THE AUTUMN BUDGET

On 30 October, the Chancellor, Rachel Reeves, laid out details of the UK Government’s Autumn Budget.

Many within government, including the Prime Minister himself, had previously warned that the Budget would introduce measures that would be “difficult” for some. They argued that tough choices had to be made in order to plug what ministers had described as a £22 billion financial “black hole” left by the previous administration. Moreover, £22 billion was not the full extent; in order to fund improvements to ailing public services, the Chancellor told Parliament that her Budget would seek to raise a total of £40 billion.

Regardless of one’s political leanings, one has to conclude that this is a huge sum. Indeed, it brings total UK taxation to what could arguably be its highest rate in history.

However, the ways in which new tax and spending plans have been restructured means that the effects will not be felt equally across the economy. Some property investors may gain from some measures, as should some lower-earning tenants and prospective home-buyers, but others will assuredly feel the pinch. There is no simple way of summarising the Budget’s impacts; they will vary according to a host of different factors.

Manifesto Promises

Before the election, Labour party officials had promised that they would not raise income tax, VAT or National Insurance payments for workers. That caveat “for workers” was significant because, in the event, much of the Budget’s revenue-raising potential did indeed rest on a big hike to National Insurance – albeit only payable by businesses. All but the smallest firms will pay a higher rate of NI contributions and they will face a lower threshold at which they have to start paying them.

By shifting the burden to employers rather than workers, the Chancellor can argue that she has delivered on the party’s promise. Workers will not face higher NI payments, nor higher rates of VAT or income tax. On the face of it, that suggests that ordinary tenants and house-hunters will have escaped the worst of the Budget’s impacts, but employers have been quick to argue that workers will still feel the knock-on effects.

In particular, they point out that not all firms can fund the extra costs simply by taking a hit to profits. It will leave them with less headroom either to support future pay-rises or to take on additional staff. Many will also have to pass on some or all of the extra costs in the form of higher prices.

Costs, Inflation and Affordability

The consequence of higher prices could be more inflationary pressure, and if CPI inflation begins to rise, the Bank of England may be less willing to make substantial cuts to the base rate of lending. That could leave those with mortgages paying more for longer.

Higher inflation also erodes the ‘real’ value of any capital and rental gains. Right now, CPI inflation is running at 1.7% per annum, whereas according to the latest Land Registry statistics, house prices in, say, the East Midlands are rising at an annual rate of +2.1%. That means that in real terms, properties in the East Midlands are currently gaining value, but if inflation were to creep up to 2.1% then they would be producing no net gain.

Rental values have generally been rising at well above the rate of inflation, and yields have also been delivering strongly inflation-beating results. It would take a substantial upturn in inflation to send those measures into negative territory. But, even so, any erosion of real-terms returns will be unwelcome among investors.

Costs, Earnings and Employment

The other key impact of higher NI contributions relates to companies’ ability to afford pay rises, to take on new staff, and to invest for business expansion. If their capacity to do such things is reduced, that could gradually stifle any increase in real-terms wages, and slow any growth in employment. That matters to investors because if these changes cause tenants and would-be homebuyers to find themselves with less spending power, growth in capital and rental values could also begin to decline.

Stamp Duty Land Tax

For investors thinking about expanding their portfolios, one of the Budget’s most obvious negative impacts takes the form of an immediate rise in Stamp Duty. The surcharge on buy-to-let properties and second homes rose by two points, from 3% to 5% as of the end of October.

As a percentage calculation, it will inevitably have a more pronounced effect on investors seeking to buy higher-priced properties. It could therefore be construed as a further argument for looking to Britain’s more affordable regions further north, and to lesser-celebrated commuter-belt communities around popular cities. Here, asking prices tend to be lower and, thus, higher rates of Stamp Duty will impose less of a burden.

In April 2025, the normal Stamp Duty threshold for home-movers will fall from £250,000 to £125,000. This means that most house-buyers will pay tax on a larger proportion of the price of their chosen property. This will raise the effective cost of buying homes for many people, but first-time buyers will still benefit from a higher allowance – their threshold being set at £300,000 (down from the previous figure of £425,000.) Nevertheless, such changes could have a dampening effect on future house price growth and sales activity in general.

Capital Gains Tax has also risen but, importantly, it will not affect gains on the sale of buy-to-let properties or second homes. This ‘no change’ result will have come as a relief to those landlords who had feared a major CGT increase. 

Support for Lower Income Households

However, not all of the Budget’s effects will work against investors. For example, it included news of an increase in the Minimum Wage, which will help those on lower incomes to deal with affordability pressures and to be better able to pay rising rents. For employees aged 21 and over, the National Living Wage will rise from £11.44 per hour, to £12.21. There are similar upgrades for those aged between 18 and 20, those aged 16 or 17, and apprentices. State benefits and pensions will also rise. 

More generally, the Office for Budget Responsibility (OBR) predicts that average per capita disposable incomes will continue to grow, but it suggests that they may now do so more slowly as a result of employers passing on higher costs in the form of slower wage growth.

One surprise announcement related to the previous government’s freeze on income tax thresholds. Through a process known as ‘fiscal drag’, such freezes tend to pull more and more people into higher tax bands as their earnings rise over time. The Chancellor had been expected to extend the freeze in order to generate more revenues but, in fact, she announced that thresholds would be unfrozen from 2028. This means that they will once again rise in line with prices. The real-terms effect of this is that it will release many households from the effects of fiscal drag so it will – to an extent that is yet difficult to predict – offset other affordability pressures.

Pros and Cons

This last point follows a general theme to this latest Budget: some measures will help to safeguard household incomes while others, either immediately or in the longer term, may act to erode them. For example, it might be fair to state that investors targeting lower-income tenants will benefit from the added income security that the new Budget will extend to them. However, measures such as steeper taxes on private education will have the opposite effect for those targeting much higher earners. 

Local Market Effects

Other measures will have more specific and localised effects. For example, the UK Government has committed to spending more on public services, particularly the NHS, so investors might see a boost to the incomes of tenants in areas surrounding large hospitals and similar facilities. This in turn could aid affordability and support faster rental growth in these local markets.

Something similar could result from promised new spending on certain regions and industries. For example, there is extra money promised for the defence sector, as well as for carbon capture, hydrogen production and nuclear energy. Many of these commitments will have positive but localised effects and, of course, they will play out over time rather than having any immediate transformative effect.

Summary

No one yet knows how the economy will rebalance itself, or whether the Budget will do as the Chancellor hopes and fuel a revival in the UK economy. In the longer term, such growth could mean more jobs and higher average earnings but, as with so much of this Budget, those benefits may be offset by greater affordability pressures elsewhere.  

In general, the lion’s share of the tax burden will indeed fall on businesses rather than tenants and home-buyers, so underlying demand in the property market may not greatly change. Supply will also remain limited, despite a promised £500 million of extra funding for affordable house-building, so the most fundamental of market forces should still tend to drive values higher.

The Chancellor warned that this Budget would be difficult and, with the detail now visible, most would agree with that assessment. It will certainly change many aspects of the economy and the property market in particular but, at heart, property remains a reliable asset, underpinned by strong demand and very limited supply. Those fundamentals will not change and so, in the longer term and despite the economic turbulence, buy-to-let investment should continue to deliver very respectable real-terms rewards.

Darren Bennett

Managing Director

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