Bonus Busting Budget Means Tax Bill Will Be Met By The Many And Not The Few

Chris Etherington,

This was a bonus busting Budget from Rachel Reeves as most of the burden of the additional tax bill will ultimately fall on employees. Whilst the initial cost of employers’ National Insurance contributions (NICs) may not immediately hit staff, many will see it flow from their pay packets in time. Bonuses may be curtailed and pay rises limited in the coming year as the cost of employing staff increases substantially. The additional cost to an employer for a staff member on a salary of £35,000 is around £925 a year, an effective tax increase of 2.6%.

It is not a decision the Chancellor will have really wanted to make. The election manifesto pledges have tied Rachel Reeves in knots, leaving her with no other option but to raise employers’ NICs to generate significant sums in tax receipts. The philosophy behind the Budget is a big bet on growth and to deliver change but this may well be a counterproductive measure and hinder business investment in the short-term.

There are some unexpected winners from such a move. Those who are self-employed or working in partnership are not directly impacted by the announcements made today, although clearly it will have an initial impact on profits in relation to any staff they employ. Similarly, pensioners will not share in the pain, unless the moves prove to be inflationary as well.

Some other big winners could be insurance companies. In limiting the amount of inheritance tax (IHT) relief on shares in family businesses and farms, insurance may need to be taken out to ensure businesses do not have to fold on the death of a shareholder or farmer. The news is likely to send farmers and family businesses into a tailspin to manage the potential IHT exposure with no cash to pay these liabilities. With interest on late paid tax set to be 4% above the base rate, costs could spiral upwards. These IHT changes could also sound the death knell for larger family trusts, making it much more costly for such trusts to be established.

The IHT changes, particularly in relation to AIM listed shares, could also cause some millennials and Generation Z to view this as a Bleak House Budget. Charles Dickens’ famous story satirises the state of the courts that dealt with inheritances, with delays so long that the costs involved ate up the funds in the estate.

The changes announced today also allow the Treasury to take a more substantial bite out of some estates. HMRC estimates that the IHT relief AIM shares currently benefit from costs the Exchequer £185m annually.

Millennials are often described as generation rent and some will have seen a future inheritance as their only real prospect of getting on the property ladder. More of those funds that could have been earmarked for a house deposit will instead go on the country’s day-to-day spending.

Similarly, whilst the changes to Stamp Duty Land Tax (SDLT) look like they are targeted at landlords, potentially restricting rental supply further, they could also trip up married couples and civil partners. For example, when a newly married couple buys a new property to live together, if either spouse already owns a home then they could be hit with an additional 5% SDLT liability.

The Chancellor has emphasised the mantra that the country needs to “invest, invest, invest” to grow the economy. Whilst some will be protected from the tax hikes announced, the additional bill for the country’s day-to-day spending will be met by the many and not the few.

The 1.2% increase in employers’ National Insurance contributions (NIC) from April 2025 to 15%, and a reduction in the secondary threshold, the point at which employers pay NIC, to £5,000 will cost businesses approximately £940 a year per employee, based on UK mean salary of £36,000. This makes the effective percentage increase in employers’ NIC to around3%.

This impact stretches to employee benefit and incentives, meaning all employee remuneration will suffer as a result.

It was already predicted that an increase to employers’ NIC will squeeze employment costs for employers, which is likely to restrict current and future pay increases. The addition of the reduced secondary threshold, means greater cost pressure and the possibility of bringing forward job losses to avoid the NIC impact.

Notwithstanding the negatives, the positive is employees and employers continue to benefit from NIC savings through pension salary sacrifice arrangements, as the mooted employers’ NIC charge on pension contributions has not materialised. Any businesses that are still procrastinating on implementing a pension salary sacrifice arrangement should look to put them in place as soon as possible to benefit from the increased NIC savings.

The Chancellor has also softened the blow for businesses as most employers will benefit from the increased employment allowance of £10,500, which reduces employers’ NIC, but is all relative given the other announced changes.