Less a mini, and more a maxi, budget 2022

Note: This article was originally published on 23 September 2022. Subsequently, several policies were reversed by government, including some detailed below. In the interest of accuracy for those reading this article in the future, we have struck through those policies below which no longer apply. Strike through, as opposed to deletion, allows you to see what was reversed.

This update was made on 19 October 2022, following the new chancellor, Jeremy Hunt’s, statement.

Liz Truss and Kwasi Kwarteng have certainly arrived with a bang. Today’s “mini budget” is the largest tax giveaway we have seen in decades. The announcements are a huge shake up to the UK tax system and represent a dramatic change in policy.

In brief - what’s changed?

• National Insurance Contributions – reversal of the increases implemented last April.
• Corporation tax – scrapping of the planned rise to 25% (for larger companies) due next April.
• Income tax – 45% band scrapped and 20% band reduced to 19%, both from next April.
• SDLT – residential threshold doubled to £250k (plus benefits for first time buyers).
• IR35 – 2017 and 2021 changes reversed.
• EIS extended, SEIS and CSOP limits increased.
• Numerous tax breaks within new investment zones

1. INCOME TAX

The planned April 2024 1% cut in the basic rate of income tax will be brought forward to April 2023. 

Without intervention, this would have led to a reduction of the amount which charities are able to reclaim under the Gift Aid scheme.  The previously announced transition period, enabling charities to reclaim tax relief at the current basic rate of 20%, has therefore been extended to cover 2023/24 and as announced by the previous Chancellor it will continue to apply until April 2027.  Relief at source pension schemes will also be able to claim 20% tax relief for 2023/24.

One of the big shocks of the day was the removal from April 2023 of the 45% additional rate of income tax which currently applies to those earning over £150,000.  Its removal, combined with the surprise reversal of the proposed dividend tax increase next year, means that there will now only be two rates of dividend tax, 7.5% and 32.5%.

Bringing forward the basic rate reduction was not unexpected, but the abolition of the additional rate has taken many by surprise.  For those high earners, 2023/24 is looking to be a good year.  Coupled with the removal of the bankers’ bonus cap and the freezing of alcohol duty, expect to hear the popping of a few corks by some.

It will be interesting to see how both employees and employers react to these changes and in particular whether Christmas 2022 bonuses become Easter 2023 bonuses. A review of employment terms and employee expectations may be timely.

2. NICs and the Health and Social Care Levy

As has been widely reported, there will be a reduction in Class 1 and Class 4 contributions from this November (covering employees, employers and the self-employed). The planned introduction of the new Health and Social Care Levy will also be cancelled next year.

The NIC benefit will effectively be shared between employees and employers.  It is unlikely that this change will significantly affect the timing of any payments to employees. However, some payroll systems may not be able to implement the change in time for November salary payments and those affected employees should therefore expect to receive back-dated payments in December or January.

The increase in NICs this year and the new levy were introduced as a means to increase spending on health and social care.   The Chancellor has stated that funding will be maintained as if the levy is still in place.

3. OFF PAYROLL WORKING

The IR35 legislation (which applies to those who provide their services through a personal company) has become more complex since reforms in 2017 and 2021 required the end user of the services to determine whether the working relationship with the contractor was a self- employment or an employment arrangement.  The abolition of these reforms will return the obligation to determine the correct status to the contractor, as had previously been the case for nearly 20 years.

Whilst the old IR35 legislation is not necessarily perfect (given the tax consequences, how many contractors will hold their hands up to the question “Are you really an employee in disguise?”), the recent reforms have placed a significant burden – and risk - on both public and private sector businesses using the services of contractors working through personal service companies. Inevitably, cautious engagers often categorised individuals as requiring PAYE deductions. This change will mean the risk returns to the contractor (or more accurately, their personal service company).   All arrangements entered into with contractors using personal service companies should be reviewed to ensure that their provisions will reflect the revised position from April 2023 (for example, provisions dealing with the right to deduct tax and any warranties about status).  The change announced today may also lead to some businesses delaying entering into these arrangements until the risk reverts to the contractor next year.

4. CORPORATION TAX

Next April’s scheduled increase to 25% corporation tax for larger companies has been scrapped, meaning the most profitable 30% of companies in the country (those anticipated to be affected by the changes) will continue to pay tax at 19%. In addition, the annual investment allowance (which provides 100% tax relief for certain expenditure) will remain at £1m and not, as planned, revert to £200,000.

This will allow the country’s largest companies to generate greater profits net of tax. The ultimate beneficiaries are likely to be the shareholders, which will include pension funds as well as individuals and companies. When combined with the reduction in tax on dividends, this might materially increase the net dividend a shareholder receives, or allow a company to maintain its net dividend level while increasing the wages it pays its employees.

5. SDLT

Everyone paying over £250k for a residential property will save £2,500 in SDLT. The question is, will sellers simply increase their sales price to absorb this (factoring in mortgage leverage, that might be an average increase of £5,000 - £10,000)? While it was glossed over in the speech, the outright removal of SDLT for developers purchasing in investment zones could save material sums and dramatically encourage development in these areas.

6. Investors and share options

The increase in the individual limits under company share option plans to £60,000 is very welcome, as is the loosening of SEIS restrictions (increasing the amount companies can raise to £250,000 and the amount individuals can invest to £200,000, while also increasing the maximum company age to three years and gross asset test to £350,000). The true value of these schemes had eroded over time with inflation. All changes apply from April 2023. This will allow more SEIS investment in slightly more mature / larger companies, offering more investors the 50% initial saving SEIS offers (as opposed to the 30% saving EIS offers) and might increase investment in start-up companies. The indication that EIS (and VCT) relief will also be extended beyond their imminent sunset clauses is also reassuring for investors, though there is currently no detail of what that extension looks like.

Final thoughts

These announcements provide good news to many, including entrepreneurs, employees, businesses and investors, but rely on kick starting growth and trickledown economics. It will be interesting to see how it is received and whether it works.   We also have a further budget in November to look forward to when we might expect to see more involvement from the OBR.