Rachel Reeves unveiled her first budget this week. In many ways, it was already an historic moment even before she stood up at the despatch box: not only was it the first Labour budget for almost 15 years, it was the first UK budget ever delivered by a woman.  

However, due to mass speculation beforehand of large potential tax rises, there was a good chance that this budget would be historic for other reasons—namely, hitting people’s pockets at a time when the cost of living crisis had already hurt so many. In fact, prior to Reeves’s speech, Sir Keir Starmer had warned of the need for painful short-term action, though for the benefit of the longer term good.  

Key takeaways

• Reeves announced a series of measures that equate to a £40 billion rise in taxes, predominantly funded by a rise in employer National Insurance contributions.

• She made significant changes to capital gains tax (CGT) rules with both the basic and higher rate of CGT increasing.

• Due to Square Mile’s long-term investment philosophy, we are well-positioned to weather the potential impacts of the new Labour budget.

The Budget in more detail

Throughout her speech, Reeves mentioned the need to make difficult decisions in order to fund rebuilding the foundations of the UK economy and provide economic stability to the country.

So what difficult decisions did Reeves actually make?

Thanks to a series of leaks, many of the tax changes Reeves announced were simply confirmed. For instance, we had confirmation about VAT on private school fees as well as a confirmation of the energy windfall tax where the levy on energy profits will go up from 35% to 38%. Furthermore, an increase to the minimum wage was confirmed too. It will now increase to £12.21 an hour for those aged 21 and over.

She also announced an increase in Capital Gains Tax to bring in more receipts. The basic rate of CGT will increase from 10% to 18%, while the higher rate will increase from 20% to 24%. Business Asset Disposal Relief will also increase to 14% from its current 10%, but this will not happen until April 2025. What this means is that investors and business owners will face higher tax bills on any gains going forward. It will become increasingly important to utilise tax-efficient structures to limit the impact.

When it came to changes for Inheritance Tax, thresholds have been frozen for longer, until 2030 now, and inherited pensions will be brought into a person’s estate from April 2027. Plus, there will be a 50% relief on inheritance tax for shares on the Alternative Investment Market (AIM) and other similar markets - setting the effective rate of tax at 20%.

Finally, the rumour of an increase to employers' National Insurance contributions was confirmed. Reeves announced that employers’ National Insurance will increase to 15%. She also announced that the threshold where payments begin has been lowered to £5000 from £9100. Given these new rules, the changes will impact large employers the most acutely. The Chancellor expects the changes to raise an extra £25 billion a year.

In all, Reeves announced a series of measures that equate to a £40 billion increase in taxes, which is at the higher end of expectations. She spoke of how the tax increases were necessary to boost public services and tackle the £22 billion fiscal black hole left by the Conservatives.

How did the markets react?

Shortly after the Chancellor finished her speech, medium-sized UK-listed companies (with a strong domestic focus) saw an uptick, but settled soon after. The AIM market had a similar strong rally. Prior to the budget the AIM market had been under pressure on fear the Government would withdraw the IHT tax relief on AIM listed shares. But with the Government announcing a 50% relief on AIM shares for IHT, any uncertainty has been removed and shows the government supports the part this market plays in promoting UK economic growth. The AIM market has lagged the other main markets year to date and the removal of this potential headwind to investment is an important step to its potential recovery.

In Fixed Income, the bond markets’ reaction was arguably dampened by the prior news leak of the Government’s changes to the fiscal debt rules - giving Reeves more money to play with and making traders more comfortable with her announcements. That being said, the UK 10 year gilt yield did see its biggest rise in more than two months, as investors reacted to the likely impact of the budget on the Bank of England’s ability to cut rates. Moreover, investors will continue to balance the impact of the amount of extra gilts coming into the market to fund the extra spending Reeves announced.

Square Mile’s take

At Square Mile, we believe it is imperative at important moments like these, to stay true to our long-term investment philosophy. Any Budget announcement has the power to affect markets materially (as we saw with the Truss/Kwarteng Budget), but our long-term diversified approach means we build our portfolios to perform in a range of environments - even at times of fiscal and political uncertainty.

For example, in reaction to this budget specifically, it is possible that the rise in employers’ National Insurance could act as an inflationary pressure as companies pass on the costs. Should that happen, it is very possible that the Bank of England’s current rate-cutting cycle may not be as big or as quick as anticipated.

The impact of a rise in employers’ National Insurance contributions will also impact business differently. Businesses that are already under pressure may exit, while those with the strongest franchises will be better placed to absorb any costs that they cannot pass on. In this environment, stock selection will be vital in identifying the potential winners and losers.

Such impacts will take some time to play out. However, Reeves’ speech does at least give us some level of certainty now, helping us make more informed decisions. Moreover, our philosophy is to invest in high-quality funds that can weather heightened volatility, while focusing on diversification ensures our portfolios are never overexposed to one region, sector, or asset class.

It means that, as the Labour government continues to settle in, we will remain vigilant to the ways their policies may affect long-term market conditions - as we would for any Government

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