Budget tax measures: Context for the UK’s nations and regions

Approximate read time: 15 minutes

On 27 January 2025 the House of Lords is due to debate the following motion:

Lord Morrow (Democratic Unionist Party) to move that this House gives consideration to the impacts in the nations and regions of the UK of the removal of the agricultural property relief for inheritance tax, the increases to employers’ National Insurance contributions, and the extension of VAT to private school fees.

1.  Reforms to agricultural property relief for inheritance tax

1.1 Planned changes to agricultural property relief

In the autumn 2024 budget the government announced reforms to agricultural property relief (APR) from inheritance tax.^[1]

At present, APR is available at a rate of 100% or 50% (based on eligibility criteria) with no cap on the total amount of relief.^[2] From April 2026, inheritance tax relief for agricultural assets will be capped at £1mn, with a new reduced rate of 20% being charged above that (rather than the standard inheritance tax rate of 40%). The tax will be payable in instalments over 10 years interest free.^[3]

A Treasury policy paper on reforms to APR published in October 2024 provided information on the national distribution of claims at death for APR in the 2021/2022 financial year.^[4] A more detailed distributional analysis of the reforms was contained in a letter from the chancellor of the exchequer, Rachel Reeves, to the chair of the Treasury Committee, Meg Hillier, in November 2024.^[5] Neither piece of analysis examined the impact of the removal of APR for inheritance tax on a sub-UK basis.

1.2 Contribution of agriculture to the economies of the UK’s nations and regions

Table 1 shows estimates from the Office for National Statistics (ONS) of the gross value added (GVA) of the agricultural sector and the share of total GVA accounted for by agriculture in each nation and region of the UK in 2022. GVA is a measure of the value that producers add to goods and services they buy and sell. In the table, nations and regions are ranked in descending order of the importance of agriculture as a share of the economy.

Table 1: Gross value added of agriculture and agriculture’s share of total GVA in 2022 by UK nation and region

*The Office for National Statistics’ categorisation of agriculture also includes hunting activities.

(Source: Office for National Statistics, ‘Regional gross value added (balanced) by industry: All ITL regions’, 24 April 2024)

Relative to the total GVA of individual nations and regions, agriculture is of most importance to the economies of Northern Ireland, the East Midlands and Scotland. The sector’s contribution to total GVA is smallest in London, the South East and the North West.

1.3 Average farm size and farm value in the UK’s nations and regions

The Department for Environment, Food and Rural Affairs (Defra) publishes data on average farm size for the nations and regions of the UK. Combining this with estimates of the value of agricultural land gives a measure of the land value of the average-sized farm in different parts of the UK. This is shown in Table 2.

Table 2: Average farm size, average land value and value of average-sized farm by UK nation and region in 2023

(Source: Date on average farm size from Department for Environment, Food and Rural Affairs, ‘Official Statistics: Agricultural facts: Summary’, 31 October 2024 and Department for Environment, Food and Rural Affairs, ‘Agriculture in the United Kingdom data sets’, 22 July 2024. Data on average land values from Farmers Weekly, ‘Farmland in your area: 2024’, 26 January 2024, converted from £ per acre into £ per hectare)

On this calculation, average farm values are highest in the North East, the East of England and Yorkshire and the Humber. Average farm values are lowest in Wales, the North West and the South West. Average farm values in almost all parts of the UK exceed the planned £1mn cap on inheritance tax relief for agricultural assets.

However, note that the figures in Table 2 are averages. According to Treasury data, in 2021/22, 73% of APR claims came from estates with qualifying assets worth less than £1mn.^[6] So average figures might obscure the fact that many farms could have a lower value than the numbers presented in Table 2 if the average is skewed higher by larger farms.

In addition, while the figures in Table 2 look at land value, the government has said the valuation of an estate for inheritance tax purposes would also include non-residential agricultural buildings, farm vehicles and tools, livestock, chemicals and fertiliser stock. It has also said that certain exemptions and nil rate bands etc would apply, potentially reducing inheritance tax liability depending on people’s circumstances.^[7]

2.  Changes to employer national insurance contributions

2.1 Planned changes to employer national insurance contributions

In the autumn 2024 budget, the government announced several changes to employer national insurance contributions (NICs). These included:^[8]

• an increase in the rate of NICs paid by employers on their employees’ earnings, from 13.8% to 15%
• a decrease in the secondary threshold (the threshold after which employers start paying NICs on their employees’ earnings) from £758 a month to £417
• an increase in the employment allowance from £5,000 to £10,500, and a removal of the £100,000 eligibility cap

The changes to employer NICs will take effect from 6 April 2025.

2.2 Impact of changes to employer NICs at a UK level

According to HM Revenue and Customs (HMRC) analysis of the UK-wide impact of the changes to employer NICs, around 1.2 million employers will be affected. It is estimated that 250,000 employers will gain from the package, 940,000 will lose out in net terms, and a further 820,000 employers will see no change.^[9] This results in an average annual tax increase of just over £800 per employee. The average employer who loses out will see their liabilities increase by around £26,000.^[10]

The Office for Budget Responsibility (OBR) assumes that firms will pass on most, but not all, of their higher tax costs to employees. In 2025/26, the year the changes in employer NICs take effect, the OBR assumes firms pass on 60% of the higher costs to workers and consumers, via lower wages and higher prices, leaving 40% to be absorbed by the employer in lower post-tax profits. Further adjustment takes place thereafter, such that, from 2026/27 onwards, the OBR assumes that 76% of the total cost is passed through lower real wages, leaving 24% of the cost to affect profits.^[11]

The OBR also expects that workers and firms, respectively, may reduce labour supply and demand in response to lower wages and higher employer costs. It anticipates the measures may reduce labour supply by around 0.2%, or a little over 50,000 on an average-hours equivalent (AHE) basis, by 2029/30.^[12]

The Treasury will compensate public sector employers for higher employer NICs costs through higher budgets for day-to-day spending.^[13] Therefore, any effect on wages and employment will be restricted to private sector employers and employees.

2.3 Private sector employment in UK nations and regions

Table 3 shows the latest data on private sector employment and the share of private sector employment in total employment in each UK nation and region. The numbers relate to the three months to September 2024.

Table 3: Private sector employment by UK nation and region in July–September 2024

(Source: Office for National Statistics, ‘Public sector employment’, 17 December 2024)

Using the share of private sector employment in total employment as a proxy for exposure to planned changes to employer NICs, the East of England, London and the South East are most exposed. The North East, Wales and Northern Ireland are least exposed.

2.4 Average wages in UK nations and regions

Table 4 shows average annual earnings by UK nation and region in the three months to September 2024. The numbers relate to total earnings, since the ONS does not publish regional data on earnings broken down between the private and public sectors. Table 4 also provides an estimate of the annual cost to employers, before any behavioural and indirect effects, of raising employer NICs from 13.8% to 15% and decreasing the secondary threshold from £758 a month to £417. The actual cost of the changes to employer NICs will be lower than this, reflecting the increase in the employment allowance and the removal of the eligibility cap. However, data limitations mean calculating the regional impact of changes to the employer allowance is beyond the scope of this briefing.

Table 4: Average annual earnings and cost to employers of the planned rise in employer NICs and decrease in the secondary threshold, before any behavioural and indirect effects, by UK nation and region

(Source: Office for National Statistics, ‘EARN05: Gross weekly earnings of full-time employees by region’, 12 November 2024; and author’s own calculations)

On average, employers in London, the South East and the East of England are estimated to face the largest rise in costs from the increase in employer NICs and the decrease in the secondary threshold, before any behavioural and indirect effects. Employers in Northern Ireland, the North East and Wales are estimated to face the smallest increase in costs.

3.  VAT on private school fees

3.1 Planned changes to VAT on private school fees

On 29 July 2024, the government announced that from 1 January 2025, all education and boarding services provided by a private school or connected person would be subject to VAT at the standard rate of 20%.^[14] This policy was confirmed in the budget on 30 October 2024.^[15]

The government expects some, but not all, of the impact of VAT on private schools to be passed on in the form of higher fees. On average, the government expects private school fees to increase by around 10% as a result of this measure. The government also predicts that, in the long-run steady state, there will be 37,000 fewer pupils in the private sector in the UK as a result of the VAT measure. This represents around 6% of the current private school population.^[16]

There is no detailed official analysis of the expected impact of VAT on private school fees on a sub-UK basis. The HMRC policy paper ‘Private school fees—VAT measure’ contains a brief discussion of national and regional effects.^[17] According to HMRC:

The impacts of this policy may vary between different parts of the UK as a result of different local circumstances. Some areas of the UK have a higher concentration of private schools and a higher proportion of local pupils attending private schools; there are also variations in local state sector capacity. Impacts in Scotland, Wales, and Northern Ireland will generally be smaller than in England because those nations have a lower proportion of pupils in private schools, but again there will be regional variation. National differences in education policy will also shape impacts.

3.2 Role of private schools in the UK’s nations and regions

Approximately 6–7% of pupils in the UK as a whole are educated in independent schools.^[18] This equates to around 560,000 to 570,000 pupils.

Regional data on the private schools sector is collated by the Independent Schools Council (ISC), a member association for independent schools. The ISC covers 1,411 schools and around 86% of independent school pupils attend a school that is a member of the ISC.^[19]

Every year the ISC conducts a census of its members. The 2024 census found that in the ISC’s member schools the greatest number of schools and pupils were in London, at 318 schools and 116,133 pupils. This was followed by the South Central region then the South East. Wales and the North East had the fewest, at 19 schools and 7,304 pupils and 17 schools and 7,420 pupils respectively.^[20] Table 5 shows pupil numbers by UK nation and region, as defined by the ISC.

Table 5: Private school pupil numbers by UK nation and region*

*The ISC census does not publish data for Northern Ireland

(Source: Independent Schools Council, ‘ISC census and annual report 2024’, 17 May 2024, p 32)

3.3 Private school fees by UK nation and region

According to the ISC, day school fees vary by region. The ISC’s 2024 census found that average termly fees for day schools were the lowest in the North West at £4,312, rising to £7,334 per term for day schools in London.^[21] Average fees by UK nation and region and type of school are shown in Table 6.

Table 6: Average private school fees per term by UK nation and region

(Source: Independent Schools Council, ‘ISC census and annual report 2024’, 17 May 2024, p 32)

4.  Read more

• House of Lords Library, ‘National Insurance Contributions (Secondary Class 1 Contributions) Bill’, 23 December 2025
• House of Lords Library, ‘Budget 2024: Inheritance tax, family farms and food security’, 5 December 2024
• House of Commons Library, ‘VAT on private school fees’, 29 November 2024
• House of Lords Library, ‘Autumn budget 2024: Key announcements and analysis’, 5 November 2024
• House of Lords Library, ‘Independent schools: Proposed VAT changes’, 14 October 2024

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