Reeves’ budget recipe: a pinch of pain, a measure of relief and some healthy clarity

Managing market expectations is a crucial task for a Chancellor of the Exchequer and Rachel Reeves may have achieved it with her first budget.

After a nervous few weeks, as many investors braced for tax rises, the atmosphere after the budget itself is one of relief and clarity – at least on the direction of travel.

Tax rises for asset owners, but less than many feared

That mood was most obvious in the AIM market where expectations that inheritance tax relief on small-cap shares might be scrapped altogether had seen a sell-off and market slump. In the event, the Chancellor announced that the IHT tax relief would be cut by just 50%.

This is still not an ideal outcome, but it is better than some had feared, as evidenced by AIM bouncing back robustly in the immediate aftermath of the budget.

Other significant tax changes for markets were rises in capital gains tax rates — up from 20% to 24% for higher rate taxpayers and 10% to 18% for lower rate taxpayer — again perhaps not entirely welcome for investors but less than some pessimistic predictions.

Business Asset Disposals Relief – much valued by owner-manager entrepreneurs – will also rise but in a staged process, from the current 10% to 14% in April 2025 before rising to 18% in April 2026.

One budget measure, the effect of which will be harder to judge, is the plan to apply inheritance tax to unspent pensions from April 2027. The importance of this will vary from individual to individual and it will take time to see how this might affect investment behaviour.

Swings and roundabouts for UK plc

For UK businesses, the most unwelcome step – but also widely expected – was the increase in employer National Insurance contributions by 1.2 percentage points to 15% and a cut in the threshold. Other reliefs will mitigate the effect on the smallest businesses, but it will be a significant cost increase for larger companies, which may have to be passed on to customers via inflationary price increases.

On the plus side, UK listed companies does now have clarity on its tax position and a guarantee from the Chancellor that the rate of corporation tax will be kept at 25% for the duration of this parliament. For profitable UK companies, this will be reassuring, because while tax rises are not welcome, the one thing that is even more unsettling is uncertainty about the future.

Even more positive was the emphasis the Chancellor placed on clean energy as a key sector for the UK economy. Our Raised in London 2024 survey earlier this year found FTSE leaders believed the UK capital markets would benefit from having a ‘super sector’ and cleantech, including green energy, was one of the favoured candidates.

Clarity should help investment

Given the state of public finances and the government’s own pessimistic commentary over the last few weeks, many investors, fund managers and companies may have been bracing themselves for a truly painful budget.

There are undoubtedly elements in this budget that will be unwelcome by one or more of those groups, but the pain is markedly less than many had been expecting. Meanwhile the greater clarity that now exists on the tax agenda and the government's own spending plans means there is much greater visibility on the future, and that is one of the most important foundations for investment.