The Chancellor has announced significant changes to tax rates in a ‘mini-budget’ which represents one of the biggest tax-cutting budgets in 50 years and which the government have said will cost £36bn. The announcements, part of the government’s “Growth Plan 2022”, signalled a shift in policy brought in by Liz Truss’s new Conservative leadership team. Chancellor Kwasi Kwarteng was clear that the aim is to stimulate the economy through a series of tax cuts that will help both employees and businesses.
For employees, last year’s increase in national insurance contribution (“NIC”) rates was reversed and there are cuts to income tax rates coming in from April 2023. For businesses, the reversal of the employer’s NIC rates and abolishing the planned increase in corporation tax rates in April 2023 will be a welcome boost.
National Insurance Contributions (NIC)
As widely anticipated, the government has confirmed in-year reductions in National Insurance rates and the cancellation of the Health and Social Care levy as a separate tax due to be introduced from April 2023. The key changes announced are:
- NIC rates will be cut by 1.25% percentage points for employees, employers and the self-employed, effectively reversing the uplift introduced in April 2022 for the rest of the tax year. This reduction will apply from 6 November 2022 and it will cover Class 1 (both employee and employer), Class 1A, Class 1B and Class 4 (self-employed).
- The Health and Social Care Levy of 1.25% due to be introduced from April 2023 will not now go ahead.
- The 1.25 percentage point increase to income tax on dividends, which was announced alongside the Health and Social Care Levy to ensure those who gained income from dividends contributed the same amount to help fund health and social care will be reversed from April 2023.
The government has committed to retaining the increase in NIC thresholds which were increased in July 2022, which aligned the primary threshold for NIC to the standard personal allowance of £12,570. This, combined with the reversal of the 1.25% increase, means that employees will be paying less NIC than in the last tax year.
The planned one percentage point cut in the Basic Rate of Income Tax (from 20% to 19%) will now take effect from April 2023 rather than April 2024 and is the first cut to basic rate tax in 15 years costing the government £5bn.
More of a surprise is that the government is also removing the additional 45% rate on income tax on annual income above £150,000 from 6 April 2023. This means that all annual income above £50,270 will be taxed at 40%, the current higher rate of income tax. The dividend additional rate will also be removed to align with the dividend upper rate, which is being reduced to 32.5% from 6 April 2023. Those who would have otherwise been additional rate taxpayers will, from April 2023, benefit from a Personal Savings Allowance of £500, in line with higher rate taxpayers. This was not previously available to them.
The NIC and income tax changes will reduce the amount payable by workers. As an example: for an employee with an annual income of £25k, the monthly tax/NIC saving from 6 April 2023 compared to present will be £23.30 and for an employee with an annual income of £60k, the monthly saving will be £80.81. The employer monthly saving will be £16.56 and £53.02 respectively.
Corporation tax rate
Liz Truss campaigned on a promise to reverse the planned increase in corporation tax to 25 per cent from April 2023. As expected the government has now cancelled this planned increase. Rather than rising to 25% from April 2023, the rate will remain at 19% for all companies.
Maintaining the rate of corporation tax at 19% keeps the UK’s current international competitiveness relative to other major economies. According to OECD 2022 figures, at 19%, the UK’s rate of corporation tax will remain significantly lower than its G7 counterparts.
Tax relief on capital expenditure
The Annual Investment Allowance which gives 100% relief for certain capital expenditure was temporarily increased to £1m p.a. but was due to return to £200k p.a. in April 2023. The Growth Plan confirms that the £1m allowance will become permanent.
The Growth Plan published by the government also signalled a change for off-payroll workers. Changes introduced over the past few years have put the burden on to medium and larger businesses to determine the employment status for off-payroll workers operating through an intermediary. This has required a rework of systems/controls and, in many cases, businesses have simply put workers on the payroll to lower the risk. These changes will be reversed from April 2023 and it will once again be the responsibility of the intermediary company to determine the employment status.
The above changes, and the reduction in Employer’s NIC, will be a welcome boost for businesses dealing with the high inflationary environment.
To continue the growth drive, the Chancellor announced they are currently in discussions with 38 local authorities to establish investment zones in England. The government has also confirmed that it intends to work closely with the devolved administrations and local partners to deliver this opportunity to drive local growth in Scotland, Wales and Northern Ireland.
Businesses in designated areas in investment zones will benefit from 100% business rates relief on newly occupied and expanded premises. In addition, businesses will receive full stamp duty land tax relief on land bought for commercial or residential development and a zero rate for Employer National Insurance contributions on new employee earnings up to £50,270 per year.
To incentivise investment there will be a 100% first-year enhanced capital allowance relief for plant and machinery used within designated sites and accelerated Enhanced Structures and Buildings Allowance relief of 20% per year.
In addition to the tax cuts above, the Chancellor has also increased the nil-rate band for stamp duty from £125,000 to £250,000 with immediate effect. Effectively, the portion of the purchase price between £125,000 and £250,000 will now have no stamp duty whereas before today it was 2%. The nil-rate band for first-time buyers has been increased from £300,000 to £425,000 (so long as the cost of the property is not greater than £625,000). The housing market as a whole has performed very strongly since the start of the pandemic, but the stated aim of these changes is to reduce barriers to moving and increase the volume of transactions so that households can take a step up when they grow and downsize at the right time.
VAT-free shopping for overseas visitors
Finally, to encourage visitors to the UK, the government will be consulting on introducing a VAT-free shopping regime for overseas visitors. This change, combined with the weak sterling rate, should certainly make the UK an attractive tourist destination.
All of the above, when taken with the energy cost support already announced, will come at a significant cost estimated at c. £100bn. Time will tell if the stimulus given by the mini-budget will help the economy grow sufficiently to start paying for the cost not only of these changes, but also the support provided during the pandemic.
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