Autumn Budget 2024 Commentary: Manufacturing

The government has unveiled 7 key pillars to its growth mission, the most relevant of which for manufacturers are expected to be:

• Investment, Infrastructure and Planning – higher public and private investment in infrastructure is likely to create opportunities in the manufacturing sector.
• People – a commitment to improved employment prospects, skills and productivity would help ease the pressures presented by a growing skills gap and help bridge the disconnect between education and industry. However, this sentiment is at odds with the increase to employer’s National Insurance (more detail below).
• Industrial, Strategy and Trade – an industrial strategy and a trade strategy with a view to free, open trade could help the industry recover from some of the challenges presented by Brexit.
• Innovation – as this is integral to the continued success of UK manufacturing.
• Net Zero – Whilst this is a key concern across the sector, as identified in our recent publication, “Manufacturing a Sustainable Future”, 35% of manufacturers are concerned about costs as a barrier to reducing carbon emissions.

Manufacturers operating in the following areas of specialism could stand to gain from specific initiatives:

• Committing £975 million in R&D funding for the aerospace sector over five years. Further details will follow in Phase 2 of the Spending Review.
• Committing over £2 billion in R&D and Capital funding over 5 years to support the automotive sector, including the zero emissions vehicle manufacturing sector and supply chain. Further details will follow in Phase 2 of the spending Review.
• Up to £520 million for a new Life Sciences Innovative Manufacturing Fund to drive growth and build resilience for future health emergencies.
• Tax reliefs for the UK’s world-leading creative industries, which will provide £15 billion of support over the next 5 years.

In line with this, the government’s Corporate Tax Roadmap confirms there will be no fundamental changes to business tax capital allowances, or to R&D tax credit incentives, which should give businesses the confidence to continue with any planned investment in the short to medium term.

Funding for the Made Smarter Adoption programme will double to £16 million in 2025-26, supporting more small manufacturing businesses to adopt advanced digital technologies and enabling the programme to be expanded to all nine English regions.

One of the key challenges faced by the sector is the availability and retention of appropriately skilled labour. From April 2025 the National Living Wage will increase to £12.21 per hour for all eligible employees over 21 years old, and the National Minimum Wage for 18-20 year olds will increase to £10.00 per hour for all eligible workers. The government is also increasing the minimum wages for Under 18s and Apprentices to £7.55 per hour.

This, together with the increased protections afforded to employees through the Workers Rights Bill already pre-trialled, will undoubtedly impact margins for some manufacturers and have an impact on hiring decisions. On the other hand, as technological developments increasingly allow for automation of basic tasks, those already investing in upskilling a leaner and more efficient workforce may be insulated from these changes as higher-skilled workers will typically command salaries above the living wage.

An increase in the employer’s National Insurance rate from 13.8% to 15% together with a reduction in the Secondary Threshold to £5,000 (from £9,100) will further increase the cost of employing people, which will not be welcomed in a sector already competing to attract and retain the best talent. Increasing the costs associated with employment could lead to reduced profitability, a reduction in hiring power particularly for SME’s, and less funding available for upskilling the workforce. Some of this increase will be mitigated by a reduction in corporation tax which will reduce the impact on profitable businesses by up to 25% of the increase.

Most manufacturing employers will see the costs of staffing their factories increase as a result of the Employers NIC changes and the reduction in the Secondary Threshold alone creates an additional cost of £615 per employee (before any corporation tax reduction) which will substantially exceed the small £5,500 increase in the Employer’s Allowance to £10,500

• Owner-managers of manufacturing businesses will face new challenges planning for succession and exit, as they will now need to navigate increases to the rate of Capital Gains tax and restrictions to Business Assets Disposal Relief. It is expected that this could cost exiting shareholders up to an additional £40,000 in tax for any disposals made in 2025and up to £80,000 after this point.
• The changes to the Business Property Relief rules for Inheritance Tax Purposes to cap IHT relief to the first £1m of value with an effective 20% IHT charge on the excess value over £1m are an unwelcome introduction for privately owned businesses that could create a significant financial challenge when a business owner passes away.