We knew that the new Prime Minister wanted to cut income tax rates at some time in her tenure because we had been told so repeatedly. What we did not expect was the measure to be enacted so soon after the new Chancellor had been installed and we certainly did not expect the scrapping of the 45% ‘additional rate’ tax band for those earning over £150,000. In what has been termed a ‘mini budget’ the new Chancellor, Kwasi Kwarteng, delivered a package of more than 30 measures intended to tackle high energy bills, drive down inflation and cut taxes to drive growth.
Income Tax Changes
An ‘additional’ tax rate of 50% was introduced in April 2010, reduced to 45% three years later but from 6 April 2023 will be no more. The 40% band will now be the highest tax rate such that the 13.7% previously ‘additional’ rate taxpayers will not only pay less tax but now everyone will benefit from the £500 personal savings allowance. The level of personal allowances remains (for the moment), meaning taxpayers earning more than £125,140 will still have no personal allowances.
The increase in dividend rates will also be reversed from 6 April 2023 such that the tax rates of income tax in England and Northern Ireland will be:
|Earnings band (after allowances)
||On earnings and profits
|Basic rate (0 to £37,700)
|Higher rate (above £37,701)
This reduction/cancellation in tax rates is pleasing for the individual taxpayer but tax relief given at source (currently at 20%) on pension contributions and Gift Aid donations will be affected. The government has confirmed that there will be a four-year transition period for Gift Aid relief to maintain the income tax basic rate relief at 20% until April 2027 and a one-year transitional period for ‘Relief at Source’ pension schemes.
The rates of class 1 NIC are reversed back to the levels in place on 5 April 2022 but the rates imposed from 6 July 2022 to 6 November 2022 remain. Therefore for all employees (except directors paying NIC cumulatively) the tax year will effectively be split into two – the first period for the first seven months of the tax year (6 April to 5 November 2022) and a second for the remaining five months (6 November 2022 to 5 April 2023). The calculation means that over the year the main Primary rate payable by the employee will be 12.73% (i.e. seven months at 13.25% and five months at 12%) and the main Secondary rate payable by the employer will be 14.53% (15.05% and 13.8%). Corresponding rates of Class 4 NIC for the full tax year 2022/23 will be 9.73% and 2.73% (a reduction from 10.25% and 3.25% to 9% and 2% respectively).
The figures are as follows:
Employees’ Class 1 NIC
12% on earnings in the band: £1,048 to £4,189 per month (£12,570 to £50,270 per year)
2% on earnings above £4,189 per month (£50,270 per year)
Employers’ Class 1 NIC
13.8% on earning above £758 per month (£9,100 per year)
The employment allowance remains at £5,000.
Care will be needed if payroll is run around the changeover date. If the software has not been updated in time payments may have to be made using pre- 6 November percentages and any underpayment sorted out in the following payroll run.
Other Key Tax Announcements
The statement included the reversal of a string of planned tax rises including the intended increase to 25% in the corporation tax rate originally set for 6 April 2023 — this remains at 19%. Planned beer, wine, cider, and spirits duty rate increases have also been cancelled and overseas shoppers can now shop sales- tax free in the UK.
The Annual Investment Allowance is a valuable tax break providing a 100% tax deduction for up to £1m of plant and machinery purchased in a year. This cap was due to be reduced to £200,000 on 1 April 2023 but will now be kept at £1m indefinitely.
Queries remain over the application of the ‘super relief’. Under this relief qualifying expenditure on new plants and machinery incurred from 1 April 2021 to 31 March 2023 receives 130% tax relief effectively allowing 24.70% tax relief on expenditure (130% x 19%). Now that the corporation tax rate is being retained at 19% from 1 April 2023, we await further announcements as to whether this relief will remain.
The Enterprise Investment Scheme, providing tax incentives for individuals to subscribe for shares in unquoted trading companies, was due to end in 2025 but has now been extended for an undefined period. The similar Seed Enterprise Investment Scheme providing tax relief for investment in small trading companies also remains in place with increases in the annual investment caps of £100,000 per investor, £150,000 per company.
IR35 never really went away – the rules just changed. Now from 6 April 2023, another change means we are back to the original 2017 rules. The off-payroll working variants for the public sector (from 6 April 2017) and for large private sector organisations (from 6 April 2021) are to be scrapped. It will now be up to the directors of intermediary companies to decide whether there would be an employment relationship between the worker and the engager, if all intermediaries in the chain are ignored.
Stamp Duty Land Tax
As from 23 September 2022, the threshold from which SDLT must be paid on the purchase of residential property had doubled from £125,000 to £250,000. This means that the 2% tax rate has been abolished, saving purchasers a potential £2,500.