New Chancellor’s Announcement
*** This Blog was originally published following a Fiscal Event on 23rd September 2022.***
Since then, there has been TWO significant amendments that were announced on 4th October 2022.
It is now confirmed that additional rate tax is to remain and,
A further budget event will take place before the end of October 2022 and in advance of the Bank of England November interest rate setting.
As mentioned, it is also confirmed that the Office of Budget Responsibility will provide oversight on next announcements made.
We will publish a further update after this next event and in the meantime if you have any questions, please contact us on 01423 223640 or advice@prosperis.co.uk ***
Last Friday, the new Chancellor, Kwasi Kwarteng stood up to make his statement on 'The Growth Plan' with much of what he had to say about energy support for businesses and households, bankers' bonuses, investment zones and reversals to NICs had already been announced. The government also said that the Chancellor's statement would not be subject to a forecast (independent scrutiny) from the Office for Budget Responsibility. The Chancellor’s Growth Plan set out a new approach to the economy built around three central priorities:
· reforming the supply-side of the economy
· maintaining a responsible approach to public finances
· cutting taxes to boost growth
So, let’s look at a bit more detail of the proposals before I comment:
Energy bills - Plans for business
The Energy Bill Relief Scheme is designed to cut energy prices for non-domestic energy customers, charities and public sector organisations. The scheme will apply to fixed contracts agreed on or after 1st April 2022 in addition to deemed, variable and flexible tariffs and contracts. Running for an initial six-month period, the scheme will apply to energy usage from October 1st to 31st March 2023. According to the government, savings will first be seen in businesses' October bills.
Plans for households
Prime Minister Liz Truss announced the Energy Price Guarantee (EPG) for households on 8th September which will apply from the start of October 2022. The EPG means an average household will pay no more than £2,500 per year for each of the next two years. It comes in addition to the £400 Energy Bill Support Scheme and will save the average household at least £1,000. The EPG limits the price suppliers can charge customers for energy supplies. This takes account of temporarily removing green levies, worth around £150, from household bills. The guarantee will supersede the existing energy price cap.
The government estimates the EPG will deliver substantial benefits to the economy, boosting growth and curbing inflation by four to five percentage points, which will in turn reduce the cost of servicing the national debt.
Stamp Duty Land Tax
A number of changes have been announced to the Stamp Duty Land Tax (SDLT) regime. The changes increase the amount a house buyer will pay for residential property before they become liable for SDLT. The residential nil rate tax threshold is increased from £125,000 to £250,000.
The nil rate threshold for First Time Buyers' Relief is increased from £300,000 to £425,000 and the maximum amount an individual can pay while remaining eligible for First Time Buyers' Relief is increased to £625,000.
The changes apply to transactions with effective dates on and after 23rd September 2022 in England and Northern Ireland. These changes do not apply to Scotland or Wales which operate their own land transactions taxes. There are no changes in relation to purchases of non-residential property.
Income tax
The government had previously announced there would be a cut in the basic rate of income tax, from 20% to 19%, from April 2024. This is now being accelerated so that it takes effect from April 2023. The government states this reduction is worth over £5 billion for workers, savers and pensioners.
In addition, to 'incentivise enterprise and hard-work and simplify the tax system', the government will abolish the 45% additional rate of income tax from April 2023. Consequently, there will be a single higher rate of income tax of 40%.
These changes will generally apply to taxpayers in England, Wales and Northern Ireland. It remains to be seen what the Scottish government will do in relation to the income tax cuts and setting of rates on non-savings income.
Tax Relief Consequences
There are a number of tax consequences which stem from these changes. One of them is the amount of tax relief given at source on pension contributions and Gift Aid donations. This is currently given at the basic rate of 20%. The government has stated there will be a four-year transition period for Gift Aid relief to maintain the income tax basic rate relief at 20% until April 2027. This will support almost 70,000 charities and is worth over £300 million. However, there was little comment on pension contributions other than there will be a one-year transitional period for Relief at Source pension schemes to permit them to continue to claim tax relief at 20%.
Dividends - From April 2023:
· the dividend ordinary rate of 8.75% will reduce to 7.5%
· the dividend upper rate of 33.75% will reduce to 32.5% and
· the dividend additional rate will be abolished
As corporation tax due on directors' overdrawn loan accounts is paid at the dividend upper rate, it will also reduce to a 32.5% charge for loans made on or after 6th April 2023. These changes will apply in Scotland as the rules on dividends apply to the whole of the UK.
National Insurance contributions
In September 2021, the Government published its proposals for new investment in health and social care in England. The proposals were intended to lead to a permanent increase in spending not only in England but also by the devolved governments. To fund the investment, the Government introduced a UK-wide 1.25% Health & Social Care Levy based on the National Insurance contributions (NICs) system but ringfenced for health and social care.
The Health & Social Care Levy Act provided for a temporary 1.25% increase to both the main and additional rates of Class 1, Class 1A, Class 1B and Class 4 NICs for 2022/23. From April 2023 onwards, the NIC rates were intended to revert back to 2021/22 levels and be replaced by a new 1.25% Health and Social Care Levy.
However, the new Chancellor has decided to:
· reverse the temporary increase in NICs from November and
· cancel the Health and Social Care Levy completely.
The Health & Social Care Levy was expected to raise around £13 billion a year to fund health and social care and the Chancellor has confirmed that funding will be maintained at the same level as if the Levy was in place, funded from general taxation.
According to the Government, not proceeding with the Levy will reduce tax for 920,000 businesses by nearly £10,000 on average next year. For SMEs, the Government predicts the savings will be around £4,200 on average for small businesses and £21,700 for medium sized firms from 2023/24. In addition, it will help almost 28 million people across the UK save £330 on average in 2023/24, with an additional saving of around £135 on average this year.
More detail for employees and employers
The changes take effect for payments of earnings made on or after 6 November 2022, so:
· Primary Class 1 NICs (employees) will generally reduce from 13.25% to 12% and 3.25% to 2%
· Secondary Class 1 NICs (employers) will reduce from 15.05% to 13.8%
The effect on Class 1A (payable by employers on taxable benefits in kind) and Class 1B (payable by employers on PAYE Settlement Agreements) NICs will effectively be averaged over the 2022/23 tax year, so that the rate will generally be 14.53%.
The Government hopes most employees will receive the NICs reduction directly via the payroll in their November pay but acknowledges some will have to wait until December or January, depending on the complexity of their employer's payroll software.
Self-employed
Following the principle detailed above, the changes to Class 4 NICs will again be averaged across 2022/23, so that the rates will be 9.73% and 2.73%.
Business - Corporation tax rates
It had been previously announced the rate of corporation tax would increase for many companies from April 2023 to 25%. This change will now not go ahead, leaving the rate of corporation tax at 19% for the majority of companies. The 19% UK corporation tax rate is significantly lower than the rest of the G7 and the lowest in the G20. In line with this change, the Bank Corporation Tax Surcharge will remain the same, as will the Diverted Profits Tax.
IR35 and off-payrolling
Over the last 20 years, there have been numerous changes to the tax system to try and address 'disguised employment' and to generate additional tax and NICs accordingly. In a surprise announcement, the Government has stated it will repeal the off-payroll working rules from April 2023. From this date, workers providing their services via an intermediary will once again be responsible for determining their employment status and paying the appropriate amount of tax and NICs.
Seed Enterprise Investment Scheme (SEIS) limits are increased
To stimulate growth in smaller, early-stage companies, SEIS investment limits were doubled to £200,000 a year and companies can now raise £250,000, up from £150,000.
Other items on the Chancellors agenda sees reform within his own Department by absorbing the Office of Tax Simplification into HMRC and The Treasury, a new VAT refund scheme for overseas visitors to the UK to stimulate tourism as well as direct investment into infrastructure and specific regions around the UK.
Market Assessment
Financial markets assess the health of a nation’s economy, and its political stability, in two ways. The fledgling Truss-Kwarteng administration is off to a shaky start, at least as far as the government bond and currency markets are concerned.
Buyers of UK government bonds express their level of satisfaction, or concern, through the yield demanded on government debt. The worse the outlook, and the less confident investors become, the higher the level of compensation they demand.
Fixed income markets do not appear impressed. Granted, the 10-year government bond yield bottomed in summer 2020 as the economy began to shake off Covid-19 and inflation stirred, but the benchmark gilt yield has soared since Liz Truss’s Conservative leadership victory on September 5 — hardly a vote of confidence.
A jump of almost 40 basis points to an 11-year high on the very morning of Friday’s mini-Budget looks like a thumbs down as well.
Sterling
Sterling’s ongoing and apparently accelerating decline to fresh 47-year lows against the dollar, suggests that currency markets are yet to be convinced. The Government is following the playbook of tax cuts and supply-side deregulation set by the early-1980s Thatcher and Reagan administrations. Some hail them as architects of an economic turnround in the wake of the stagflationary chaos of the mid-to-late 1970s.
Share and bond prices have marched higher relentlessly since those reforms, albeit with notable stumbles along the way. From that perspective, the new residents of Downing Street may be surprised their programme is getting such an indifferent welcome from the currency, bond and even the stock markets.
Part of the reason is perhaps that Kwarteng has less room for manoeuvre than his predecessor, Sir Geoffrey Howe, did in the early 1980s. Back then, the national debt was less than 40% of GDP, while interest rates peaked at 17% in late 1979 and began to fall in the second half of the 1980s. In contrast, the £2tn-plus national debt today equates to almost 100% of GDP and interest rates look set to keep going up as the Bank of England wrestles with the legacy of its misjudgement inflation would prove transitory.
This may explain why markets are nervous about the currently uncosted nature of Kwarteng’s plans and the initial lack of involvement from the Office for Budget Responsibility.
Summary
All this is being done in the name of growth. Mr Kwarteng and Liz Truss, the new prime minister, hold high taxes on both labour and capital largely to blame for Britain’s low growth. Slashing them will help the country return to a trend growth rate of 2.5% a year over the medium term, Mr Kwarteng promised. So too will a host of promised supply-side measures, such as pledges to reform planning rules and create low-tax investment zones.
Those decisions put the Conservative government at war with its own recent past. A cut to national insurance, a payroll tax, comes barely a year after it was introduced by Boris Johnson and Rishi Sunak. The increase to corporation tax had not even come into force by the time Mr Kwarteng pledged to remove it. Proposed increases on alcohol duty introduced by Mr Sunak will be scrapped. Reforms to self-employed status introduced under Theresa May (who left office in 2019) and Boris Johnson (who left in September this year) will be repealed.
It also marks a philosophical break. For the past decade, the Conservatives have based their appeal on a reputation for sound finances. Now, under Mr Kwarteng, debt will pile up. Tax cuts will increase Britain’s public-debt-to-GDP ratio from a little over 80% in 2021-22, to nearly 95% in 2026-7, says the Institute of Fiscal Studies. Even Boris Johnson, a spendthrift prime minister, accepted increased spending had to be funded by extra taxes. Now, the Conservatives, or at least the party’s front bench, are relaxed about unbalanced books.
What should Prosperis Clients do next?
Whilst we remain in challenging economic times with the prevailing investment markets continuing to be volatile, these announcements do provide important financial planning strategy considerations. Please speak with a Prosperis Advisor on 01423 223640 or advice@prosperis.co.uk to find out how we can help you.
We discussed Pension funding earlier in this briefing and would strongly encourage a review of personal funding to take advantage of the higher Basic & Additional Tax rate changes before 5th April 2023. Whilst there are no specific changes to Higher Rate Taxpayers the existing opportunities remain and should not be ignored.
We expect some clients may want to consider deferring income or bonus payments into the 2023/24 tax year where their income tax position may become more favourable.
No mention was made of Inheritance Tax and Pension Allowances however media speculation remains rife hinting at further changes to come in a later fiscal statement, expected to be 23rd November 2022, so we remain vigilant to this, particularly as any further announcements will come under OBR scrutiny.