On September 23, 2022, Kwasi Kwarteng, the fifth Chancellor in as many years, gave a “Fiscal Event” or “Mini-Budget” that cut taxes to help the economy grow. This was in line with what new Prime Minister Liz Truss said she would do when she was running for the top job in the Conservative Party.
But many people worry that the cost of the growth measures will add a lot to the government’s debt, which will have to be paid for in the future by raising taxes.
The headline announcements were:
- The end of the Health and Social Care Levy, which was 1.25% of income.
- A change to the plan to raise the corporation tax.
- The basic rate of income tax will go down.
- The elimination of the extra income tax rates.
The government’s bold plan is meant to help the economy get back on its feet and save jobs. To help pay for help with energy costs, many European countries have put windfall taxes on energy companies. But Liz Truss has said that the UK should not take such a step.
Why was that not a real budget?
The Office of Budget Responsibility (OBR) usually reports on the state of the UK economy at the time of the Budget and also looks at how the Budget proposals will affect the economy. The Chancellor’s speech was called a “fiscal event” because there wasn’t enough time for a full OBR report.
We still expect a “real” Budget to come out later this Fall.
Health and social care levy scrapped
On September 7, 2021, we learned that employers, employees, and people who work for themselves would have to pay a new Health and Social Care Levy of 1.25 percent starting in 2023/24. This was to happen even faster in 2022/23 because National Insurance contributions were going up by 1.25 percentage points (NICs). As expected, and even though the thresholds were changed earlier this year, the higher NIC rates have caused many people’s take-home pay to go down.
The Health and Social Care Levy has been gotten rid of, so it won’t start in April. Also, starting on November 6, 2022, the government will not raise NICs by 1.25 percentage points.
For this third change in NIC rates and bands in 2022/23, employers will need to make sure that their payroll software is up to date.
For NIC rates that change every year, transitional rates will be used to deal with the change in the middle of the tax year. In particular,
• For 2022/23, the main NIC rate for Class 1 employees, which includes company directors, will be 12.73 percent, and there will be an extra rate of 2.73 percent.
• Class 1A NICs on taxable income and expenses will be set at 14.53% for 2022/23 if they are not paid monthly through payroll. The same is true for PAYE Settlement Agreements and Class 1B NICs.
• For 2022/23, the main rate of Class 4 NICs paid by self-employed people will be 9.73%, and the extra rate will be 2.73 %.
Dividend rates reduced from 2023/24
Many directors and shareholders of family businesses pay themselves a small salary and take the rest of their “pay” in dividends. Since there is no NIC on dividends, they would have been able to avoid the extra 1.25% NIC charge when it was first put in place.
So, the government raised the tax rates on dividend income by 1.25 percent for 2022/23.
Even though the NIC increase is going away on November 6, 2022, the extra 1.25 percent will still be taken out of dividends paid in 2022/23.
From 2023–2024, however, the dividend income tax rate will go back to 7.5% for people in the basic rate band and 32.5% for those in the higher rate band. Note that you don’t have to pay tax on the first £2,000 of dividends.
Income tax rates cut for 2023/24
Rishi Sunak, the previous Chancellor, had hinted that the basic rate of income tax might go down from 20% to 19% in 2024/25. This will now happen one year earlier, in 2023/24, and it will apply to income other than dividends.
The “additional rates” of income tax of 45% and 39.35% that apply to incomes over £150,000 will go away on April 6, 2023.
This means that in 2023/24, there will only be two tax rates for general income: 19% and 40%. There will also be two tax rates for dividend income: 7.5% and 32.5%.
Also, from April 6, 2023, people who would have been additional rate taxpayers will get the same £500 Personal Savings Allowance as higher rate taxpayers. They didn’t have access to this before. The tax rate on savings income up to the Allowance is 0%.
It is important to note that the Scottish income tax rates for general income are set independently, and we are waiting for the results of the Scottish Budget Review to find out what the rates will be in Scotland next year.
Corporation tax rate increase scrapped
In the March 2021 Budget, Rishi Sunak said that the rate of corporation tax would go up to 25% on April 1, 2023, if a company made more than £250,000 a year. If a company made less than £50,000 a year, the rate would stay at 19%. On profits between £50,000 and £250,000 a year, the effective rate was set to be 26.5%.
Even with the rate increase, the UK would have still had a very competitive rate compared to other major trading countries, many of which are also raising their corporate tax rates.
But the planned increase won’t happen now, which is what Liz Truss said would happen when she ran for Conservative Party leader and Prime Minister.
All businesses that pay 19% in corporation tax will keep doing so.
£1 million Annual Investment Allowance now permanant
The decision to make the £1 million Annual Investment Allowance (AIA) permanent will be good for businesses that buy plant and machinery. This has been put off more than once, and it was supposed to go back to £200,000 in April 2023. The AIA is different from the super-deduction in that it can be used by both unincorporated businesses and limited companies, and the equipment doesn’t have to be brand new.
The much-criticized “off-payroll” working rules went into effect on April 6, 2017, for the public sector. On April 6, 2021, they went into effect for large and medium-sized private sector companies.
The rules took the place of the “IR35” rules, which were used when workers gave their services to these organisations through a personal service company (PSC) or another middleman. The result was that the not-insignificant tax compliance burden was moved from the PSC to the organisation that bought the service.
Now, the off-payrolling rules will be gone as of April 6, 2023, and the responsibility for IR35 compliance will once again fall on the PSC itself. This means that the PSC has to figure out and pay PAYE and NICs if the worker (usually the Director) would be considered an employee if they worked directly for the organisation that bought the service. This fits with what is needed when a PSC provides services to a small private organisation.
New investment zones
The English government is talking with 38 local government areas about setting up “Investment Zones” in certain places.
Each Investment Zone (IZ) will give businesses big, targeted, and time-limited tax breaks, as well as looser planning rules that will make more land available for housing and business development. These will be centres of growth, attracting investment in new shopping malls, restaurants, apartments, and offices and making it easier for people to move into thriving new neighbourhoods. The tax breaks that are being thought about are:
1. 100% Business Rates Relief for businesses in IZs that have just moved in or grown.
2. A 100% first-year allowance for businesses that have spent money on assets that can be used in IZs.
3. Enhanced Structures and Buildings Allowance: This will let businesses reduce their taxable profits by 20% of the cost of qualifying non-residential investments per year, which will cover 100% of their investment costs over 5 years.
4. Zero-rate employer NIC for any new employee who works in the IZ at least 60% of the time and makes up to £50,270 per year. Employer NICs are charged at the normal rate for earnings over this amount.
5. Full Stamp Duty Land Tax (SDLT) relief for land and buildings bought for commercial use or development, as well as for land or buildings bought by people who are building homes.
This fact sheet has a list of the 38 local governments that are taking part in the talks –
Encouraging investment in unlisted companies
The new Chancellor backs the tax-advantaged Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) and says he sees the value in extending them in the future.
The goal is for the UK to be an entrepreneurial democracy where people own shares.
The Seed Enterprise Investment Scheme (SEIS) is legal, the Treasury has confirmed.
They are changing the rules to make them more open, and companies will be able to raise £250,000 through the scheme. This is 66% more money than before.
Investors who are not related to each other can get a tax break of up to £100,000 a year for 50% of the amount they put into the SEIS. There is also a lot of tax relief for investors who make money from capital gains.
Employee ownership shares
The government has said that the tax-advantaged Company Share Option Plan (CSOP) will be changing in two ways.
Based on the market value at the time the option is granted, the most an employee can get is £30,000. This amount will go up to £60,000 for any new options that are given after April 6, 2023. This change doesn’t affect the options that are already there.
There will also be more freedom in how share options are given after April 6, 2023, when restrictions on the type of shares used will be taken away.
Most UK trading companies can use the CSOP scheme because, unlike the Enterprise Management Incentives (EMI) share scheme, there is no size limit and no restrictions on what kind of business can be done.
SDLT threshold increased to £250,000
At the end of their Budget speeches, chancellors like to pull surprises out of a hat and announce them.
Even though it had been talked about before this mini-budget, the SDLT was still a surprise because house prices have been going up steadily. The market is likely to slow down if mortgage rates go up, so the SDLT changes are meant to stop a housing slump. Moving has a multiplier effect on the economy because people spend money decorating and furnishing their new home. Estimates show that this spending adds up to about 5% of the value of the house.
So, it is important to keep people’s faith in the property market over the medium term and keep the growing momentum going as the UK economy gets better. So, the government cut SDLT for people who buy homes in England and Northern Ireland.
For residential real estate deals that close on or after September 23, 2022;
The Nil Rate Band (NRB) has gone up from £125,000 to £250,000.
The NRB has gone up from £300,000 to £425,000 for first-time buyers. This is true for first-time buyers who buy a home for less than £625,000 (it used to be £500,000).
Scotland and Wales have different tax rules for buying and selling property, and there are no plans to change this.