The leaked Budget — What Rachel Reeves’ measures mean for Scottish solicitors and their clients

As the dust settles following the Chancellor’s leaked Budget, Peter Ranscombe runs his slide rule over Rachel Reeves’ decisions and their impacts in Scotland.

It will go down in history as the “leaked Budget”, after the Office for Budget Responsibility (OBR) accidentally released the details of Chancellor Rachel Reeves’ second Budget before she had even stood up in the House of Commons to deliver it. “Shambolic”, “surreal”, and “flabbergasted” were among commentators’ more polite descriptions of the leak.

Yet, away from the political noise, the Budget contained a raft of measures that will not only affect Scotland’s solicitors but also their clients. Many lawyers will now be rethinking their own pensions, savings, and investments.

Briefings before the Budget had indicated the Chancellor would shy away from introducing rumoured new taxes for limited-liability partnership (LLP) members, but the Law Society of England & Wales still declared victory. “The Law Society has been lobbying the government on behalf of our members to ensure that firms using LLPs will not face a new tax in today’s budget,” said president Mark Evans.

One major change trailed in the hours before the OBR leak was the introduction of a £2,000 annual cap on salary sacrifice payments into pensions, after which national insurance contributions (NICs) will be charged.

Robert Holland, law firm Aberdein Considine’s head of employment, said: “For many organisations, salary sacrifice has been a tax-efficient way to enhance employees’ retirement savings while reducing national insurance costs. The proposed changes remove much of that efficiency, particularly for higher earners and senior staff.”

Changes to individual savings accounts (ISAs) mean the annual cash allowance for under-65s will drop from £20,000 to £12,000, pushing the remaining £8,000 allowance towards investments. But Andrew Tully, Nucleus Financial’s technical services director, observed: “Reducing the maximum cash ISA saving is unlikely to drive significant additional stocks and shares ISA saving.”

Meanwhile, two-percentage-point increases in the basic and higher rates of dividend tax – to 10.75% and 35.75% respectively – “will be felt by entrepreneurs as a kick in the teeth, as it takes guts to set up a small business and cash-flow can be uneven and profits uncertain, especially in the current environment where the economy is struggling,” according to Jason Hollands, wealth management firm Evelyn Partners’ managing director.

Reaction from Scottish businesses and investors

Trade body Offshore Energies UK chief executive David Whitehouse decried the decision to keep the energy profit levy. “The future of North Sea energy depends on investment, which won’t come without urgent reform of the windfall tax,” he said.

Alcohol duty will rise on 1 February in line with the retail price index (RPI), prompting Mark Kent – the Scotch Whisky Association’s chief executive – to warn: “The previous 3.65% increase to spirits duty has reduced spirits revenue by 7% – a loss to the Treasury of  £150m. Hiking duty today, for the third time in two years, not only limits our sector’s ability to contribute to much-needed economic growth and productivity, but will once again fail to deliver for the public purse and needlessly cost jobs.”

Jobs were also a concern for Scottish Tourism Alliance (STA) chief executive Marc Crothall, after the national minimum wage rose by 8.5% and the national living wage for over 21s climbed by 4.1%. “The STA is fully supportive of better pay for the sector’s workforce in making it a more attractive and valued career choice, but raising the national minimum wage for 18-to-20-year-olds above the inflation rate will only add to business costs and once again make it challenging for our sector businesses to invest in their product to stay competitive,” he said.

David Ovens, investment syndicate Archangels’ joint managing director, said: “The Chancellor’s decision to widen eligibility for, and extend, enterprise incentive schemes (EIS) is a clear demonstration of support for the role founders and investors play in economic growth. Both EIS and Venture Capital Trusts have been instrumental in channelling patient capital into innovative businesses, and continuation of the schemes ensures we can keep backing ambitious founders with confidence.

“The three-year stamp duty holiday for new UK listings is a positive step toward making London more competitive as a listing destination. However, the real challenge for Scottish scale-ups remains building sufficient scale and market traction to reach initial public offering (IPO) stage.”

Knock-on effects for Scottish Budget

Focus will now shift to 13 January, when finance secretary Shona Robison unveils the Scottish Budget. Her decisions will shape much of next year’s Holyrood election campaign, with spending priorities likely to divide the parties.

“We needed a step change from the UK Government with investment in public services, support for jobs and industry in Scotland, and serious action on energy bills,” said Robison. “Instead, we got a chaotic mess and the increase in funding for the Scottish Government will not even cover half the cost of the employer’s NICs brought in this year.”

One of the key decisions facing Robison will be any adjustments to Scottish income tax (SIT) thresholds, having ruled out an increase to SIT rates. While Reeves’ freezing of the personal allowance at £12,570 will affect Scots, the other bands are in Robison’s hands.

Reeves’ headline £820m boost for Holyrood’s Budget via the infamous “Barnett consequentials” – changes to devolved administration funding triggered by spending in England – is split between £510m of day-to-day resource spending over four years and £310m of capital spending over five years. “There is no detail yet as to how these break-down year-by-year,” noted João Sousa, deputy director at the University of Strathclyde’s Fraser of Allander Institute.

“There is another measure that will affect SIT, which relates to a new category of property income that will be taxed at a different rate by the UK Government; it is currently taxed at the same rate as earnings from work,” he explained. “Income from property is part of SIT; details are in short supply as to what it will mean, but it might affect the block grant adjustment and leave the Scottish Government with a choice to make as to whether it follows suit with a higher rate for property income.”

Guy Hinks, the Federation of Small Businesses’ Scotland chair, said: “All eyes will be on the Scottish Government’s own Budget in January and how they invest the extra £820m. In addition, with the removal of the two-child benefit cap, the Scottish Government no longer needs to set aside additional funds for their planned mitigations. That gives them a golden opportunity to breathe life into our high streets and town centres by lowering business rates for particularly hard-pressed sectors.”

Scottish Beer & Pub Association president Andrew Lawrence added: “The changes to business rates in England mean that, without some form of relief in the Scottish Government’s January budget, Scots pubs will continue to face a heavier rates burden that their English counterparts. We’re calling on the Scottish Government to use its Budget to set out a permanent fix for this imbalance and to deliver immediate rates relief before more pubs are forced to shut.”