INTRODUCTION

On 23 September 2022 the Chancellor delivered a mini-Budget that contained the biggest package of tax cuts in 50 years. The reaction has been mixed. Some claim that the measures will encourage spending and help get the economy back on track, while others have criticised the move because the tax cuts will inevitably benefit those on higher incomes the most.

Irrespective of the arguments either way, it’s important to understand how the changes will affect you directly. We cover the most important changes in this Special Focus.

Note. The proposed changes will be subject to Parliamentary scrutiny, and will require approval before becoming final. Additionally, given the current government’s history of making U-turns, the latest coming on 3 October 2022 with the decision to abandon the plan to cut the top rate of income tax, it’s possible that there will be some changes when the draft legislation is published.

NATIONAL INSURANCE

In April 2022 most rates of NI increased by 1.25%. This was in anticipation of a new Health and Social Care Levy that was due to come in from April 2023. The increase was met with criticism, as it coincided with a period when household bills were increasing. In response, the government increased the threshold at which NI is payable on 6 July 2022 to align with the income tax personal allowance.

 

What was announced at the mini-Budget?

As had been widely expected, the increase in NI rates is to be reversed. This will happen on 6 November 2022. Rates will be reduced to the level they were at in 2021/22. The Health and Social Care Levy is also scrapped.

 

How will this affect employees?

The applicable rates of Class 1 primary NI will be:

• 12% for earnings between the primary threshold (PT) of £12,570 and the upper earnings limit (UEL) of £50,270; and
• 2% for earnings above the UEL.

These rates are known as the main rate and additional rate respectively. The PT and UEL are generally split across monthly (or weekly) pay periods, except for directors (see below). The monthly equivalents are £1,048 and £4,189 respectively.

Note. The PT and UEL specified above have applied since the PT increase in July 2022.

Example - before and after change

Ghazala earns £60,000 per annum, paid monthly. In the months October and November 2022, her NI calculations will be as follows:

October

Gross pay = £5,000

Up to PT - £1,048 @ 0%

£1,049 to £4,189 = £3,141 @ 13.25% =  £416.18

£4,190 to £5,000 = £810 @ 3.25% = £26.33

TOTAL NI = £442.51

November

Gross pay = £5,000

Up to PT - £1,048 @ 0%

£1,049 to £4,189 = £3,141 @ 12% =  £376.92

£4,190 to £5,000 = £810 @ 2% = £16.20

TOTAL NI = £393.12

Ghazala will be £49.39 better off each month.

 

What about employers?

The secondary Class 1 NI rate will also reduce on 6 November 2022 - from 15.05% to 13.8%. The increase in the employment allowance that has been effective since April 2022 will be retained, meaning the first £5,000 of secondary NI contributions are offset.

Don’t forget that the allowance is not available to companies where the only employee paid above the lower earnings limit is the sole director, i.e. one-person companies. Nor is it available to companies where the previous year’s NI bill exceeded £100,000.

 

Are company directors affected?

Yes, and perhaps more so than employees. As directors have an annual earnings period for NI purposes, things are slightly more complicated. Usually, the NI rates apply for a full tax year. However, with the rate changing part-way through the year it will be necessary for directors to play a composite rate for 2022/23.

The HMRC policy note (see here) confirms that the main rate will be 12.73%, and the additional rate will be 2.73%. Because of the annual earnings period, the secondary rate for employers will also be a composite of the old and new secondary rate, i.e. 14.53% for directors.

Example

Jane, a director, has an annual salary of £95,000. For 2022/23 her NI bill will be calculated as follows:

Gross pay = £95,000

Up to PT - £11,908 @ 0%

£11,909 to £50,270 = £38,362 @ 12.73% = £4,883.48

£50,270 to £95,000 = £44,730 @ 2.73% = £1,221.13

TOTAL NI = £6,104.61

In the absence of the change of rates, Jane’s NI bill would have been £6,536.66.

Directors are subject to a PT of £11,908 due to the change of thresholds in July 2022.

 

Are the enhanced NI thresholds also being scrapped?

The good news is that the increase in NI payment thresholds, which were aligned with the income tax personal allowance of £12,570 in July, are being retained. However, there are particular rules for directors - again because of the annual earnings period. As the threshold changed part-way through the year, directors have an equivalent PT of £11,908, which is a blended threshold.

The employers’ secondary threshold hasn’t changed during the year, and is set at £9,100.

 

Do the changes apply to Welsh and Scottish taxpayers?

As the power to set NI rates and thresholds is exclusively reserved for Westminster, taxpayers in Wales and Scotland are directly affected too.

 

What about self-employed workers?

The rate of Class 4 NI increased from April 2022. This increase is also scrapped, so the main and additional rates will fall to 9% and 2%. However, because Class 4 is assessed on an annual basis via self-assessment, it is again necessary to apply blended rates. These will be 9.73% and 2.73% for 2022/23.

The enhanced payment threshold also applies to the self-employed, but because it took place part-way through the year a blended threshold applies in a similar way to that for directors, and is £11,908 for 2022/23.

INCOME TAX

The main rates of UK income tax have been 20%, 40%, and 45% for basic, higher, and additional tax payers respectively since 2012. There are different rates applicable to certain types of income in Scotland. Dividend income is subject to a separate set of tax rates. These were increased by 1.25% in April 2022 to coincide with the increase in NI rates. Currently, the dividend rates are 8.75%, 33.75%, and 39.35% to the extent that they fall within the basic, higher, and additional rate bands accordingly. A dividend allowance of £2,000 effectively applies a 0% band.

 

Is income tax being cut?

In perhaps the biggest announcement of the mini-Budget, the Chancellor declared the intention to abolish the additional rate altogether from April 2023, this would have meant that the UK returning to a two-tiered income tax system for 2023/24. The basic rate will also reduce to 19%, a year ahead of schedule. However, following fierce criticism, the decision to abolish the additional rate was reversed.

 

Does this just apply to earnings?

It applies to all non-dividend income, for example self-employed profits, rental profits, and savings income not covered by other allowances.

 

Are the dividend tax rates changing too?

As the increased the dividend tax rates in April had an anti-avoidance motive linked to the NI rates increase, they are no longer necessary. As a result, the dividend tax rates will revert to their previous levels from April 2023. The applicable rates will be as follows:

• dividends falling within the dividend allowance amount (£2,000) - 0%
• dividends falling to be taxed within the basic rate band - 7.5%
• dividends falling to be taxed within the higher rate band - 32.5%
• deividends falling to be taxed above the additional rate threshold - 38.1%

The dividend allowance is really a 0% band. As a result, it uses up part of the tax band it falls into. Therefore, it remains reckonable income for the personal allowance abatement threshold and the high income child benefit charge.

 

Do these changes affect Scotland and Wales?

The Scottish parliament has full autonomy over its income tax rates, though this is restricted to non-savings and non-dividend income. As a result, the changes will not directly affect Scottish taxpayers’ employment income, pension income, self-employment profits or rental profits. The revised UK rates will apply to savings and dividend income. Had the original plan to scrap the additional rate been enacted, it would have created a large disparity between higher earners in Scotland and England.

Example

Assuming the Scottish tax rates and bands remain the same, and there are no changes to the personal allowance abatement rules, the positions for a Scottish and an English employee each earning £200,000 next year could have looked like this:

Scottish	£		English	£
tax at 19%	411		tax at 19%	7,163
tax at 20%	2,191		tax at 40%	64,920
tax at 21%	3,775
tax at 41%	48,752
tax at 46%	23,000
Total tax	78,129		Total tax	72,083
NI at 12%	4,524		NI at 12%	4,524
NI at 2%	2,995		NI at 2%	2,995
Total NI	7,519		Total NI	7,519
Take home pay	114,352		Take home pay	120,398

 

Welsh income tax works differently, being added to the UK main rate after deducting 10%. The current Welsh Rate of Income Tax is 10%, meaning rates for Welsh taxpayers are aligned with the main UK rates. This means that, subject to any changes, Welsh taxpayers will enjoy a reduced basic rate from April 2023.

 

What should owner managers do?

There will clearly be an incentive to delay taking dividends until after the end of the tax year to take advantage of the lower rates. 

Example

Jill is the sole director and shareholder of Bcom Ltd. Her combined salary and dividends so far this year mean she has total taxable income of £148,000. Jane was planning to take a further £50,000 in dividends in March 2023. If she does, this will attract an additional income tax bill of £19,563 (£2,000 @ 33.75% and £48,000 @ 39.35%).

However, if Jane delays the dividend until on or after 6 April 2023, the tax will be £18,938, saving £625.

Of course, whether this is realistic would depend on the requirement for the cash. But the amount could potentially be drawn against the director’s loan account initially, with the dividend being credited later on.

STAMP DUTY LAND TAX

Stamp duty land tax (SDLT) is payable by the buyer of an interest in land, e.g. purchasing the freehold interest in a property. Prior to the mini-Budget, there was a 0% band for the first £125,000. There was also a relief for first-time buyers that extended the 0% band to £300,000. There is a limit on the value of a property that the relief can be claimed on which, prior to 23 September, was £500,000.

 

What’s happened to the 0% band?

The first announcement regarding SDLT was extending the 0% band to £250,000. This is a generous increase; although it is only half of what it was during the height of the pandemic SDLT holiday. The increase took effect at midnight on 23 September 2022.

 

Doesn’t this diminish the value of first-time buyers’ relief?

If doubling the 0% band was the only measure, it would have certainly reduced the value of relief for first-time buyers. However, in a second announcement the Chancellor also increased the first-time buyer threshold by £125,000. From midnight on 23 September 2022, first-time buyers will not pay any SDLT where the purchase price does not exceed £425,000.

Example - first-time buyer

John purchases a house for £550,000. It is his first property. John’s SDLT bill will be calculated as follows:

First £425,000 at 0% - £0

Next £125,000 at 5% = £6,250

Had John purchased the property before 23 September 2022, he would not have qualified for first-time buyer’s relief, as the maximum qualifying property value was £500,000. The SDLT would have been £17,500, i.e. £125K @ 0%, £125K @ 2%, and £300K @ 5%.

 

Have increased house prices been considered?

The general increase in the average house price has been dealt with by increasing the maximum value of a property that can be subject to a claim for relief for first-time buyers. Again, the increase was £125,000, meaning the maximum value is now £625,000 from midnight on 23 September 2022.

 

Where does this apply?

SDLT only applies to property located in England and Northern Ireland, not Scotland and Wales (both of which have separate devolved equivalent taxes). There can be situations where a property sits in both Scotland and England, or Wales and England , meaning two sets of rules apply.

 

Does the cut affect non-residential properties?

Only properties that are wholly for residential use are affected.

 

Have Scotland or Wales made any changes?

The Welsh government has announced it will make changes to land transaction tax (LTT) following the changes announced to SDLT. From 10 October 2022:

• the nil rate band will increase to £225,000 (currently £180,000); and
• some rates will increase.

Previously, a rate of 3.5% applied between £180,000 and £250,000 and 5% between £250,000 and £400,000. From 10 October 2022, a rate of 6% will apply between £225,000 and £400,000.

The Scottish Government has not announced any changes, but will be reviewing the impact of the mini-Budget in the coming weeks.

 

COMPANY TAXES AND CAPITAL ALLOWANCES

In his mini-Budget the Chancellor made clear that he wanted to promote growth in business. He backed this up by announcing significant changes to the corporation tax (CT) and capital allowances regimes.

 

What’s happening with corporation tax?

The main rate of CT was to be increased from 19% to 25% for profits arising on or after 1 April 2023.  A small profits rate of 19% would continue for companies with annual profits of £50,000 or less. Companies with annual profits between £50,000 and £250,000 would be liable at the main CT rate but receive marginal rate relief that would reduce the average rate to between 19% and 25%.

The increase has been scrapped meaning that all companies, regardless of how much their profits are will continue to pay CT at 19% on profits arising before and after 1 April 2023.

 

How are capital allowances changing?

The main principle of capital allowances is to spread tax relief over more than one year for the cost of durable items expected to be used in a business for two or more years, e.g. office equipment. However, tax relief for purchases of items which together cost no more than the annual investment allowance (AIA) can be claimed in full for the financial period in which the expense is incurred.

The AIA was temporarily increased for trading companies and unincorporated businesses to £1 million for qualifying expenditure made between 1 January 2019 and 31 March 2023 inclusive. It was due to revert to its permanent level of £200,000 for purchases made on or after 1 April 2023.

The Chancellor announced that the £1 million limit will be made permanent. This means there will be no change to the AIA amount in April 2023 or until the government legislates to change the permanent amount again.

 

What purchases qualify for the AIA?

The types of asset to which the AIA can apply was not changed in the mini-Budget. Only expenditure on plant or machinery can qualify subject to the following exclusions:

• cars (see GOV.UK)
• plant or machinery you used for a private or non-business reason before being utlised in your business
• items received as gifts to you or your business.

 

 

IR35 AND THE OFF-PAYROLL WORKING RULES

 

The so-called IR35 rules were introduced in 2000 to prevent tax avoidance primarily resulting from employees terminating their jobs one day and returning the next, or soon after, to do the same or similar work but operating through an intermediary (most commonly a company, but frequently also partnerships and agencies). The legislation works by deeming income earned on services provided by an individual through an intermediary to be employment income and so subject to PAYE tax and NI.

In the original legislation it was the responsibility of the worker to decide if the IR35 rules applied to any of their earnings. That is, whether their work would be considered employment if they worked directly for their customer instead of through an intermediary. If so, the intermediary had to account for the PAYE tax and NI.

In April 2017 the first tranche of off-payroll rules was introduced. The effect of these was to shift the responsibility for deciding if IR35 applied from the worker to the business, organisation or agency they were working for (the client), but only if work was directly or indirectly for a central or local government body. If the off-payroll rules applied the client was required to account for the PAYE tax and NI.

In April 2021 the off-payroll rules were extended so that they applied to private sector businesses etc. as well as government bodies. Small private businesses etc. are not subject to the off-payroll rules.

 

What changes will be made to the off-payroll rules?

The off-payroll rules introduced in April 2017 and April 2021 are to be scrapped with effect from 6 April 2023. This does not affect the original IR35 legislation which will continue to apply beyond April 2023.

As a result of the withdrawal of the off-payroll rules all individuals who work through an intermediary will again be responsible for determining if the IR35 rules apply to any work they do and, if so, ensuring the intermediary accounts for any PAYE tax and NI on the income affected.

 

Will there be anti-forestalling measures to prevent avoidance?

While the government is clearly not a fan of the off-payroll rules there is a good chance that anti-forestalling rules will apply to their abolition. Specifically, to stop workers and their customers dodging the off-payroll rules on income earned before April 2023 by deferring billing for it until after. It’s likely that the abolition will only apply for earnings generated on or after 6 April 2023. However, this is speculation, and we will only know when the legislation is drafted or the government confirms its intention.

 

How has HMRC responded to the repeal of the off-payroll rules?

HMRC was the driving force behind the introduction of IR35 and off-payroll rules. It will not be happy to be losing the latter. While it has offered no official response to the repeal of the off-payroll rules it ought to take the sting out of its efforts to police and enforce the rules. However, based on previous form we cannot be sure of that. Even after 5 April 2023 HMRC will be entitled to make enquiries into off-payroll arrangements that existed before that date.

If you work through an intermediary, you and your customers should continue to follow the off-payroll rules closely, at least until 6 April 2023 or unless HMRC indicates its intention to relax its approach earlier.

 

OTHER ANNOUNCEMENTS

What else should we be aware of?

There were a number of smaller fiscal announcements included in the published document “The Growth Plan 2022” that we haven’t already covered.

1.     The seed enterprise investment scheme will be expanded, permitting companies to raise up to £250,000 of qualifying investments in a tax year. The qualifying investment limit for individual investors is also increasing to £200,000. The age of the trade that can qualify and the permitted gross assets will also be increased. These changes will apply from April 2023.

2.     The company share option scheme is to have the value of options that can be granted doubled to £60,000. As a tax-advantaged share scheme, it is a very attractive form of bringing in (and retaining) key employees.

3.     A number of new “investment zones” are to be designated. These will attract similar tax reliefs to freeport sites, e.g. enhanced capital allowances for businesses operating withing the catchment areas.

4.     All alcohol duty rates will be frozen from 1 February 2023.

5.     A new VAT-free shopping scheme for non-UK visitors to the GB mainland will see travellers able to obtain a VAT refund for goods bought in high street shops where these are exported in personal baggage.

6.     The government will embed tax simplification into the institutions of government. It will therefore abolish the Office of Tax Simplification and set a mandate to HM Treasury and HMRC to focus on simplifying the tax code.