign up to our mailing list to receive expert analysis on the day of the Chancellor's announcements. Stay ahead with the latest insights.
