A Budget for Growth?


The chancellor has now delivered his Budget and the media storm has commenced on what it means for the environment, social support, etc.

But what does it mean for business? There is certainly plenty for companies looking to invest or upskill their workforce, but business is facing a challenging back drop of rising prices, shortages of materials and labour and, for some sectors, patchy demand for products and services. 

The chancellor’s Budget was set against the backdrop of competing priorities; on one hand reducing the national debt over the medium and long-term whilst supporting the economic recovery after the pandemic with continued fiscal stimulus and direct grant support to hard hit sectors on the other. 

This Budget was also set against the backdrop of increasing inflation which is impacting all sectors. The Chancellor acknowledged this growing concern, stating the government is ready to act, if necessary, while also signalling that the government views current inflationary pressures as transitory.  

From a business point of view, we can look at the various policies with the following framework: 

Demand and market development – The picture is mixed in terms of the creation of demand in the economy. The Budget increase in public R&D spend to develop the UK’s science and technology industries will spur investment and growth, and the direct investment in the 12 regions targeted with a £4.8bn investment aimed at “levelling up” will drive the demand side, however, the changes in individual taxes are expected to lower household income reducing consumer demand.

It should be noted that the boost public R&D to £20bn by 2024-2025 is lower than the £24bn the Government announced before the pandemic. This spending is designed to maintain the UK’s status as a competitive location for research and innovation, and to encourage private R&D investment.  

The Resolution Foundation calculates that the tax changes will lower household income by c£3,000 by 2027. This will reduce disposable income which when added to the inflationary pressures due to shortages and supply chain issues there is likely to be a dampening of demand over the period in the Budget

The key demand side elements of the budget can be summarised as:

  • Public R&D investment of £20bn (1.1% of GDP). The Government will reach this level in 2024-2025.
  • £4.8bn direct investment in infrastructure in the 12 regions
  • A 1.25% Health and Social Care Levy will be introduced from 6 April 2022 via an increase to National Insurance Contributions, before becoming a freestanding levy from 6 April 2023.
  • From 6 April 2022, the dividend tax rates will also be increased by 1.25%.
  • No increases to capital gains tax and inheritance tax rates or allowances. No changes to reliefs, including Agricultural Property Relief and Business Property Relief.
  • The income tax limits, and personal allowance will remain at their current level until April 2026.
  • The value of a property sold before attracting Stamp Duty Land Tax (SDLT) reverted to £125,000 on 1 October 2021.
  • For those on Universal credit the “taper” on increased earnings will be cut by 8% decreasing the effective tax rate on these earnings

Business investment – There was good news for business regarding corporation tax relief on investments, increasing the incentive for businesses to invest. The measures include extending the Annual Investment Allowance and broadening the scope of the Research & Development Tax Relief. These policies compliment the “Super-deduction” announced in the March Budget, which runs until 31 March 2023. Business looking to invest will find these policies accommodating.

  • Extending the temporary £1m level of the Annual Investment Allowance to 31 March 2023.
  • From April 2023, Research & Development (R&D) Tax Relief will be extended to include data and cloud accounting costs. Plans to target abuse and improve compliance will be published later in the Autumn. 

Costs – While the Chancellor addressed inflationary concerns in his Budget speech, direct action on key issues such as gas and fuel were not specifically included. Elements of the budget, including the changes to the National Living Wage which will increase the National Living Wage to £9.50 an hour starting on 1 April 2022, may continue the pressure on wage inflation and therefore prices further.

There were however some changes that will, to some degree, reduce cost pressures including

  • A freeze on fuel duty and a freeze on Vehicle Excise Duty for heavy goods vehicles
  • Reduction of business rates by £7bn over the next five years.
    • A freeze on the business rates multiplier in 2022-2023, worth £4.5bn.
    • From 2023 a business rates relief will mean business face no increase if they make qualifying property improvements for 12 months
  • Valuations every 3 years from 2023.
  • 50% cut in the domestic Air Passenger Duty

Skills development – In the short-term businesses can continue to take advantage of the grant to hire apprentices. Over the medium and long-term the Budget directs new spending towards boosting the skills of young people and developing the overall skill level of the UK’s workforce.

  • Extending the £3,000 apprentice hiring incentive for employers until 31 January 2022.
  • Additional £1.6bn for 16-19 year-olds’ education in England by 2024-25.
  • £2.8bn in capital investment in skills.
    • This is aimed at increasing the condition of tertiary vocational training in England and to develop skills in the regions.
  • Increasing apprenticeship funding to £2.7bn by 2024-2025.

Corporation Tax – While not announced in this budget, the increase in Corporation Tax will have a significant impact on business in the medium term. The main rate of corporation tax will remain at 19% until April 2023. From this date the main rate will increase to 25%. Smaller companies with taxable profits not exceeding £50,000 will pay the Small Profits Rate of 19%.

There are some other policies worth pointing out which will affect business overall, as well as more funding for devolved nations and targeted policies for industries such as food and drink:

  • The Recovery Loan Scheme will also be extended until 30 June 2022
  • Increase in funding for devolved parliaments
  • Alcohol duty rates frozen – Whisky will have the lowest tax rate since 1918.
  • A 5% reduction on draught beer and cider duty rates.
  • Simplification of alcohol duty rates, bringing the number of main rates from 15 to 6.

The policies announced in the Budget attempt to incentivise businesses to invest in growth, while the Government attempts to create a highly skilled workforce for the future. However, the increase in individual taxes will dampen demand, and the increase in National Living Wage will be difficult for hard hit sectors. Forward looking businesses will see plenty of opportunity to make the most of historically low interest rates and tax incentives to invest and grow out of the pandemic.

About Where Now Consulting Ltd: Where Now Consulting is a management consulting company that focuses on helping its clients to grow and compete. The company offers a range of consulting services, including business turnaround and performance improvement, formulating market entry strategies, mergers and acquisitions, joint ventures and alliances, and sales and distribution strategy and management.