Rachel Reeves has just announced £40bn in tax increases, many of which are coming from businesses. But what does this mean for UK stocks?
The answer will vary from one company to another. But there are a couple of FTSE 100 and FTSE 250 firms that I think are particularly interesting.
BP
Windfall taxes are a constant risk with BP (LSE:BP shares). And the big news is that this is set to rise to 38%, bringing overall taxation to 78% on hydrocarbon exploration and production.
The government is also withdrawing the 29% oil and gas investment allowance. While the decarbonisation allowance is unchanged, BP has shifted its focus away from this area recently.
Worse yet, the firm is likely to face windfall taxes even with oil prices falling. The mechanism for resetting taxes back to 40% only applies if oil falls below $71.70 and gas goes below £0.54.
While oil is close to this level, gas is nowhere near. So BP could find itself having to pay higher taxes while also seeing its revenues reduced by oil prices that aren’t particularly high.
UK natural gas prices
Source: Trading Economics
One way or another, the company is likely to have to pay more in windfall taxes, which will mean profits will be lower than they would have been. But there is a potential upside.
With the tax incentive withdrawn, BP might pull back on its investments. In that situation, the company might decide to return cash to shareholders instead – making the dividend potentially interesting.
J.D. Wetherspoon
For J.D. Wetherspoon (LSE:JDW), things could have been worse. While costs are likely to go up, there was also good news for the company.
The big challenges will come from increased National Insurance contributions from employers and a higher National Minimum Wage. That is something the firm will have to deal with.
On the other hand, though, the Chancellor announced a cut to duty on draught alcohol. That’s an unexpected boost for the pub industry as a whole.
This gives J.D. Wetherspoon a choice. It can either use the cut to offset higher costs, or it can pass it on to customers and look to widen the gap between its prices and those of its rivals.
The other positive news was an extension to the business rates relief the hospitality industry has been benefiting from since Covid-19. This should also help the firm’s bottom line.
Overall, the Budget was better than I expected for J.D. Wetherspoon. And the stock has jumped 5% as a result.
Tough times ahead?
Before today’s announcement, it was widely understood that taxes were going to go up. And businesses were likely to be major contributors.
The latest announcement gives UK investors a clear sense of what the tax environment will look like over the next few years. So the next question is which stocks to buy.
