Growth Plan 2022
Written by Ray Coman
Only three weeks into his appointment, and Kwasi Kwarteng has unleased a major tax reform. While far reaching, the government stopped short of labelling the announcements as a Budget and therefore avoided the associated forecasting requirement from the Office for Budget Responsibility. Consequently, the Treasury has not had to justify how the planned tax cuts will be costed.
Despite the lack of explanation, it is evident that the tax cuts will be funded through the issuance of government debt. The markets have reacted strongly and the pound has dropped to below USD1.09 for the first time in over 37 years. The price drops reflects surprise about the extent of the tax cuts. Today’s announcements been viewed by economists as the biggest reduction in tax since the 1972 “dash for growth”.
Corporation tax rises to be halted
Bankers’ bonus caps to be removed
Investment zones to be established
Annual Investment Allowance increase to be fixed
Reduction in the basic rate of income tax
Top rate of income tax to be abolished
Company Share Option Plan (CSOP) facility improved
Stamp duty thresholds increased
National insurance rises scrapped
Corporation tax rises to be halted
Much anticipated, the rise in corporate tax scheduled for April 2023 has been shelved. This news will be welcome among many limited company contractors who will no longer be required to change to sole trader status to save tax. The rate of corporation tax will remain at 19%. The plan had been for corporation tax to rise to a level of 25% for the most profitable companies. The bank Corporation Tax Surcharge, will also be abolished.
Bankers’ bonus caps to be removed
Regulation limiting the variable pay of senior bankers will be removed. Currently a bonus is limited to 100% of fixed pay (or up to 200% with shareholder approval.)
Investment zones to be established
Designated areas of the UK, will benefit from a raft of tax incentives. The incentives include 100% business rates relief, Enhanced Structures and Buildings Allowance allowing up to 20% per annum of the cost of commercial building to be written off against profits, Stamp Duty Land Tax relief for commercial buildings and an employer’s national insurance exemption on salaries of up to £50,270 for workers in the designed zones.
Annual Investment Allowance increase to be fixed
The temporary increase in the annual investment allowance was scheduled to come to an end in April 2023. However, the government has made permanent the increase in the limit to £1 million per annum. The fall in the limit to £200,000 will not go ahead as scheduled.
Reduction in the basic rate of income tax
The main rate of income tax will be cut to 19%. This is the first drop in the rate of income tax since April 2008. The change will take effect from April 2023, a year earlier than previously planned.
Top rate of income tax to be abolished
The 45% additional rate of tax applicable to income above the additional rate tax threshold which has always been £150,000, will be scrapped. The rate was introduced in 2010 when it was 50% and was later dropped to 45 pence in the pound in April 2013. It will be a scrapping of a tax tier which will have lasted for 14 years. The top rate of tax disappears from 6 April 2023. From that date, the tax system will be reduced to three tiers with the highest rate of 40% applying to income over £50,270.
Previously additional rate taxpayers were not entitled to the saving allowance of £500. However, along with the abolition of the additional rate, all taxpayers will now be entitled to have interest of at least £500 exempt from tax.
Dividend tax to be repealed
The rate of tax on dividends was increased in 2022/23 by 1.25%. Therefore, basic rate dividend rate is 8.75%, the higher rate is 33.75% and to rate: 39.35%. The 1.25% cut in the rate of dividend tax has been scheduled for April 2023. In the same way as the non-savings rate, the additional rate tax on dividend will be abolished. The highest rate of dividend tax will be 32.5%.
IR35 repealed
The off-payroll regulation which are complex have been at least in part reversed as part of this package of reforms. From April 2023, worker providing services via an intermediary company will be responsible for determining their working status. This relieves the paymaster from making that determination and will therefore likely lead to a return to the previous prevalence in use of companies as a mechanism for providing services.
SEED limits increased
The Seed Enterprise Investment Scheme (SEIS) is designed to encourage investment in smaller companies through the mechanism of tax incentives. The amount that can be raised by a qualifying company has increased to £250,000 from £150,000 from April 2023. To qualify as a SED company, gross assets cannot exceed £200,000. However, the limit will be increase from next April to £350,000.
Company Share Option Plan (CSOP) facility improved
The value of share options that a company can issue to employees under a CSOP will increase from £30,000 to £60,000 from April 2023. Currently, it is a requirement tat the shares are “worth having” either because it will give the employees and directors control of the company, or because there is a readily available market for the shares. The ‘worth having’ restrictions will be eased to make the tax incentive available to a wider number of companies, including growth companies, and will bring this type of share plan more in line with Enterprise Management incentive Scheme.
Stamp duty thresholds increased
The threshold at which stamp duty rates apply have been doubled. The new limits are not temporary and take effect from today.
The rate at which buyers were previously liable to stamp duty land tax will start at £250,000, previously this was £125,000.
For first time buyers the stamp duty exemption will apply to homes with a value of £425,000 (previously £300k.) This relief will be available for first time buyers for properties with a value up to £600,000.
National insurance rises scrapped
The recent increase in national insurance rates is also due to be scrapped. April 2022 brought in a 1.25% National Insurance rise for both employers and employees. However, this will be reversed and will therefore have lasted only seven months. The reduced rates will take effect from 6 November.
The rise in national insurance was to be re-branded as a ‘Health and Social Care Levy’ in April 2023. However, this levy has today been scrapped. This will help self-employed workers previously facing a hike in the rate of Class 4 NICs.
Summary
The dramatic series of tax cuts that emphatically reverse the direction of government tax policy over recent years. The new chancellor is betting that economic growth will offset the drop in treasury receipts.
This new fiscal stance of demand led recovery pushes in the opposite direction to the Bank of England’s monetary policy to quell inflation. If the tax cuts achieve the desired economic outcome, the central bank will be under pressure to raise the base rate yet again. A combination of increased borrowing requirement and higher rates of interest have the potential to push government debt cost to levels which will be harder to sustain.
>Fast on her leadership pledge to push growth, the new prime minister and chancellor have set forward their plan. Following today’s announcement, the differences in fiscal policy between government and opposition are considerably sharper. The next UK general election must be held no later than January 2025.
This year’s Spring statement was delivered in the context of the unprovoked attack on the Ukraine by Russia, related energy price increases and ongoing inflation headwinds.