A short look at the facts with commentary
WOW – Some ‘Mini’-Budget that, with the new Chancellor Kwasi Kwarteng announcing £45bn in tax cuts and tax incentives for business investment, massive infrastructure investment, the energy price guarantee, all funded by a big increase in borrowing.
I think ‘Massive’ Budget would have been a more apt description.
This starts a fundamental ideological shift, with the biggest tax cutting budget in 50-years with the big winners being business and high earners. Kwarteng is a long advocate of a small state, low tax approach, and hopes to rescue a stagnant economy that has only witnessed average growth of 1.8% in the last two decades, with a target of reaching growth to 2.5% per annum and increasing productivity. He hopes this approach will ‘unleash the enormous potential of the country’.
This seems at odds with the Bank of England’s attempts to take money out of the economy by raising interest rates just last week by 0.50% to 2.25%. Cutting taxes is a fiscal stimulus and could further fuel inflation. However, Kwarteng maintains the this will not increase inflationary pressure at a time when full employment across the country is high. He has put his faith in the idea that tax cuts will boost the supply side of the economy and boost growth.
It is no doubt a gamble, and such trickledown economics that save the wealthy more than the poor will be divisive, although Kwarteng insists that doing nothing would be worse.
The initial market reaction has been negative, with stock markets falling, the pound falling to a 37 year low against the dollar, with concerns about how all of this will be paid for.
Time will tell, it’s bold, proper bold.
Taxation
The headlines are:
From 6th April 2023 the basic rate of income tax will be reduced from 20p to 19p in the pound.
From 6th April 2023, the additional rate of income tax of 45%, payable when earnings exceed £150,000 will be scrapped.
This also effects tax on dividends, with the removal of additional rate tax (currently 39.35%), on dividends in excess of £150,000 while they have also announced plans to reverse the 1.25% increase to dividend tax from 6th April 2023. This will reduce higher rate dividends from 33.75% to 32.5%.
The 1.25% Employer and Employee National Insurance rise that occurred in April to fund health and social care will be reversed on November 6.
The stamp duty threshold will double from £125,000 to £250,000 and increase from £300,000 to £425,000 for first time buyers. Second time house purchases will still incur the additional property rate of 3% from £0.
The corporation tax rate will stay at 19% as opposed to increasing to 25% over five years from 2023.
So what?
This has planning implications. Firstly, if possible and affordable, bonuses or dividends that this year may be liable to additional rate tax should be deferred into next tax-year.
In contrast, but being mindful of annual pension allowances, personal pension contributions benefiting from additional rate tax relief should be brought forward.
The scrapping of the additional rate tax also means such taxpayers will now get access to the personal savings allowance – so they can earn £500 in interest per year on their savings without paying tax.
Other Headlines
Energy Bill Relief Scheme
The government has announced a cap on energy prices for businesses, cutting the soaring rates for electricity and gas by up to 50% for six months from 1 October.
This comes two weeks after prime minister Liz Truss announced a new, taxpayer-funded energy price guarantee that will cap the cost of gas and electricity for households for two years, meaning an average annual bill will be around £2,500.
The government’s new energy bill relief scheme will provide a discount on the unit prices of gas and electricity for businesses, equivalent to the domestic price cap, for an initial six-month period.
It will apply to fixed tariffs agreed on or after 1 April 2022 and variable contracts.
Customers do not need to apply to the scheme to access the support as it will be automatically applied to bills.
The scheme will see the price per unit of wholesale electricity capped at £211 per MWh and gas at £75 per MWh, which is less than half the wholesale price expected this winter.
For comparison, wholesale costs in England, Scotland and Wales for this winter are currently expected to be around:
£600 per MWh for electricity
£180 per MWh for gas
Tax incentives
Investment zones
New investment zones will offer businesses tax cuts and reduced regulation in an attempt to drive growth and encourage investment across the UK.
Revealed as part of Chancellor Kwasi Kwarteng’s Mini Budget, 38 local authorities are currently in discussion to establish ‘investment zones’ in England, with plans to expand these across Scotland, Wales and Northern Ireland.
Businesses in the designated sites will benefit from a raft of tax incentives, while construction will receive fast track planning applications.
Seed Enterprise Investment Schemes (SEIS)
As part of his plans to promote growth in the economy, the Chancellor Kwasi Kwarteng announced extensions to the Seed Enterprise Investment Scheme (SEIS) in his mini-budget on 23 September 2022.
From April 2023:
Companies will be able to raise up to £250,000 of SEIS investment. The current limit is £150,000.
The gross asset limit will be increased from £200,000 to £350,000, and the trading time limit from two to three years.
The individual annual investor limit of £100,000 will be doubled to £200,000.
Company Share Option Plan (CSOP)
The Company Share Option Plan (CSOP) is a form of share incentive arrangement under which qualifying companies can grant tax-advantaged options to their employees. There is a limit on the value of CSOP options that an employee can hold at any one time and for many years this has stayed at £30,000.
Today’s announcement that this limit will be doubled to £60,000 from April 2023 will be very welcome news to those qualifying companies and participants that find themselves held back by the existing cap. Another important announcement is that some of the restrictions on the class of shares that can be used for CSOP options will be eased to bring them closer to the rules of the more flexible Enterprise Management Incentive (EMI) tax-advantaged option scheme. This change will make CSOP available to a wider range of eligible companies, particularly in the private sector, although other qualification rules (such as those on control) mean that it continues to be unavailable to some
Annual Investment Allowance (AIA)
The annual investment allowance (AIA) allows businesses to claim a 100% deduction on capital expenditure on qualifying plant and machinery up to a certain limit.
The AIA was set at £200,000 with effect from 1 January 2016 and was increased to £1 million on a temporary basis from 1 January 2019. This temporary increase has been subject to several extensions since it was first announced with the latest extension due to run out on 31 March 2023. Rather than yet another extension the government have now announced that the AIA will be permanently set at £1 million. The permanent replacement will be welcome as it provides a greater level of certainty to businesses and removes the complexity of changing amounts. The government are hoping this permanent change will encourage further business investment and expect that that the new permanent allowance will cover the investment needs of 99% of the UK’s businesses.
Repeal IR35/Off Payroll laws
The Government has announced that the recent reforms to the off-payroll working rules (a part of the rules around “disguised employment” also known as IR35) will be reversed from 6 April 2023, it appears both for private and public sector businesses. As a result, contractors providing services through a personal services company will once again be responsible for determining their own employment status and paying the appropriate amount of tax and NIC.
