31st October 2024
The UK has been waiting 14 years for a Labour budget and, as expected, a rise in employers’ national insurance has stolen many of the headlines, but there was much more. Green Square’s Tony Walford asks if agency leaders are in for a bumpy ride in 2025 as a result.
This afternoon, a client compared the budget to one of those fairground ghost trains where you’re promised an absolute bedlam of horrors but, once it starts rattling along the track, it’s all a bit lame. I have to say she was bang on the money, but there were still some nasty twists.
The first thing that’s quite irritating is that in scaring folks by largely keeping schtum on what would happen regarding capital gains tax (CGT) and inheritance tax (IHT), while promising no rises in income tax, corporation tax and VAT, Rachel Reeves led a lot of business owners and individuals to take major life decisions in the short term based on conjecture.
Last month, in a piece in The Drum, I countenanced against agency owners and shareholders taking a discount to close a sale pre-budget in case the hit to CGT wasn’t as bad as expected. It had been mooted that it could be aligned to income tax, so worst case 45%, but today’s hike from 20% to 24% for higher and top-rate taxpayers is right at the bottom end of expectations.
Business asset disposal relief (formerly entrepreneurs relief), which gives qualifying business shareholders a reduced tax rate of 10% on the first £1m of gains, is being held until April 5, 2025, when it will rise to 14% and 18% in 2026.
Those that sold quickly and at a chunky discount may rue the day, but I don’t write this with a smug ‘I told you so.’ The government fueling expectations of a Halloween horror-show budget with many being plunged into the depths of hellfire, when in reality it’s a few burnt marshmallows around the fan heater, is a very poor show.
The lack of transparency was pitiful and the cynic in me would think it was done on purpose to drive the tax grab up between July’s election result and today’s budget through fear, with the huge time period between the two cementing this conspiracy theory further.
The good news is we now know what the rates are and, as it’s not that bad, we don’t foresee a big impact on agency M&A or ongoing investment. Indeed, those qualifying shareholders in a sale process will still save £40,000 in CGT if they get it closed by April. Those in private equity firms that invest in the companies they fund personally will see a relatively modest rise of 4% in their CGT rates. – again, not ridiculously penal, and I’d like to think it won’t impact investment.
The real kicker for all businesses however, and particularly smaller ones already struggling with staff costs, is the increase in employers’ NI and the reduction in the threshold from next April.
Businesses currently pay employers’ national insurance of 13.8% on every employee’s salary once their salary exceeds £9,100. This is a direct cost of employment and the increase in employers’ NI to 15% (and threshold reduction to £5,000) will have a direct impact of at least 1.2% on the total salary bill of virtually all businesses that employ staff. There is some light for businesses that have four or fewer employees on the national minimum wage who will get an additional £5,000 relief, but this is unlikely to be of any comfort to the vast majority reading this piece.
Staff costs are an agency’s biggest single expense line, with a key ratio being staff cost to revenue and the golden target being somewhere between 55% and 60%.
Many agencies have been struggling to even get down to a ratio of 60% in recent times, particularly as salaries have gone up with the cost of living while clients have pushed back on fee increases. This additional levy is very unwelcome and if firms can’t pass the cost on to their clients, they will need to find savings in the form of reducing discretionary spend. This could include agencies revisiting their own marketing strategy, holding recruitment, cutting various internal budgets and, in the worst case, reducing headcount.
On a macro view, clients will also be suffering the NI increases and the broader impact of higher staff costs and resulting lower profitability could lead to reductions in marketing budgets. These are often the first to be cut in tough times and last to be reinstated when things improve and will be a double-edged sword for all of us in the marketing industry.
There were other changes, of course, but the employers’ NI twist in the ghost train track is the one with the biggest capability of spilling a lot of folk from the carriages. Let’s see how the upcoming impact pans out as we head towards the next tax year.