2025 UK Budget

The government has identified a significant ‘tax gap’ across the UK economy. The tax gap is the difference between what should be collected (based on taxpayer data) and what is actually collected. Over the next five years, the government is expanding HMRC’s resources in an aim to bring in an additional £6.5 billion per year in tax revenue. The plan to bridge the tax gap includes a commitment to overhauling HMRC’s IT system. It is proposed that this will improve HMRC’s debt management system by ensuring tax debt is settled faster, making the overall organisation more productive. The government announced that an additional 5,000 compliance staff will be recruited, while 1,800 debt management staff will be maintained and recruited. Taxpayers can also expect digitalisation to simplify interaction with HMRC allowing taxpayers to self-serve and manage their own tax affairs.

The government announced that it is capping the headline rate of corporation tax at 25 percent, the lowest across the G7. It has committed to maintaining the capital allowances system, preserving the R&D tax relief, and developing a new process for increasing tax certainty in advance of major investments. In our letter to the Exchequer Secretary to the Treasury ahead of today’s Budget, we raised the importance of certainty and stability for the R&D tax relief, given the myriad changes in recent years. As such, it is welcome to see a commitment to preserving the R&D tax relief. Offshore trusts The government announced that transitional arrangements will be introduced to tackle offshore trusts which are used to shelter assets from inheritance tax (IHT). The details of how these measures will operate will be discussed in due course once those details become available. Carried interest The tax treatment of carried interest will be reformed by increasing the capital gains tax (CGT) rate on such interest to 32 percent. From April 2026, a revised regime will apply which will have bespoke rules reflecting the characteristics of the relevant reward. VAT on private schools The government has maintained its commitment to introduce VAT on education and boarding services provided by private schools. From 1 January 2025, VAT of 20 percent will apply to charges for services provided by private schools in this regard.

The government has taken the decision to increase employers National Insurance contributions by 1.2 percent to 15 percent from 6 April 2025. The secondary threshold will reduce to £5,000 (previously £9,100). The secondary threshold is the level at which an employer is liable to pay National Insurance on each employee’s salary. The government has increased the Employment Allowance to £10,500 (previously £5,000). The allowance will also be extended to all eligible employers by removing the £100,000 cap. This means that businesses will be able to employ up to four workers on the National Living Wage on a full-time basis without a liability to employers’ National Insurance arising. The government has not raised employee National Insurance at this time. This will ensure that the tax burden on individual workers is not increased further (we note that the tax burden has increased due to lack of indexation of the tax bands relative to inflation). The income tax and National Insurance contributions thresholds will be unfrozen from 2028-29 onwards.