How does the Budget impact your investments?

The key to this Budget for investors is whether Chancellor Rachel Reeves has successfully balanced the finances whilst introducing policies that will deliver growth and incentivise British companies to invest in the UK, which could help boost economic activity and productivity. We look at some of the key announcements made today and their potential impact.

The rise in minimum wages announced the day before the Budget is good news for those on the lowest incomes but could potentially impact the economy and markets in several ways.

Firstly, there is the question of affordability for companies, particularly smaller businesses. Wages are a significant cost to companies, so there is a risk higher minimum wages lead to job cuts, rising unemployment and weighing on the economy. However, Reeves believes that the higher minimum wage will support the economy as it feeds through to higher disposable income and boosts consumer spending, especially as those who benefit are likely to spend any additional income they receive.

Secondly, the rise in minimum wages of 6.7% for people over the age of 21 (and by 16.3% for 18 - 20 year olds) from April 2025 could well have an inflationary impact. Wages are a large component of inflation measures and with minimum wage rises affecting millions, combined with the recent agreements for wages increases with the trade unions, investors should be prepared for the potential return of higher inflation.

There were rumours that this would be a target for the Budget. Today, it was confirmed that the relief would be reduced from 100% to 50% from April 2026. This means IHT will be charged at an effective rate of 20% on qualifying alternative investment market (AIM) shares.

BPR generally applies to shares in AIM-listed companies that have been held by the investor for the two years immediately preceding the transfer. Currently, relief from IHT is at 100% on qualifying AIM shares.

Concerns BPR would be completely removed had weighed on the AIM market in recent months, leaving some AIM shares attractively valued. Today’s announcement, whilst disappointing for investors, is better than feared and there is still a potential tax benefit from holding AIM shares. The AIM market has rallied following the announcement.

Concerns that Labour would increase borrowing weighed on bond markets ahead of the Budget – with global investment banks preparing for UK debt issuance to rise to £300 billion for 2024, the second highest on record.¹ Government bonds had sold off ahead of the budget as a result. Today Chancellor Rachel Reeves confirmed she will change the fiscal rules and use a broader definition of debt, arguing this takes into account the benefits as well as the liabilities of any borrowing. This allows additional borrowing of up to £50 billion each year.

Bond markets fell (and yields rose) following the Budget speech. The combination of greater than expected levels of debt along with greater than expected capital investment could mean interest rates stay higher for longer. The gilt market yields remain higher than seen in mid-September reflecting bond investors concerns.

As is the case with budget announcements there is a lot in the detail and the impact on financial markets may change over the next few weeks.

¹ Financial Times, Bond market braced for rise in UK debt issuance to £300bn this year, 28 October 2024