* Last updated 3 October 2022
In a statement this morning the Chancellor announced that the scrapping of the 45% rate of income tax would not go ahead as planned on 6 April 2023, describing it as having become a ‘distraction’ from the government’s ‘overriding mission to tackle the challenges facing our country’.
It is not clear based on his statement whether Mr Kwarteng was indeed referring only to the 45% rate of income tax or to the additional rate more generally (which includes the current 39.35% rate of income tax on dividends). If the additional dividend rate is not scrapped then, based on the details in the Growth Plan referred to above, we would expect it nevertheless still to decrease back to 38.1% (ie reversing the increase brought in by Rishi Sunak). If the additional dividend rate is still scrapped and it is in fact only the proposed ditching of the 45% rate which is being reversed, that would mean that the highest rate of income tax on earned income would be 45% while the highest rate of income tax on dividend income would be 32.5% (from the start of the next tax year). This discrepancy, coupled with the loosening of IR35 rules mentioned above, would no doubt have some effect on the planning behaviour of self-employed taxpayers.
This remarkably fast u-turn comes on the back of a number of pieces of bad press for the government, including a hit to Sterling, serious issues in UK government bond market and disruption to UK mortgage rates and products, which, among other things, immediately followed the mini Budget. While the Chancellor and the PM resolutely maintained their position for a little over a week, it looks now like this Lady is for turning.
* Article published on 23 September
Our freshly minted Chancellor of the Exchequer, Kwasi Kwarteng, has unveiled in his mini-budget (or was it a fiscal event?) this morning a host of spending pledges and tax reforms intended to boost the UK economy and drive growth. Sources close to the Chancellor had been briefing that there would be more rabbits than Watership Down and the Chancellor will consider that he did not disappoint. The ‘Growth Plan 2022’ undoes many of the tax changes brought in or scheduled by the previous Conservative government and then goes even further in its pursuit of a low tax, high growth economy. The Chancellor will be hoping that the harvest from the magic money tree that our new Prime Minister found in the orchard at Chequers will be bounteous enough to fund his generous tax reforms in addition to the unprecedent provision to be made to households and businesses to help them meet the spiralling costs of energy.
The future tax increase is a marvellous political tool. One Chancellor announces a future increase in taxation and takes plaudits for promoting fiscal rectitude but without actually costing anyone any money. The next Chancellor arrives and announces that the proposed increase will not go ahead and gets to say they are cutting taxes, without actually cutting taxes. It is almost like they planned it that way. As such, the planned national insurance contribution (NICs) increases have been scrapped along with the planned Health and Social Care Levy.
Although cuts in the rates of income tax had been mooted, the complete abolition of the additional rate of tax (45% rate) was more dramatic than anticipated. So that some benefit is felt across the whole income spectrum and not just at the top end, the previously announced 1% cut in the basic rate of tax (20% rate) will also come in a year early (April 2023). This along with the changes to NICs will benefit all taxpayers, with the abolition of the 45% rate affecting some 629,000 people (but they probably didn’t all go to school with the Chancellor).
As expected, the cap on bankers’ bonuses will be scrapped. Despite the name, the existing cap does not restrict the pound value of bonuses but rather limits them to 100% of basic salary. It is the Treasury’s argument that this has done nothing to limit overall remuneration for bankers and has instead driven business elsewhere.
Whatever the actual economic effects of these changes, we do not doubt that the scrapping of the top rate of income tax and removal of the bankers’ bonus cap will attract certain people to the UK given the historic international mobility of people earning in those brackets.
A cut in the rates of stamp duty land tax (SDLT) is always a welcome fillip to the housing market, particularly for overseas buyers who have already seen an effective 20% price cut in UK property because of the fall in value of Sterling. The value on which the zero percent SDLT rate is charged will be raised from £125,000 to £250,000, with first time buyers enjoying the zero percent rate on the first £425,000 of a first property with a value not exceeding £625,000. However, these changes avoid the issue that SDLT is a highly inefficient tax for the property market and is well overdue for a root and branch reform. There are no changes to the higher rates of SDLT, which climb to 12% on values over £1.5m with the 3% additional property and 2% non-UK buyer surcharges remaining in place. The measures announced to simplify the planning process are likely to have a more beneficial long term effect on the housing market.
The proposed increase in corporation tax to 25% next April has been binned, meaning the general rate of corporation tax will remain at 19%, the lowest (remarked the Chancellor) among G20 nations. This will no doubt help promote the UK as a place to do a business.
As widely trailed beforehand, local ‘investment zones’ will be established where businesses will be able to benefit from lower rates of tax including the elimination of business rates, SDLT and reductions in employers’ national insurance contributions for new employees. It remains to be seen how many of these zones will be established and where in the country they will be. Whether this will actually increase investment or simply move it around the country remains to be seen.
VAT free shopping for tourists will return, which we expect will give a boost in particular to the high-end retail sector.
Other announcements will be welcome to investors, certain self-employed workers and companies: the limits on seed enterprise investment schemes and company share option plans will be increased and recent changes to the IR35 rules (the rules dealing with how ‘off-payroll’ workers are taxed) will be repealed.
The Office of Tax Simplification will be closed down and its onerous mandate of simplifying the tax code passed to the Treasury and HMRC.
This Chancellor hinted at the start of his mini-budget that this was just the beginning – so watch this space, as more tax reform is likely on its way should this government hang on long to see its plan through. The big question on everyone’s lips is whether or not Trussonomics will prove a success – judging from this first foray into tax policy it seems as if the government is not going to die wondering.
Note: We have provided a transcript of the video if you are unable to listen to the audio. This transcript is generated using a combination of speech recognition software and human transcribers and may contain errors.
Christopher Groves (00:04): Hello and welcome to our summary of today's what was definitely 'not a budget' budget. We've been promised a tax-cutting Bonanza and boy did the Chancellor deliver. A number of measures have been widely trialed beforehand, but there are also some surprises he pulled out of the hat at the last moment. Charlie, what happened today?
Charlie Tee (00:19): Well, I think the biggest surprise was the abolition of the 45% additional rate of income tax which the Chancellor had managed to keep very well hidden indeed, when coupled with the 1% reduction in the basic rate of income tax to 19% from next April as opposed to April 2024. I think we're now looking at the lowest rate of income tax in this country for many years. It was widely trialed that the national insurance increases wouldn't go ahead and from the 6th of November this will be the case. The social care levy from next April has also been abolished and in some more good news, dividend tax rates are going down again by the 1.25% they were increased this year. And so if you're looking to declare dividends, you may well wish to wait until April 2023 before doing so. The other big tax cut that wasn't actually a tax cut is that the rate of corporation tax will not be going up to 25% from next April as had been previously announced, and will be staying at 19% and this is currently the lowest rate in all the G20 economies. The other big discussion point before the 'not a budget' was what would happen to stamp duty. And the Chancellor did make an announcement here as well, didn't he Chris?
Christopher Groves (01:29): Absolutely, Charlie. Lots of frenzied speculation about what would happen to SDLT and indeed a reduction was delivered, but perhaps in a more targeted way than many homeowners would have hoped, with an increase in the threshold which becomes payable on further reductions for first time buyers. House builders might perhaps be further cheered by the proposed simplification of the planning system, but that's something we've heard a lot before. There are other measures introduced to stimulate investment, principally investment zones, which is an idea we've heard a number of times before, a number of different guises. Whether or not they will actually increase the amount of investment or simply move it around the country remains to be seen. For companies, though, further measures to stimulate investment and for individuals, an increase in the amount of SAIS relief that can be claimed on investments into small companies and also increases in the amount of shares that can be offered under company share schemes. So a number of ways to encourage people to take that money out of their pocket and spend it. Overall though, I thought it was very interesting announcement.
Charlie Tee (02:26): I think so, Chris. I think if the objective of the government was to put money back in the hands of individuals and businesses, then they've certainly not disappointed and I think no one can accuse them of not having the courage of their convictions. If the Chanellor's to be believe, this is just a start as well. I think the big question for everyone is will the growth plan of 2022 serve to turbocharge the British economy? I think it's gonna be very interesting to see.
Christopher Groves (02:50): Absolutely. The Chancellor will be certainly hoping all that money he's giving to people will be spent and invested very quickly. As Charlie said, more announcements are promised. We didn't hear anything about capital gains tax or inheritance tax today, so perhaps more to come on that front. Please join us as and when that happens. Thank you.