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07 Feb 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

House prices bounce back in January

  • Having fallen in December, house prices bounced back in January, getting the new year off to a strong start. January’s rise sees the Halifax house price gauge reach another record high.
  • The housing market will continue to perform well in the run up to March’s stamp duty changes, but will likely see only a modest improvement across the course of 2025, as affordability challenges persist and interest rates fall slowly.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “House prices increased by 0.7% month-on-month in January, more than recovering after a -0.2% fall in December, according to Halifax. House prices can be volatile from month-to-month, but the market has been resilient over the last 12 months, with prices rising by 3.0% compared to the same time last year. Having dipped in December, January’s pick up takes house prices back to a new record high, with the average property price now estimated to be £299,138.

“As the interest rates on fixed rate mortgages fell through the middle of last year, the housing market picked up and prices started to rise more quickly. Towards the end of last year, mortgage rates ticked up as financial markets started to expect fewer interest rate cuts than they had a few months earlier. But with stamp duty thresholds set to return to normal in March, housing demand has remained solid as house buyers rushed to complete transactions before the change. 

“Early indicators of housing demand point to another month or two of decent performance for the housing market ahead of the Stamp Duty changes. But over 2025 as a whole, we think that the housing market will show only a modest improvement, given the Bank of England’s gradual and cautious approach will see interest rates fall slowly against a backdrop of stretched housing affordability.”



06 Feb 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Bank of England points to careful pace of cuts going forward

  • Over the next year, the Bank of England expects to face a tricky trade-off between weak growth and above-target inflation. But today’s vote to cut Bank Rate to 4.50% highlights the increasing influence that the growth outlook is playing in its decision making.
  • Interest rates will fall further from here, but the Bank of England will proceed ‘carefully’ as it gives itself time to monitor how the economy develops over the coming months. There was no explicit guidance from the Bank of England’s rate setters on how far or quickly interest rates will decline from here, but their medium-term inflation forecast suggests that the Monetary Policy Committee (MPC) will likely cut Bank Rate at least another couple of times this year.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Faced with the dilemma of managing both weak growth and above-target inflation, the Bank of England kept its focus on growth today, voting to lower Bank Rate to 4.50% by a vote of 7-2 in favour. However, cracks amongst the rate setters widened further, with the two dissenters voting in favour of a larger cut to 4.25%. While the MPC stopped short of providing explicit guidance on where interest rates go from here, it indicated that more cuts are likely. However, the MPC will be cautious as it monitors how the economy develops. 

 “When the MPC raised interest rates, the incoming inflation and pay data were the key inputs to its interest rate decision. But today’s meeting confirmed that this singular focus is now firmly in the rear-view mirror. With echoes from its December meeting, the Bank of England’s guidance indicated that the growth outlook has gained greater prominence in its thinking. Indeed, actions speak louder than words and the MPC voted to lower Bank Rate, despite forecasting inflation to rise to 3.7% in the middle of this year as it marked down its growth forecast for 2025 to 0.75%. 

 “The Bank of England’s latest inflation forecast shows that the MPC thinks it will have to cut interest rates a couple more times to get inflation sustainably back to target. But it remains unsure how much weak growth will feed through to falling inflation, while there is still uncertainty around how shifts in international trade policy will impact the growth and inflation outlook. It seems the majority of the MPC want to lower interest rates slowly and allow themselves time to observe how these developments play out.

 “For now, it seems reasonable to think that the MPC meeting will proceed with its ‘cut-hold’ tempo and deliver another cut at its May meeting. But data surprises through the middle months of 2023 and 2024 saw the Bank of England change course significantly, so developments over the coming months could be important in determining the path of interest rates over the course of 2025.”



06 Feb 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

A big drop in construction PMI which signals little

  • The construction Purchasing Managers’ Index (PMI) fell substantially in January, falling into contractionary territory after performing relatively well at the end of 2024. But avoid reading too much into this big fall - in recent months, strong PMI readings have not been reflected in official estimates of construction sector activity.
  • The construction sector is only a small part of the UK economy, but looking across all the PMIs, the indication is that growth started 2025 on a weak footing. However, recent survey readings have been a poor reflection of official growth estimates. We expect the slowdown at the end of last year to be temporary and the growth outlook to improve in 2025.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “The construction PMI fell substantially in January, slipping into contractionary territory with a reading of 48.1. Softening demand and rising cost pressures pushed the PMI to below the 50 no-change mark for the first time since February 2024, and comes on the back of a period of relatively strong readings for the construction sector, with the survey having recorded 53.3 in December. January’s weakness was broad-based, with contractions reported across house building, civil engineering, and commercial construction projects. 

 “Official estimates of construction activity have painted a much weaker picture than the PMIs over the last year. Given this relatively poor fit, we shouldn’t read too much into this survey’s big fall. Overall, as one of the more interest rate sensitive parts of the economy, we think that the sector’s prospects will gradually improve over 2025 as interest rates slowly come down, supporting the housing market. Although, like the broader economy, the sector will still face some headwinds as it continues to contend with a shortage of skills and elevated labour costs. 

 “While the construction sector is only a small part of the wider economy, the big picture from the surveys of all the different sectors is that the economy saw little growth at the start of 2025. This should be taken with a pinch of salt. Recent survey readings have typically been affected by business sentiment and not necessarily by changes in private sector activity. In our view, the slowdown in activity during the second half of last year will be temporary, and UK growth will improve in 2025.”



05 Feb 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

PMIs suggest growth off to a slow start in 2025

  • The UK services Purchasing Managers’ Index (PMI) dipped in January, pointing to modest growth in the first month of this year. Nonetheless, we think that the soft growth seen at the end of 2024 was a blip, with economic performance likely to improve in 2025
  • In the face of a loosening labour market, the survey also pointed to rising cost pressures. Inflation is likely to build in the coming months and remain above 2% across 2025. In response, we think that the Bank of England will continue to gradually lower Bank Rate, with a cut to 4.50% coming at tomorrow's meeting.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “January's final S&P Global survey indicated that growth in the services sector got off to a slow start in 2025. Having gained a little momentum in December, January's survey suggested that the sector faltered, with the PMI falling back to 50.8, from 51.1 a month earlier – matching November’s reading, which had been the joint-lowest level in more than a year. Firms were relatively pessimistic about the pipeline of incoming business, citing uncertainty around the global economic outlook and the impact of the Autumn Budget on corporate confidence.

“In recent years, the S&P Global PMIs have been volatile and proved a relatively weak indicator of upcoming growth estimates. The survey has typically been influenced by business sentiment and has not necessarily reflected changes in private sector activity. Therefore, having gone sideways through the second half of last year, we expect the weakness in official GDP estimates will be a brief soft patch, rather than the start of a sustained downturn in growth. We anticipate that GDP growth will pick up in the first quarter of 2025.  

“January's survey highlighted the dilemma facing the Bank of England. Respondents reported that the labour market continued to loosen, while higher labour costs put further upward pressure on prices. With inflation set to rise further and remain above the 2% target through this year, the Bank of England is likely to cut interest rates gradually this year. Having left Bank Rate unchanged at 4.75% in December, we should see a 25bps cut at tomorrow's Monetary Policy Committee (MPC) meeting.”

 



03 Feb 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

January’s manufacturing PMI points to softer decline in activity

  • The UK manufacturing Purchasing Managers’ Index (PMI) rose in January, with the index signalling a slower pace of contraction than in recent months. Though we think the hit to business sentiment from the National Insurance Contributions (NICs) rise may be exaggerating the loss of momentum in the sector, we still expect manufacturing performance to remain subdued this year.

  • Input cost inflation continued to rise in January, and producers reflected this in selling prices. With the impact of a weaker pound continuing to filter through to import costs, core goods inflation is likely to be stronger than it was last year.

  • We are unlikely to receive any explicit guidance on how far or how quickly interest rates will fall. But the new inflation forecast will probably show that most Monetary Policy Committee (MPC) members expect to cut Bank Rate by more than financial markets have been predicting over the last couple of weeks

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “January's final S&P Global manufacturing survey reported that activity was falling at a slower rate, with the PMI rising to 48.3 from 47.0 in December. The higher PMI partly reflected a less severe decline in output, with the investment and intermediate goods industries faring far better than the consumer goods sector. But survey respondents suggested that new orders and employment conditions remained weak.

“Interpreting today's survey is challenging, given the month-to-month volatility in the S&P Global results and their weak relationship with the Office for National Statistics' (ONS) estimates of manufacturing activity in recent years. With survey results typically being heavily influenced by changes in business sentiment, rather than genuine shifts in activity, we suspect recent outturns have been affected by the increase in employers' NICs announced at the Autumn Budget. Still, we think 2025 will be a subdued year for UK manufacturers, given the impact of tight domestic policy settings and the potential impact on global demand from US trade policy.

“Survey respondents reported that input cost inflation was accelerating, due to suppliers passing on their own cost increases. Manufacturers also reported that cost increases were reflected in final prices. Core goods inflation was negative in the second half of 2024, but with the impact of a weaker pound continuing to filter through, we expect goods prices to tick upwards over much of this year.”



31 Jan 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Bank of England taking another small step, but longer-term outlook uncertain

  • The EY ITEM Club expects the Bank of England to cut Bank Rate to 4.50% by a vote of 8-1 in favour at its February meeting  

  • Soft growth is carrying more sway with some Committee members now than it did this time last year. So, we expect a cut even though the Bank of England’s projections are likely to show its low-growth, above-target inflation dilemma has worsened

  • We are unlikely to receive any explicit guidance on how far or how quickly interest rates will fall. But the new inflation forecast will probably show that most Monetary Policy Committee (MPC) members expect to cut Bank Rate by more than financial markets have been predicting over the last couple of weeks

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “We view a 25bps cut in Bank Rate as highly likely when the Bank of England meets in early February. But that does not take away from the longer-term dilemma facing the Bank of England, as its latest set of projections are likely to show that upcoming growth will be weaker, but near-term inflation will be higher than when it met three months ago.” 

MPC mood has shifted

“The Bank of England’s December meeting marked a switch in the mood music for some of the MPC. Having been heavily focused on incoming inflation data as they raised rates, the Bank of England’s pre-Christmas meeting indicated concerns around the growth outlook were beginning to carry greater sway in interest rate decisions. In fact, three members broke from the majority, favouring a consecutive 25bps Bank Rate cut. 

“With further signs that growth stagnated across the final quarter of 2024, accompanied by a loosening labour market, we think that the MPC could forecast growth below 1.0% in 2025 and will act again to support demand.” 

Temporary inflationary pressures? 

“Sterling’s depreciation and energy price rises over the last three months will likely push the Bank of England’s near-term inflation forecast back towards the 3% ‘letter writing’ threshold, that the point at which the Governor has to write to the Chancellor to explain why inflation is above the 2% inflation target. But while this will make uncomfortable reading for Committee members, they will likely view these pressures as temporary. 

“Looking further ahead, the weaker growth outlook will probably translate into an inflation forecast that is again below the inflation target. Pay growth has been much stronger than the MPC expected, but at its December meeting this was largely dismissed as volatility, so will probably not have a significant bearing on the Committee’s longer-term thinking. The bigger wildcard will be the Committee’s annual reassessment of the supply-side of the economy, which will be shared at this meeting and could reduce the link between weak growth and lower inflation.”

Reading between the lines

“The Bank of England doesn’t tend to give strong guidance on exactly where interest rates are heading and it’s unlikely that the MPC will use this meeting to follow in the footsteps of other Central Banks in giving a clear indication as to where they expect interest rates to settle. Instead, with the continued uncertainty around the growth and inflation outlook given the upcoming changes in employers’ National Insurance Contributions (NICs) and international trade policy, we think that the MPC will keep its cards close to its chest and stick to its current guidance that it intends to reduce Bank Rate gradually. 

“The inflation forecast itself could be more revealing. The MPC will likely forecast inflation to undershoot the 2% target over the next two and three years, and this would imply that, if growth and inflation play out as it projects, then the Committee expects to reduce interest rates more quickly across 2025 than the two to three cuts financial markets have been factoring in over the last few weeks.” 



24 Jan 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

The PMIs started 2025 on a slightly brighter note

  • The UK flash composite Purchasing Managers’ Index (PMI) rose slightly and pointed to a modest pace of activity growth in January. The EY ITEM Club thinks the recent weakness in official output growth is likely to prove temporary, with quarterly GDP growth expected to pick up in Q1 2025.
  • The survey also pointed to further rises in the balances for costs and prices. With inflationary pressures likely to continue building steadily across much of 2025, the EY ITEM Club thinks that the Monetary Policy Committee (MPC) is likely to continue cutting Bank Rate gradually over the course of this year.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “January's flash S&P Global survey indicated a modest pace of activity growth at the start of 2025 as the composite PMI moved slightly further into expansionary territory, rising to 50.9, up from 50.4 in December. But fortunes continued to diverge at the sectoral level. The services PMI edged up to 51.2 in January from 51.1 a month earlier, while manufacturing production continued to contract, albeit at a much slower pace. Nevertheless, some of the survey’s details remained relatively poor, as both new orders and employment continued to fall.

“The S&P Global PMI has shown a weak mapping to official activity estimates in recent times. Nonetheless, the EY ITEM Club suspects that the weakness in official output growth during the second half of 2024 will prove temporary rather than the start of a sustained slowdown. The EY ITEM Club expects quarterly GDP growth to pick up in Q1, after having probably flatlined in Q4 2024.

“Elsewhere in January's flash survey, respondents reported that rising salary burdens and energy costs led to the sharpest increase in input cost inflation in over one-and-a-half years. Prices charged inflation also picked up as firms sought to protect margins by passing some costs onto consumers. This reinforces the view that inflation will rise through much of 2025, remaining above the MPC’s 2% target for a prolonged period.  This sustained period of inflationary pressure should see the MPC maintain its gradual pace of interest rate cuts for the rest of 2025.”



22 Jan 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Government has little fiscal room for manoeuvre

  • UK government borrowing picked up in December and is now running ahead of where it was at this point last year. If the recent trend continues, borrowing in 2024-2025 will overshoot the Office for Budget Responsibility's (OBR) borrowing forecast by a substantial margin. 
  • Although financial markets' interest rate expectations have fallen back over the last week, they remain higher than those seen at the Autumn Budget. If sustained, this will still see a lot of the Chancellor's fiscal headroom used up on higher debt interest payments.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Public sector net borrowing was £17.8bn in December 2024, £10.1bn higher than a year earlier. This reflected both greater day-to-day spending, with the current budget deficit £7.3bn higher than December 2023, and a large increase in investment due to a one-off £1.7bn transfer to repurchase military homes. Across the fiscal year-to-date, government borrowing has reached £129.9bn, £8.9bn more than at this point last year. Borrowing is on track to overshoot the OBR's Budget forecast for 2024-2025 by more than £10bn.

“Even before today's data, the Government had left itself a small margin for error against its fiscal rules of around £10bn. While the recent rise in financial markets' interest rate expectations has pared back slightly on the back of surprisingly soft US inflation data, expectations still remain higher than when the OBR assessed the Chancellor's fiscal plans at the Autumn Budget. Higher debt interest payments alone will make it a close call as to whether the Chancellor's fiscal rules are met, even before considering other forecast revisions.

“The Chancellor has insisted that her fiscal rules are non-negotiable. So, on one hand, if the OBR does forecast that the existing headroom has disappeared, further fiscal consolidation may have to be announced in March. The Government intends to hold only one policy event per year, so this would probably have to be in the form of trimmed public spending in the outer years of the forecast horizon. On the other hand, even if the OBR estimates that the fiscal rules will be met, the Government’s room to manoeuvre will remain tight and under those circumstances, policy can easily be knocked off course by subsequent economic or financial market shifts.”









31 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on Real Estate sector: Autumn Budget 2024 

Russell Gardner, EY UK Head of Real Estate, comments on the Real Estate announcements in the Chancellor’s Autumn Budget:

“The housebuilding industry will welcome the Chancellor’s pledge to hire more planning officers to help ‘get Britian building again’. However, question marks remain over where those recruits are coming from. The industry may also wonder why assistance will be restricted to support ‘small housebuilders’ given the volume of houses that need to be built.

“The real estate industry thrives on stability and clarity on tax policy, so is likely to welcome details of the new corporate tax road map. This will hopefully provide the reassurance and confidence they need to plan for the future accordingly.

“The increased rate of the Stamp Duty Land Tax surcharge on second homes is a continuation of the policies of the last few years to tax those, mainly overseas buyers, owning but only occasionally using UK houses and apartments. This, in combination with today's changes to non-domicile rules, is likely to impact the London residential market more than other parts of the UK.” 



30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on UK tax-to-GDP ratio: Autumn Budget 2024 

Chris Sanger, EY’s UK Tax Policy Leader, comments on the UK tax-to-GDP ratio following the Chancellor’s Autumn Budget:

“The OBR's latest forecast paints a striking picture, with the UK's tax-to-GDP ratio set to hit an all-time high of 38.2% by 2029-30, largely due to the tax increases announced in the Autumn Budget. Whilst increases in this measure, without any commensurate increase in spending, heralds a more inefficient system, it’s one that could represent good value or “an investment” if it actually delivers better services. Whether this increased tax-to-GDP ratio will be good value or inefficient will only really be known by the end of this Parliament.”



30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on the lack of pension related tax announcements: Budget 2024 

Paul Kitson, EY UK Pensions Consulting leader, comments on the lack of pension related tax announcements in the Chancellor’s Autumn Budget: 

“Despite speculation, National Insurance on employer pension contributions wasn’t introduced in today’s Budget, which will be very welcome news for the pensions sector. However, the introduction of inheritance tax on unspent pensions pots which the Chancellor did announce, will temper the good news, as it risks dampening the appeal of pensions as a savings vehicle – especially for higher earners. 

“While drastic change to pensions didn’t materialise in today’s Budget, all eyes will now be on the Mansion House Speech.” 



30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on e-invoicing: Budget 2024 

Chris Taylor, EY Indirect Tax Partner and E-invoicing Lead, EY, said:

“The introduction of e-invoicing in the UK is a crucial step towards a digital VAT system fit for the future, and so the consultation on e-invoicing, due to be published in early 2025, will be eagerly awaited. From a VAT digitalisation perspective, the UK is running to catch up, and e-invoicing has the prospect of reinforcing the other measures that the Government announced today targeted on closing the tax gap.

“The benefit of coming late to e-invoicing is that the UK can learn from the experience of other countries, tailoring the approaches that have been successful elsewhere to the UK’s bespoke environment. The publication of the consultation should provide enough opportunities for businesses to share the good, the bad and the ugly of e-invoicing implementation experience elsewhere with the Government.”



30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on non-dom changes: Autumn Budget 2024

Sarah Farrow, EY UK Private Client Services Partner, comments on changes to the non-domicile rules announced in the Chancellor’s Autumn Budget:

“The replacement of the non-domicile regime with a four-year foreign income and gains (FIG) regime has been widely discussed since it was first announced in the previous Government’s Spring Budget. There will be relief in the non-domicile community that the Chancellor has softened the Government’s position on some of the key points that were of most concern.

“Some aspects of the new regime will appeal to existing non-domiciled individuals, but for many the FIG regime will significantly increase their UK tax liability. For expats looking to return to the UK and individuals considering a short visit, the new regime will make the UK more attractive as they will be able to use their foreign income and gains here without being taxed on it for the first four years.

“However, those intending to visit for shorter periods to benefit from the four-year regime may be less likely to invest in the UK than the existing non-domicile population. Some high net worth individuals, with an eye on investments that typically require a longer period to mature, may decide to channel their substantial financial commitments to other countries, particularly those where nom-domicile regimes can extend up to ten years.

“Extending the Overseas Workday Relief from three to four years improves on the previous regime's taxation of employment income. This offers additional stability and strengthens the UK’s competitiveness as a place to locate business headquarters and other operations, although it does not match the five years offered by markets such as the Netherlands, France, Denmark, Spain and Italy.”

Nicholas Yassukovich, EY UK Financial Services Partner, adds:

“The non-domicile tax regime has been a key driver in attracting senior international financial services talent to the UK, especially in the banking and asset management sectors.

"Although it is softer than many expected, the new four-year foreign income and gains (FIG) regime will increase the tax burden on non-domiciled individuals and could act as a disincentive to financial services workers relocating to the UK.

"The extension of relief on employment income from three to four years will be welcomed, but is not yet in line with the five years offered by key financial hubs such as Amsterdam, Paris, Luxembourg, Madrid and Milan.”



30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on measures to boost the UK visual effects sector: Budget 2024 

Anna Fry, Partner and UK TMT Tax Market Leader, EY, comments on measures to boost the UK visual effects sector announced at the Chancellor’s Autumn Budget: 

“Today’s announcement confirms that UK visual effects costs in film and high-end programmes will receive a 5% increase in Audio-Visual Expenditure Credit and can be outside of the 80% cap on qualifying expenditure. This broadly aligns with the previous government’s proposals announced in the Spring Budget and will be well-received by the sector.

“Although there are some caveats, such as the additional tax credit generally being available only after productions are completed, this measure highlights the strong political support for the UK film industry, which has grown significantly since production incentives were introduced.

“This Government has been keen to show its support for the UK creative industries with it recognised as one of the eight key growth sectors identified in the Industrial Strategy Green Paper published earlier this month.”



30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on the corporate tax road map: Budget 2024 

Chris Sanger, EY’s UK Tax Policy Leader, comments on the corporate tax road map announced at the Chancellor’s Autumn Budget:

“The publication of the corporate tax road map was an opportunity for the Government to set out clearly the direction of its policy for business – and on the face of it, it has. The document talks about enhancing predictability, stability and certainty, which it seeks to do by providing confirmation that certain elements won’t change. It also addresses some of the calls for reform, announcing six areas of consultation. Overall, the intent is to improve the operation, accessibility, and targeting of the system and improve the ‘customer experience.’

“The road map is positioned alongside the Industrial Strategy and the upcoming Spending Review, implying that this could be a living document that can be built upon as Labour policy develops. Overall, it does provide some clear paths to the future and will offer some additional certainty to investors, but it would be good if it could be seen as the first stage of the discussion. There is an opportunity - perhaps as part of the future consultations - for the Government to commit to further areas of principle. This could then bring even greater predictability and, with it, greater investment into the UK, by both domestic and international companies.”



30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on VAT on private school fees: Budget 2024 

Carolyn Norfolk, EY Indirect Tax Partner and Education Lead, comments on VAT on private school fees:

“While the Budget included further details around the introduction of VAT on private school fees, it is likely that many providers will still find it challenging to fully get to grips with the new rules by the effective date of 1 January 2025. The new regime involves a variety of complexities and, perhaps equally challenging, will come into force part way through the school year.

“Many providers faced with delivering the change may have hoped that the Chancellor would have announced a delay to the implementation date to allow more time to review the final legislation and obtain clarity from HMRC over areas of uncertainty.”  



30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on personal tax and CGT: Autumn Budget 2024

Sarah Farrow, EY Private Client Services Partner, comments on the personal tax measures announced in the Chancellor’s Autumn Budget:

“For UK workers whose earnings stem solely from wages or salaries, the Budget held few immediate surprises for their personal finances. The Chancellor had committed to not increase current income tax and employee national insurance rates and, while the decision to not extend the freezes on personal allowance and higher rate tax bands will be welcomed by many taxpayers, they’ll need to wait until 2028 to see the difference in their take-home pay.”

Changes to Capital Gains Tax

“Following the speculation in the run up to the Budget, today’s announced increase to the main Capital Gains Tax rate may feel relatively light in comparison. The Chancellor may hope that this achieves the best of both worlds, generating an initial pre-Budget boost to Exchequer receipts with some selling assets in anticipation of a steeper hike, while the eventual, more modest, four percentage point rise is tolerable enough to avoid many holding onto assets in the future as they wait for a drop in the rate. 

“In contrast to the Treasury’s own data forecast, that a ten percentage point increase in Capital Gains Tax rates would cost an estimated £1.4bn by the end of 2027, the increases introduced today are estimated to raise £2.5bn per annum by the end of the Parliament. It appears the Chancellor agreed that a smaller adjustment would offer better revenue-raising opportunities.”



30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on the retail sector: Autumn Budget 2024 

Andy Jones, Partner, Retail Indirect Tax Leader at EY UK, comments on the retail measures announced in the Chancellor’s Autumn Budget:

“For retailers, the bottom line is that today’s Budget will likely result in increased cost pressures amid what is already a challenging backdrop. A particularly significant headline, as expected, is the proposed increase in the national minimum wage and National Insurance Contributions (NICs) for employers. Whilst good news for workers, this will impact retailers during a time of already-intense cost pressures.

“Moreover, whilst the announcement to ease the removal of the business rate discount will be welcome news for some businesses, it will still be an increase on the amounts paid today. That said, many may be hopeful that it is a first indication of the new Government’s approach to taxation and an indication that further reliefs that may come in the future. Therefore, overall, whilst the freeze on fuel duty and the reduction in Alcohol Duty rates for draught products will be welcomed, the Budget will likely lead to increased inflationary pressures for retailers and likely price rises for consumers.”

Chris Sanger, EY’s tax policy leader, added:

“Business Rates is an area that governments have struggled with for at least the last decade. This is a tax that is paid regardless of whether a business is in the red or the black - whether there are profits to fund this tax or not. We have seen the tax rate increase from the low 40s to the high 50s, marking a big increase in the costs for those firms using real estate. 

“Today’s announcement of a permanently lower sector multiplier for retail, hospitality and leisure will be recognising the fact that such businesses pay a far higher proportion of the business rates bill than their share of the economy. The fact that this will be paid for by those with larger properties is likely to be less welcome, building even greater bias into the tax system. The future consultation will provide the opportunity for this and other distortions of the business rates system to be debated and hopefully addressed.”



30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on GGT on carried interest: Budget 2024 

Sonia Rai, EY Partner, comments on carried interest:

“Today’s announcement reinforces the Chancellor’s commitment to focusing on growth and ensuring the UK remains a competitive place to do business. Sustaining the carried interest regime will be intended to stabilise an industry which is heavily dependent on talent and entrepreneurship brought to the UK by internationally mobile fund executives.

“The 32% rate of capital gains tax (CGT) from April 2025 on carried interest preserves the UK as a hub for private capital investment and should prevent the immediate departure of fund managers from the UK.

“The industry wider reforms, due to come into force from April 2026, aim to keep the effective rate on carried interest at around 34%, despite it being under the income tax regime.

“The impact of the carried interest reforms on the UK's long-term competitiveness - along with the abolition of the non-dom tax status and the inheritance tax announcement - is yet to be seen, but the worst fears arising from what was originally touted have clearly been lessened.”

 



30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY Comments: A challenging Autumn Budget for many UK businesses

Laura Mair, EY UK&I Managing Partner for Tax and Law, comments on the business-focused measures announced in the Autumn Budget:

"From a business perspective, this was a typical post-election Budget, focused more on tightening belts than loosening purse strings and, while investment was a key theme in the Chancellor's speech, some of these measures will represent a challenge for many UK companies.

“The 1.2 percentage point increase in Employer National Insurance Contributions, and the reduction in the threshold at which these are paid to £5,000, is estimated to raise an additional £23bn a year, making up more than half of the fresh tax take announced by the Chancellor. While an increase to NI allowances will offer some protection for small businesses, this remains a substantial increase in costs for larger firms. Much of this will be shouldered initially by labour-intensive industries where staffing is often the greatest expense, such as those in hospitality, rather than capital-intensive companies, which rely more on assets like machinery or intellectual property.

"Businesses typically respond to such tax increases by restricting pay rises and new hiring, delaying investment or raising prices to pass on the cost. Any of those actions, repeated at scale, risks having a dampening effect on UK growth. The challenge for the Chancellor will be how to balance the necessary task of revenue raising whilst also accelerating growth.

"The Business Tax Roadmap is intended to offer much-needed predictability over how corporation tax will develop across the lifespan of major investments, and the commitment to maintain Full Expensing, the Annual Investment Allowance and R&D reliefs will be welcome mark of policy stability for many. However, there is room to enhance the UK tax system's attractiveness to investors. EY's annual Attractiveness Survey has repeatedly shown* that, while the UK's regulatory environment, strong domestic market and availability of capital are highly appealing to global investors, its tax environment is regarded less favourably. There is work to be done here and both businesses and investors will hope the Chancellor continues to follow tradition in her future Budgets by unveiling incentives and tax cuts to promote further investment and growth.”

*UK Attractiveness Survey 2024 - 400 global investment decision-makers were asked which factors are the most important when choosing to invest in the UK:

  • 50% said legal and regulatory environment (e.g. laws for AI, sustainability, data protection etc)
  • 48% said liquidity of financial markets and availability of capital
  • 33% said strength of domestic market
  • 10% said tax environment


30 Oct 2024 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on the Autumn Budget 2024

Chris Sanger, UK Tax Policy Leader at EY, comments on the Chancellor’s Autumn Budget:

 “Today’s Budget, coming just one day before Halloween, was packed with both frights and treats. With 70 policy decisions, the 168-page red book delivered a whole plethora of announcements, many of which were only touched on in the 77 minute speech. The Budget was replete with tax rises, spending changes and some targeted giveaways. With so many changes, it seems that tax simplification is a policy that will have to wait its turn.

 “Some of the measures were indeed well trailed, if not pre-announced. A rise in employers’ national insurance by 1.2%, together with a reduction in the level at which such NICs is paid, will raise almost two-thirds of the total £40bn target revenue. This hit to the cost of employing workers will be felt first by employers, but is likely to flow into lower pay rises and more constrained recruitment in the future. Categorised by the Treasury as a cost of employment, the Chancellor will be hoping that how the money is used will outweigh the drag on the economy.

 “The other foreshadowed change on capital gains will raise a further £2.5bn, simplifying the rate bands and taking the 20% tax rate up to the 24% rate that applies to property. Somewhat smaller than had been feared, the speculation itself will already have brought money into the Exchequer. On carried interest, the Government is moving this from capital gains into income tax, but taxing it at a lower rate, broadly equivalent to 34%.

 “There were strong measures on inheritance tax, with the extension to include pensions as well as only partial relief for agricultural and other businesses, and shares listed on the Alternative Investment Market. The effect of these changes will take time to be seen.

 “The treats were few and far between. One treat was somewhat invisible – a further freeze in the fuel duty and retention of the 5p cut, costing over £3bn against what was in the forecast but not in the minds of many taxpayers. Other such invisible treats were discussions of taxes considered and then ruled out.

 “The Chancellor has also invested heavily into HMRC and tackling the tax gap, with 5,000 new staff and imposing new obligations on recruitment agents delivering an extra £6.5bn per annum - a huge part of the targeted £40bn.

 “Many will be hoping that, having had the shock from this Budget, the future years will be filled far more with far more treats.”



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