Chancellor Rachel Reeves introduced a record £40bn tax rise in her first Budget, which the Office for Budget Responsibility (OBR) warns could stifle economic growth in the long term.
According to the Office for Budget Responsibility, the UK economy will expand by just over 1% this year, peaking at 2% in 2025, but will still be below the potential growth rate of 1.66% after that.
The biggest change comes from a 1.2 percentage point rise in National Insurance Contributions (NICs) for employers, bringing the rate to 15% from April and expected to raise £25 billion. The move has been met with concern from business leaders and analysts who fear it will increase financial pressure on companies.
“This is a tough budget for business,” CBI chief executive Ryan Newton-Smith said. “While the corporate tax roadmap provides stability, increased NICs and other cost increases will hurt businesses, making it more expensive to hire or raise wages.” Newton-Smith stressed that private sector investment is essential to achieving the UK’s growth targets, and urged the government to work closely with businesses to unlock potential investment, particularly in infrastructure and green energy.
The budget also includes a rise in capital gains tax (CGT), with the bottom rate rising from 10% to 18% and the top rate from 20% to 24%, while rates on residential properties remain the same. Moj Choudhary, CEO of RocketPhone, expressed concern about the CGT changes, especially their impact on Britain’s technology and artificial intelligence sectors, which rely on high-risk capital for early-stage growth. “This reform sends the wrong message as we try to establish the UK as a global hub for AI. The CGT increase creates barriers for technology entrepreneurs, who are already reluctant due to high taxes and costs.
For small businesses, the rise in NICs is likely to pose significant challenges. Todd Davison, managing director of Purbeck Personal Insurance, warned that the tax increase could be a “deadly blow” to small businesses still recovering from the pandemic. “This increase will make running a business more expensive and could limit hiring, raise prices, or even force some owners to close their businesses,” he added, noting that businesses in labor-intensive sectors such as hospitality, retail and entertainment may face difficulties. most.
Meanwhile, the Budget includes positive news for small businesses, with an increase in the Employment Allowance easing the NIC burden on businesses with smaller payrolls. Michelle Ovens, founder of Small Business Britain, noted that while small businesses may feel the impact of the NIC and minimum wage increase, many would benefit from business rates relief and reduced tax pressure on high street businesses. “There is reason for optimism,” she said. “It is clear that the government recognizes the contribution of small local businesses.”
A freeze on inheritance tax thresholds has also been extended until 2030, sparking mixed reactions. Ms Reeves has defended the tax rises, claiming they are needed to address “black holes” in public finances and fund long-overdue compensation for victims of the Post Office Horizon and infected blood scandals.
While Reeves’ Budget aims to shore up public finances and fund vital sectors such as healthcare – with an additional £22.6bn for the NHS – many business leaders are concerned that the measures could derail the UK’s growth ambitions. Stephen Phipson, chief executive of Make UK, acknowledged that while budgeting presented challenges, particularly for SMEs, the inclusion of an industrial strategy and ongoing support for programs such as Made Smarter provided a clear path for growth in manufacturing.
As businesses across the UK absorb the budget impacts, the long-term impact on investment, employment and general economic stability remains uncertain. The £40 billion tax rise underscores the government’s commitment to balancing the books, but critics say it risks undermining Britain’s competitiveness and discouraging private sector investment needed to drive sustainable growth.
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