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UK TAX
Weekly News 21st Oct
Further interest rate cuts likely as inflation falls to 1.7%
According to the latest data from the Office for National Statistics (ONS), the UK inflation rate fell to 1.7% over the past year through September, dropping below the Bank of England’s (BoE) 2% target for the first time since 2021.
Core inflation (which excludes volatile factors such as food and energy) decreased from 3.6% to 3.2%. However, lower inflation does not mean prices are getting cheaper, only that the rate of price increases is slowing down.
With inflation below target, most financial analysts believe the BoE will cut interest rates at its meeting on November 7, lowering the rate from 5% to 4.75%.
Lower UK interest rates would have various economic impacts. While stimulating economic growth and addressing economic stagnation or deflation risks, it could also bring side effects such as discouraging savings and exacerbating asset price bubbles. Particularly for individuals who rely on savings income, lower interest rates would reduce returns, potentially lowering their willingness to spend.
At the same time, September’s inflation rate is typically used to determine benefit increases in April of the following year, including Jobseeker’s Allowance, Maternity Allowance, Housing Benefit, and Universal Credit.
The Treasury has not yet confirmed whether the 1.7% figure will be used, but it is likely to be confirmed in the October 30 budget. For pensions, under the ‘Triple Lock’ policy, it has been confirmed that the average wage growth rate of 4.1% will be applied.
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National Insurance hike for employers may threaten jobs and wage growth
This week, the Prime Minister Keir Starmer and Chancellor Rachel Reeves twice refused to rule out increasing employer National Insurance contributions in the budget, emphasising that the Labour Party would adhere to its manifesto promise not to raise taxes on employees and workers.
In response, industry association leaders representing pubs, restaurants, and hotels stated that such a move would affect hiring and limit wage growth, damaging job seekers and businesses alike. The British Chambers of Commerce, which mainly represents small and medium-sized businesses, expressed concern. CBI President Rain Newton-Smith said the Labour government’s planned employment reforms had already raised costs for businesses.
It is understood that introducing National Insurance contributions for employers’ pensions could raise up to £17 billion annually for the Treasury, while raising regular employer National Insurance contributions by 1p could generate about £8.5 billion.
According to analysis by wealth management firm Charles Stanley, an increase in employer contributions could dampen hiring and wage growth, as employers will factor in the higher employee costs. Employers consider the total cost of an employee, including employer National Insurance and pension contributions. If these costs increase, businesses may be less willing to hire new employees, raise wages, or increase pension contributions. Some companies may even pass these costs onto employees through higher prices.
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London Underground drivers to strike over pay in November
The train drivers’ union Aslef and the Rail, Maritime and Transport union (RMT) have announced that London Underground staff will strike in November due to a failure to reach an agreement with Transport for London (TfL) over pay.
It is understood that the current pay offer from TfL includes a 3.8% raise and a one-off fixed bonus.
Under the current strike plan, Aslef’s train operators and managerial staff will strike on November 7 and 12, while engineering department staff will strike on November 1. Around 10,000 members of the RMT union, including maintenance workers, signal operators, and station staff, will strike on different days between November 1 and 8. Both unions’ members will refuse any form of overtime during the strike.
However, union representatives have stated that they are willing to negotiate new pay terms with TfL before the strike begins and will cancel the strike if an agreement is reached.
Inheritance tax reportedly set to rise in Autumn Budget
Reports suggest that Chancellor Rachel Reeves plans to increase inheritance tax in the autumn budget. Although the extent of the hike and details are unclear, any changes could significantly impact families’ inheritance tax rates and future financial planning.
Inheritance tax is a tax levied on a deceased person’s estate. Each individual has a tax-free allowance of £325,000, and any estate value above this threshold is taxed at 40%. In 2022/23, only about 4% of families ultimately paid this tax.
A key exemption is that anything left to a spouse or civil partner is not subject to inheritance tax, regardless of the estate’s value. For example, if the deceased leaves their entire estate to their partner, even if it is worth £1 million, no inheritance tax is owed. However, this exemption does not apply to unmarried cohabiting partners.
Under current rules, if an individual gifts more than £325,000 and dies within seven years, the beneficiaries may still be liable for inheritance tax. If the tax rate increases or the tax-free allowance changes, those planning to leave an inheritance may need to reevaluate their choices and arrangements to minimise their tax obligations.
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Record number of businesses now facing severe financial stress
A study by bankruptcy investigators Begbies Traynor found that a record number of UK businesses are under severe financial pressure.
Between July and September 2024, 632,756 companies were flagged as being in severe financial distress. This comes as several well-known companies including retailers Ted Baker and Carpetright, restaurant group TGI Fridays, and construction company ISG announced they were either nearing bankruptcy or facing bankruptcy.
The number of companies in significant financial distress was about 5% higher than in the April-June period and nearly one-third higher than the same period last year.
Begbies Traynor’s analysis found that 21 of the 22 industries monitored in the report saw an increase in the number of distressed companies compared to the previous quarter, with the total exceeding 630,000. The energy crisis has particularly hit the utilities sector, where debt levels jumped by nearly 20%.
The positive news is that the total number of companies on the brink of bankruptcy has declined over the past quarter. During this period, 31,201 companies fell into severe financial distress, down about 23% from the previous quarter and 17% lower than the same period last year.
However, it is still too early to tell whether this trend will continue after the Autumm Budget is released. While there are initial signs of recovery, uncertainty continues to loom over UK businesses.
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