UK Tax News

2023 Autumn Statement

Published: 22 Nov 2023

Updated: 22 Nov 2023

Written by Ray Coman

Since the Spring Budget, falling inflation has given the chancellor more scope to promote growth through tax cuts.  The most significant change was made to national insurance which applies to income from work (employment earnings and self-employment profits) as applied to all individuals between 16 and state pension age, which is usually 68.  Incentives for the working population were complemented by tougher access to Jobseekers’ Allowance benefit.

Employee’s National Insurance rate to drop

Class 2 to be abolished

Drop in the rate of class 4 NIC

Minimum Wage to rise

Annual allowance to be fixed permanent at £1 million per annum

Commentary and criticism

Employee’s National Insurance rate to drop

The highest rate of employee’s national insurance applies on earnings between the Primary Threshold (currently £12,570) and the upper earnings threshold (currently £50,270.)  That Class 1 NIC will be cut from 12% to 10% starting from 6 January 2024.  While the tax cut will benefit all employees earning over £12,570, it will have the greatest impact in percentage terms on those whose income is nonetheless beneath £50,270.

The combined income tax and NIC rate for an employee (with income over the personal allowance) is 30%.  This is the lowest rate since the 1980s and is intended to reward work.

Class 2 to be abolished

Ensuring that self-employed workers are not left out by the National Insurance cut, The Chancellor also announced an abolition of Class 2 NIC.  The measure amounts to an annual tax saving £192 for a self-employer worker with profits over £12,570 a year.  The current rate of class 2 NIC is £3.45 a week.

It will continue to be possible to opt into obtaining national insurance credit (towards the state pension) provided profits are over the the Small Profits Threshold of £6,725.

Drop in the rate of class 4 NIC

The rate of class 4 NIC, which applies to income between £12,570 and £50,270 will also be cut from its current level of 9% to 8% starting April 2024. The NI cut further tips the balance in favour of sole trader over limited company status for the self-employed.

Minimum Wage to rise

The Minimum Wage (which the government increasing refer to as the National Living Wage) will increase to £11.44 from April 2024.  The age threshold for entitlement to the Minimum Wage will at the same time lower from 23 to 21 years old.

Benefits will increase with inflation (as measured by CPI) and the State pension will rise in line with the Triple Lock system.  The 8.5% annual hike is tagged to earnings rather than CPI as a measure of inflation.

Annual allowance to be fixed permanent at £1 million per annum

The annual investment allowance permits the cost of plant and machinery to be deducted in full against taxable profits in the tax year in which the expense occurs.  Plant and machinery covers: computer equipment, office fixtures and furniture, specialist equipment and intangible assts such as patent rights.  Unlike many other types of business expense, this type of item can last in a business for several years, and is therefore referred to as an asset.

Without an annual investment allowance only a portion of the cost can be deducted from profits each year.  The system (which still applies to motor vehicles) is referred to as a capital allowance.  Full expensing accelerates the rate at which tax relief is obtain on a business’s’ longer term investment in its growth.

Previously, in the Spring 2023 Budget, full expensing of asset expenditure had been set to last three years starting 1 April 2023.  The announcement made in today’s statement will make that provision permanent.

Commentary and criticism

The opposition were keen to point out that because none of the thresholds have increased in line with inflation, the overall tax burden had increased significantly under the current government.  The tax giveaway achieved through a cut in national insurance in no way compensates for the rising tax bill caused by fiscal drag.  Tax as a percentage of GDP is at historical highs.

The Office for Budget Responsibility have estimated that by 2028/29, nearly three million more people will pay tax at the higher rate and a further £400k at the additional rate because of thresholds being frozen despite the continued rise in inflation.  Conservatives are still lagging Labour in the polls and with an election set for next year.

Despite rumours in the approach to the Autumn Statement, no cuts were made to inheritance tax.

2023 Budget

Published: 15 Mar 2023

Updated: 18 Mar 2023

Written by Ray Coman

Against a background of high inflation, national strikes and global unrest, Jeremy Hunt gave his first Budget since becoming chancellor.  A rise in energy prices and defence spending have placed fresh demands on the Treasury.  In response, the government has been able to harness rapid inflation to raise revenues through freezes in allowance thresholds.  This process, referred to as Fiscal Drag, has the benefit to a policymaker of causing less headline alarm than tax rises.  Indeed, stability has been in focus, after recent inflation related tremors through the banking sector and in the aftermath of the Liz Truss crisis.  By comparison with recent years, the 2023 Budget contained fewer dramatic moves on tax policy.

In the context of the above, the delivery of incentives to the investment and business world, especially by way of relaxation to pension rules, came as some relief.  An election less than two years away against an opposition leading in the polls could provide some explanation.  The evaporation of lockdown costs also offered to relieve pressure on government spending, and allowed for the extension of covid related measures to encourage business spending, principally through annual investment allowance.

Lifetime allowance to be abolished

Capped tax free lump sum on start of pension

Pension allowance to increase

Pension allowance taper threshold to increase

Extension of annual investment allowance

Measures to prevent abuse of research and development tax concessions

Freezing of allowances despite inflation

Increased reporting for crypto

Lifetime allowance to be abolished

The lifetime allowance is the value that a pension can reach before it will suffer an excess charge.  The pension is valued against the lifetime allowance on a vesting event, which is typically when the pension holder starts to draw benefits.  The lifetime allowance charge will be abolished from 6 April 2023.  Certain lifetime allowance related processes will need to be in place until 2024/25 which would be carried out by the pension administrator.

The chancellor sited incentivises for doctors as the reason behind the change. However, the regulations will affect UK pension holders of all occupations.

Capped tax free lump sum on start of pension

Currently, an amount equal to 25% of a pension can be withdrawn as a tax free lump sum when the pension holder starts receiving a pension.  This tax relief will continue to apply up to a limit of £268,275.  The limit on the pension commencement lump sum happens to be the same as 25% of the current lifetime allowance.

Pension allowance to increase

An amount invested into a pension for a given tax year in excess of the pension allowance, is subject to an excess charge.  The charge effectively adds the pension contribution back into income so that it is taxed at the taxpayer’s marginal rate.  The maximum pension allowance is currently £40,000, but announced in the Budget was an increase in the allowance to £60,000.  This will allow taxpayers to obtain greater tax relief on pension contributions.

Pension allowance taper threshold to increase

The limit at which the allowance starts to taper will also increase from £240,000 to £260,000 on 6 April.  Once income exceeds this “adjusted income limit” the pension allowance will start to taper at a rate of £1 for every £2 that it is over that limit.  The tapering continues until the allowance reaches a minimum.  That floor will also rise from £4,000 to £10,000 with effect 2023/24.

The allowance for brought forward years will not alter.  Once the current year allowance is exhausted, the taxpayer can make use of unused allowance for the preceding three tax years.  The allowance applicable to preceding years will remain as the allowance in force at that time.

The money purchase allowance is the amount a person can contribute to a pension if that person has already started drawing benefits.  It can be an effective tax plan for individuals who continue to work after they have started receiving a pension.  The money purchase allowance is set to increase in 2023/24 from £4,000 to £10,000.

50% rise in annual allowance and scrapping of the lifetime allowance were the most significant aspect of the Budget.

Extension of annual investment allowance

The annual investment allowance is the amount that a business can deduct from taxable profits for investment in equipment, machinery and other capital assets.  Where the amount of investment exceeds the allowance, the rate at which tax relief is available drops.  The annual investment allowance was increased to encourage spending by businesses during lockdown.  It was set to reduce from £1 million to £200,000 on 6 April 2023.  However, the government announced that the limit will be fixed at £1 million indefinitely.

Measures to prevent abuse of research and development tax concessions

In the Autumn statement, the government announced a reduction in the rate of enhanced deduction for small and medium sized businesses from 130% to 86%.  Where a company is loss making, the loss can usually be set against profits of a preceding year or carried forward to profits of a future tax year.  However, R&D companies might have to operate for several years before becoming profitable and therefore the usual loss rules present a cashflow strain.  As a result, the regulation allows the loss to be exchanged for a government pay out, known as an R&D tax credit.  The R&D tax credit for large business is set to increase from 13% to 20% and for small and medium sized business it is set to drop from 14.5% to 10%. All of the above changes will be effective 1 April 2023.

The reduction in tax relief was in response to abuse by SMEs of the R&D tax relief.  Therefore, the Budget included an announcement that research and development claims will have to be accompanied by additional information which among other requirements must categorising qualifying expenditure.  For SME businesses that invest over 40% of expenses in R&D the legacy rates continue to apply.

Freezing of allowances despite inflation

Fiscal drag is the process by which inflation causes an increase in tax liability for the taxpayer as a result of fixed allowances.  With current rates of inflation, it is notable that the personal allowance, higher rate and additional rate tax thresholds are not increasing.  On the contrary, as announced in the November statement, the capital gains tax allowance is halving in April and halving again next April to just £3,000.  The additional rate limit is also reducing to £125,000. The nil rate band, which is the rate above which inheritance tax is applicable to an estate, has not increased since 2009. The individual savings account limit has also not changed from £20,000 per annum.

Increased reporting for crypto

From 2024/25, it will be a requirement for cryptoassets to be identified separately on the capital gains tax supplement of the self-assessment Tax Return.

Autumn statement 2022

Published: 17 Nov 2022

Updated: 30 Nov 2022

Written by Ray Coman

Jeremy Hunt has been brought into his role during a cost-of-living, war in Ukraine, high inflation and soaring energy prices.  The Autumn statement 2022 which was delivered about 11:30 today outlined the government’s plan to cut spending and increase taxes.

Additional rate tax

Freezing of allowances

Cut on capital allowance threshold

Dividend allowance to be dropped

Freeze to employer NIC threshold

Cut to research and development tax relief

Stamp duty sunset

Business rates

Vehicle exercise duty exemption to end

Windfall taxes

Public spending

Summary

Additional rate tax

The threshold at which taxpayers start to pay the additional rate tax of 45% will reduce from £150,000 to £125,140.  Inflation, forecast by the Office for Budget Responsibility at an average 9.1% this year and 7.4% next year, will further increase the number with income over the £125,140 rate.  The additional rate tax threshold will coincide with the level at which the personal allowance is fully abated.

Freezing of allowances

Fiscal drag explains the erosion of tax threshold by inflation.  Given the sharp rates of inflation which prevail, and which are forecast, a suspension of allowances at their current rates is a form of tax rise.  The following will frozen until at least April 2026/27:

The personal allowance, of £12,570

National insurance upper earnings limit also £50,270.

The higher rate tax threshold, currently £50,270

An inheritance tax nil rate band of £325,000 (the rate has been in force since 2009)

Pension lifetime allowance of £1,073,100

Cut on capital allowance threshold

The limit on which a taxpayer becomes liable to capital gains tax is set to decrease to £6,000 from 6 April 2023 and again to £3,000 in April 2024.  By way of recap, the rate of capital gains tax on residential property is 18% to the extent that an individual I a basic rate taxpayer and 28% thereafter.  The equivalent rates on other types of capital gains, for instance on shares, cryptocurrency and other investments is 10% and 20% respectively.  Evidently, the UK’s capital allowance system will remain more generous than many developed nations including Germany, Ireland, Canada and France

Dividend allowance to be dropped

Coinciding with the capital allowance cut is a lowering of the dividend allowance to £1,000 from 6 April 2023 and again to £500 in April 2024.

Freeze to employer NIC threshold

Small businesses are not liable for the first £5,000 of employer’s national insurance threshold.  The Chancellor committed to hold the allowance at this higher level.  Evidently, this measure will keep 40% of all business exempt from employer’s NIC until March 2026.

Cut to research and development tax relief

In response to widespread abuse of research and development corporation tax breaks, the Chancellor revealed a reduction in the rates.  The R&D enhanced expenditure relief will fall from 130% to 86% and the R&D tax credit from 14.5% to 10%

Stamp duty sunset

The previous chancellor announced a generous increase in the level of stamp duty as part of a growth plan.  The cut in stamp duty will now be temporary and is set to expire on 31 March 2025.  The rise announced in the growth plan earlier this year increased the threshold from £125k to £250k.

Business rates

In a bid to soften the impact of tax rises on smaller businesses, the government will proceed with property revaluation which are expected to reduce or eliminate business rates for a larger port of restaurants, pubs, retailers and other commercial premises.  The chancellor estimates the revaluations will benefit 700,000 businesses.

Vehicle exercise duty exemption to end

The government forecasts that over half of new vehicles by 2025 will be electric.  From April 2025, electric vehicles will no longer be exempt from vehicle excise duty

Windfall taxes

As so called ‘made in Russia energy crisis’ has led to a dramatic rise in wholesale gas and electricity.  Along with a plan to help Britain achieve greater energy independence was a set of taxes on energy giants who have profited most from this ‘windfall’ unexpected increases in energy prices.  Increase Energy profits levy from 25% to 35% from 1 January to March 2028, and a temporary levy of 45% on electricity generators was announced.  In recognition of the cyclical nature of energy business, it was also acknowledged that these taxes are likely to be temporary in nature.

Public spending

The government set out its commitment to reducing inflation, mortgage rates, unemployment and the severity of the recession.  It was confirmed however that while public spending will increase, it will be a bow inflation increase.  Unemployment has not returned to pre-pandemic levels.  Claimants of universal credit which remain at approximately 600,000 will be required to meet with a work-coach.

The UK maintains the second highest spending on Ukraine after the US.

Summary

The Autumn Statement laid out a plan to tackle cost of living crisis through countering inflation.  High inflation, in the chancellor’s words, is the enemy of stability, eroding inflation and leading to industrial unrest.  A measured response to which recognises the increase pressure on public finances will places less demand on government borrowing and thereby protect the credibility of the UK economy through these troubled times.

Tax u-turn

Published: 16 Oct 2022

Updated: 25 Oct 2022

Written by Ray Coman

The government has succumb to external pressure to reverse two of its main tax cuts.  The rate of corporation tax will not be cut as previously announced.  The top rate of income tax will not reduce in April 2023, but remain at 45%.

Truss was keen mark her new premiership with a strong change of direction on fiscal policy.  The Growth Plan 2022 would be driven by reducing tax.  Shortly after taking office, Liz Truss and the then Chancellor kwasi kwarteng set out the dramatic tax cuts on 23 September 2022.  Announcements of tax policy with such far reaching impact are typically reserved for a Budget.  The resultant ‘mini-Budget’ therefore sidestepped the requirement for tax decisions to be run passed the Office for Budgetary Responsibility to check for sustainability.

Lack of account for how tax cuts worth £45 billion were to be fund caused the market to expect a flood of uk government debt for sale.   The ensuing price collapse led the Bank of England to step in with purchases.  However, the emergency measure -itself an alarm signal- to hold up demand was insufficient barrier and price continues to chart downwards. By way of example, 1½% UK Treasury Gilt 2047, trading about 113 in December last year is now below half its value at 51.78.

The tax cuts were at odds with Bank of England attempts to quell inflation through rate rises.  The new government’s lack of coordination with global monetary policy rocked confidence in UK Plc. The pound has tumbled to historic lows, trading about par with the US dollar.

With criticism mounting against the government, it was forced to send back plans to scrap the top rate of tax.  However, this was still not enough to bring the markets into stability and after only 38 days in office Kwasi Kwarteng was replaced as Chancellor of the Exchequer with Jeremy Hunt.

With his first major policy, Mr Hunt changed corporation tax rate to 25%.  Businesses with a profit below £250,000 will not pay the full rate.  The corporation tax rate for companies with a profit below £50,000 will remain at 19%.  The rate of tax on profits between 50 and 250 thousand will gradually increase on a sliding scale.  Mr Hunt also put on the shelf the plan to reduce the basic rate of tax from 19% to 20% from next April.

As part of a reversal broadcast on 3rd October, the additional rate income tax will also be restored to 45%.  Its abolition would have meant no increase in the rate paid by taxpayers with an income over £150,000.

The Treasury has published estimates of additional revenues raised through the u-turn on tax cuts.  However, such forecasts are loose about factoring the attractiveness of Britain as a place for doing business, and the incentive for taxpayers to work their income above the additional rate.

Growth Plan 2022

Published: 23 Sep 2022

Updated: 12 Nov 2023

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

Dividend tax to be repealed

IR35 repealed

SEED limits increased

Company Share Option Plan (CSOP) facility improved

Stamp duty thresholds increased

National insurance rises scrapped

Summary

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.