Collingwood's UK Budget Response

So... that was quite a Budget.

The headline is that Rachel Reeves has raised taxes by some ￡40bn, spending by ￡70bn and borrowing by ￡30bn. There was much to cover in the 1 hour and 20 minutes that Britain's first female Chancellor of the Exchequer was on her feet.?

From the National Living Wage rising by c6% to Inheritance Tax thresholds staying the same (albeit with some changes to the rules related to farms), to the abolition of the non-dom regime (which is expected to generate some ￡12.7bn), to announcements related to electric vehicles and fuel, business rates, private schools, pensions, stamp duty and more, Reeves gave us a lot to process.?

That's even before we consider the most significant announcements from yesterday’s Budget for media business owners...

Employers contributing the majority of tax revenues

The biggest news was Reeves’ announcement of an increase in employers' National Insurance Contributions (NIC), a change set to significantly impact every growing media business.

Indeed, much of the ￡40bn generated by the Budget comes from this increase, which sees NIC rise from 13.8% to 15%. At the same time, the employee earning threshold at which employers start paying this tax has been cut from ￡9,100 to ￡5,000.

Together these changes are expected to deliver ￡25bn per year.?

There is an element of respite for smaller business owners, however, with the Employment Allowance increasing from ￡5,000 to ￡10,500. This allowance is effectively a rebate for NIC costs.

In general though, the net impact of these changes could be a significant cost burden for employers, one which will ultimately impact their underlying profit margins and willingness (and ability) to invest in staff to unlock growth.

What does this mean for M&A activity? Lower profits and lower growth could stifle dealmaking, as suppressed profits and growth would likely lead to lower deal valuations. All other things being equal, lower underlying profit means lower enterprise values. This change could well dampen business owners appetite to seek an exit.

CGT: a smaller increase than feared

On a brighter note, Capital Gains Tax (CGT) - the tax on sale of assets (including shares) - has increased by less than anticipated by some in the world of B2B media M&A. (Check out Collingwood’s latest Media Acquisition Report for more on this topic.)?

With headlines in the run up to the Budget suggesting a possible hike in CGT to as high as 39%, the CGT increase to 24% (from 20%) for higher earners has been greeted with a sigh of relief by many.?

Less impactful, but worth flagging is the basic rate of CGT increasing from 10% to 18%. And Business Asset Disposal Relief (BADR) (formerly Entrepreneurs' Relief) is stepping up from 10% to 14% in 2025/26 and then 18% by 2026/27 (remember BADR is limited to ￡1 million of gains earned in a lifetime).

The CGT changes are effective from 30 October 2024.?

In conclusion…

Before the Budget presentation we saw concern that a significant increase in CGT could create a disincentive for business owners seeking an exit, thereby suppressing deal activity, (which had started to gain pace following low deal volumes in 2023). But given the relatively small increase to the CGT regime, we do not expect these changes to have a material bearing on deal activity going forward.

Furthermore, despite the significant increase to employers’ NIC, which will undoubtedly be a big concern for business owners, we remain optimistic that deal volumes will continue to grow in 2024 and beyond.

For more on the trends shaping Information, Media, and Events M&A, download this year’s Media Acquisition Report.