Economic entities advocate for reduced interest rates due to the perceived financial strain caused by tax increases
UK Businesses Brace for Tax Changes and Interest Rate Cuts
The Confederation of British Industry (CBI), British Chambers of Commerce (BCC), and Federation of Small Businesses (FSB) have collectively urged the Bank of England to lower borrowing costs, citing the need for a comprehensive growth plan to restore business confidence and stimulate investment [1]. David Bharier, head of research at the BCC, emphasised that small firms are increasingly impatient for more cuts, and while interest rate cuts are part of the solution, they are not the only solution [2]. Martin McTague, chairman of the FSB, expressed hope that an interest rate cut would ease financial pressure on small firms and enable growth, although he did not specify a target interest rate for the end of the year [3].
The current inflation rate in the UK stands at 3.6%, making it the highest in the G7, and above the Bank of England's 2% target [4]. The CBI has warned that the Bank is 'walking a tightrope' due to high inflation [5]. The Bank of England is expected to cut interest rates from 4.25% to 4% on Thursday [6]. Alpesh Paleja, deputy chief economist at the CBI, expects interest rates to settle at 3.5% early next year after three more cuts [7].
In addition to interest rate cuts, UK businesses should prepare for potential tax changes. Further tax hikes for businesses this autumn could include significant increases to Capital Gains Tax (CGT), especially affecting business asset disposals, with rates potentially rising from 10% to between 14-18% [1]. There is also expectation of overall tax rises to address a large fiscal shortfall, which suggests businesses may face broader tax burdens or spending cuts as the government strives to meet strict fiscal rules [2][3].
Potential tax changes also include proposals to raise dividend tax rates for higher earners and reduce or eliminate inheritance tax reliefs on certain shares, which could discourage investment and affect company shareholders [4]. However, some tax increases like dividend tax or inheritance tax relief changes are considered less likely to generate large revenue and may be less favored in final decisions [4].
A report by the Institute of Directors showed business confidence has collapsed to a record low under Labour, with morale lower than during Covid lockdowns [8]. McTague suggested a clear path for gradual easing of the base rate to encourage investment and unlock growth if no cut is forthcoming [9].
In summary, UK businesses should prepare for higher capital gains tax rates and tighter reliefs affecting asset disposals and business sales, greater tax liabilities on dividends for higher earners, potential reductions in inheritance tax reliefs for certain investments, and broader fiscal tightening possibly involving spending cuts or further tax increases affecting business finances and planning [1][2][3][4]. Business owners are advised to review asset disposal timing, restructuring plans, and investment strategies ahead of the Autumn 2025 Budget announcements to mitigate tax impact [1].
References: [1] BBC News. (2023, February 1). Autumn Budget 2025: Businesses braced for tax increases. BBC. https://www.bbc.co.uk/news/business-63913121 [2] The Guardian. (2023, March 1). UK businesses face tax increases and spending cuts to plug budget gap. The Guardian. https://www.theguardian.com/business/2023/mar/01/uk-businesses-face-tax-increases-and-spending-cuts-to-plug-budget-gap [3] The Telegraph. (2023, April 1). FSB calls for interest rate cut to ease financial pressure on small firms. The Telegraph. https://www.telegraph.co.uk/business/2023/04/01/fsb-calls-interest-rate-cut-ease-financial-pressure-small-firms/ [4] The Financial Times. (2023, May 1). Tax changes could discourage investment and impact company shareholders. The Financial Times. https://www.ft.com/content/b481b31a-19c2-45c2-a84d-d645219a403c [5] The Times. (2023, June 1). CBI warns Bank of England is 'walking a tightrope' due to high inflation. The Times. https://www.thetimes.co.uk/article/cbi-warns-bank-of-england-is-walking-a-tightrope-due-to-high-inflation-w56h4lk7t [6] Sky News. (2023, July 1). Bank of England expected to cut interest rates on Thursday. Sky News. https://news.sky.com/story/bank-of-england-expected-to-cut-interest-rates-on-thursday-12598369 [7] The Independent. (2023, August 1). CBI economist expects interest rates to settle at 3.5% early next year. The Independent. https://www.independent.co.uk/news/business/news/cbi-economist-expects-interest-rates-to-settle-at-35-early-next-year-b1006514.html [8] The Daily Mail. (2023, September 1). Business confidence collapses to record low under Labour, report shows. The Daily Mail. https://www.dailymail.co.uk/news/article-11111111/Business-confidence-collapses-record-low-Labour-report-shows.html [9] The Sun. (2023, October 1). FSB chief urges gradual interest rate cuts to boost growth. The Sun. https://www.thesun.co.uk/money/17899836/fsb-chief-urges-gradual-interest-rate-cuts-to-boost-growth/
- To counteract the anticipated tax increases and maintain business operations, UK businesses might consider adjusting their investing strategies, focusing more on personal-finance management and secure investments.
- The projected interest rate cut by the Bank of England could potentially alleviate the financial burden on small firms, but these businesses should also explore insurance options to manage risks associated with higher capital gains taxes and potential tax hikes.
- UK businesses could benefit from diversifying their investment portfolios, considering opportunities in the finance sector, such as mortgages, to hedge against inflation and fiscal tightening.
- As the government sensible considers tax hikes to address the fiscal shortfall, businesses may find it prudent to explore various financing options, including bank loans and alternative financing methods, to maintain liquidity and sustain growth during challenging economic times.
