Laborious times ahead for the charity sector? An analysis of how the autumn budget will affect charities.

Labour’s first budget in 14 years was highly anticipated and discussed across the charity sector in the lead up to its unveiling on 30 October.

It brought about a slew of changes, some of which will affect charities directly, and others which will have an indirect impact on the sector.

Whilst Labour had, during its election campaign, shied away from saying it would raise taxes, the budget set out a number of increases to tax, including an increase to National Insurance payments by employers, and a rise in the National Living Wage.

The increase in National Insurance payments is estimated to cost the voluntary sector an extra £1.4bn a year, and, on average, an extra £800 per employee. In anticipation of this change, Scottish Council for Voluntary Organisations, National Council for Voluntary Organisations, Northern Ireland Council for Voluntary Action and Wales Council for Voluntary Action had penned an open letter to Rachel Reeves, the Chancellor, expressing their disappointment. This is because whilst public sector employers will be reimbursed for an increase in their National Insurance contributions, there had been no such mention of a similar reimbursement being made available to voluntary sector employers.

When the Budget was announced, and no such exemption for charities was mentioned, National Council for Voluntary Organisations and Association of Chief Executives of Voluntary Organisations wrote a further open letter to the Chancellor, describing the increase as “unsustainable” for charities, and imploring the government to reconsider its position to not extend the exemption beyond the public sector.

National Living Wage worries

The National Living Wage hike represents an increase of 77p per hour, going from £11.44 to £12.21 per hour from April 2025. Whilst this is good news for those who are amongst the lowest paid in the charity sector, it is conversely not such good news for charities who employ staff, who will have to consider this extra liability moving forwards. Charities will have some time to prepare for this minimum wage increase, but the extra pressure this will place on charities’ finances, along with the National Insurance rise, cannot be understated.

Jane Ide, chief executive of ACEVO, who supports leaders of charities and social enterprises in England and Wales, expressed her concern about the announcement. She said she was “deeply concerned” about the tax rises and suggested that they would lead to organisations being forced to “reduce staff, cut salaries, and, most importantly, scale back services for the very people they strive to support”.

Funding for social care

The budget did, however, announce an additional £600m of funding for social care, and a £22.6bn increase in the health budget over the next two years. This represents positive news for charities operating in the health and social care sector and may relieve some of the pressure they have been facing in recent years.

Those in the private education sector will have been anticipating this change for some time, but the release of the budget confirmed that, subject to the necessary legislation being passed, the standard 20% VAT rate will apply to private schools from 1 January 2025, closing a relief in VAT payments that private schools previously benefited from.

This also applies retrospectively, where school fees for terms commencing on or after 1 January 2025 are paid on are after 29 July 2024.

Many in the sector have criticised implementation of VAT on private school fees, and in particular, its hurried introduction. There are concerns that a January implementation will cause issues for schools, keeping in mind that we are, at the time of writing, less than two months away from the new year.

Charitable status of schools and removal of charitable business rate relief

It is important to note that the government is not, at this stage, proposing to remove the charitable status that some independent schools have. Labour had previously indicated in their 2019 manifesto that it would look to integrate private schools in a “comprehensive education system”, but this has not been raised by the current Labour government, and nor has the issue of whether independent schools should retain charitable status.

In addition, the government will remove the charitable (business rates) relief which is currently available to independent schools that are charities, with some limited exceptions where schools are “wholly or mainly” providing full-time education for pupils with an Education, Health and Care plan.

Whether schools look to pass the additional cost on to parents remains to be seen, either in whole or in part, and will largely depend on the financial position of the school. Many who are still enrolled into the Teachers’ Pension Scheme, or those who are currently consulting over withdrawing from it or implementing alternative pension arrangements, will already be feeling the toll of the increase to the employer contribution rate to 28.68% from 1 April 2024.

The government also announced immediately after the budget that a consultation in relation to the abuse of charity tax rules had concluded, and that as a result of this, legislation will be passed in or around April 2026. The legislation proposes to:

• Prevent donors from obtaining a financial advantage from their donation
• Prevent abuse of the charitable investment rules
• Close a gap in non-charitable expenditure rules
• Sanction charities that do not meet their filing and payment obligations.

As draft legislation will not be published until 2025, and the change is not proposed to come into force until the financial year 2026/2027, charities have some time to consider its potential implications and make any adjustments necessary.

Charities should be mindful of the announcements that comprised the autumn budget, and whilst some changes will not take effect immediately, charities should review their reserves and financial position to ensure that they are well placed for what may prove to be a turbulent few years.