23 Sep 2022
Mini-Budget 2022: How might the new Prime Minister's policies affect you?
Kwasi Kwarteng’s Mini-Budget had been billed as the biggest tax giveaway in over 30 years - and it didn’t disappoint on this front. The measures put forward, together with the energy support packages recently announced, were clearly focussed on driving growth in the economy towards the trend rate target of 2.5% per annum.
National Insurance Increases Reversed
With Liz Truss having committed to not introduce any new taxes during her premiership, any changes designed to boost the economy and help with the cost of living crisis were always going to come in the form of amendments to existing taxes, or tax thresholds.
This theme began on 22 September, when it was confirmed that the 1.25% National Insurance rise put in place by Rishi Sunak would be scrapped. The previous Chancellor added 1.25% to National Insurance Contributions for both workers and employers in April of this year to help pay for Health and Social Care. As a concession, the burden of this increase was reduced in July for the low earners when he increased the threshold for National Insurance to the same level as that for Income Tax.
This was seen at the time as a ‘tax on jobs’ – one that had been high on the list of the new Prime Minister to reverse. The 1.25% cut, which will take effect from November of this year, will benefit employers and all those earning above £12,570.
Although the reduction will be welcomed by all workers and employers alike, commentators were quick to point out that this will be of more benefit to higher earners. Someone earning £30,000 will benefit from the change by £217 per annum compared to the £1,092 benefit for someone earning £100,000 per annum.
The health and Social Care Levy due to replace the 1.25% rise in National Insurance next year was also cancelled however a key commitment behind these changes was that funding for Health and Social Care will be maintained at the current level. It was not made clear how this would be done.
Dividend Tax Rise Reversed from 2023
Investors and those who draw their income in the form of dividends will also benefit from April 2023 as the 1.25% increase to dividend rates that took effect at the same time as the rise in National Insurance – which took the top rate of tax on dividends to 39.35% - will also be reversed. Again, at a time when incomes are being squeezed, the boost to this savings and investment income will be welcomed.
Corporation Tax Rise Scrapped
Following the theme of removing planned tax rises, it was also confirmed that the expected rise in Corporation Tax next year from 19% to 25% will be scrapped.
Although offering no immediate relief, this change would be welcomed by businesses with challenging conditions set to continue into 2023. This will also be welcome news to those who invest through a company.
Investment Companies, which include those holding Buy-to-Let properties and other Family Investment Companies, were due to be hit with the full rise to 25% in 2023 and not benefit from a tapered rise from 19% linked to the company’s profits. Keeping Corporation Tax for these companies below rates of personal income tax may be viewed as significant for those who choose to structure their affairs this way. When combined with the intended reduction in dividend taxation (see below) – often the way in which profits are drawn from such companies - the savings will be significant.
Income Tax changes from 2023
Much was made earlier this year of the previous Chancellor’s pledge to lower the basic rate of income tax to 19% from 2024. Kwasi Kwarteng went one better by bringing this change forward to April 2023 meaning that all those earning between £12,570 and £50,270 will benefit from a 1% saving on their income tax bill – a maximum saving of just over £375.
But perhaps the surprise announcement today was that the additional rate income tax band will be abolished from April 2023. Currently, earnings over £150,000 are subject to the additional rate of income tax, which is 45%. The proposal is to simplify the tax system by removing this threshold, with the 40% higher income tax rate applying to all income above the basic rate threshold.
These changes do not affect Scottish tax rates.
An added benefit is that with the removal of the additional rate band, all tax payers with earnings over £50,270 will now benefit from the Personal Savings Allowance of £500 for higher rate taxpayers. This was previously not available to additional rate taxpayers and will enable £500 of bank interest to be received tax free regardless of income.
In further welcome news for investors, the abolition of the Additional Rate band will also mean that dividend income previously charged at the Additional Rate (currently 39.35%) will now be taxed at the Higher Rate for dividends, which from next April will be 32.5% - a significant saving for those in that position.
Whilst this will all be welcomed by higher earners, it is worth noting these changes will affect the rates of tax that apply to certain reliefs that might be received against income tax. Individuals may therefore wish to bring forward action, such as large pension contributions that take advantage of previously unused allowances, to this tax year, where they can do so.
It has been confirmed that there will be a transitional period for Relief at Source pension schemes which will enable them to continue to claim tax relief at 20% for a further year. A similar four year transitional period will apply for Gift Aid relief on charitable contributions, with basic rate relief kept at 20% until April 2027. Note that these transitional periods are unlikely to apply for any additional rate relief that might be due in respect of such payments!
Stamp Duty cut
A buoyant property market is regarded as a key feature in a growing economy and there had been signs of late that the housing market was slowing with rising interest rates and higher costs of living squeezing affordability.
As speculated, with a view to boosting the housing market, Stamp duty has been cut from 23 September (for England and Northern Ireland only). The key changes to Stamp Duty are:
- Nil Rate Band doubled from £125,000 to £250,000
- An increase in the level at which first-time buyers start paying stamp duty from £300,000 to £425,000
- The relief available to first time buyers will apply to a property costing up to £625,000 rather than the current £500,000.
The cuts are designed to help individuals at all levels of the property market and take a large number out of the tax altogether.
With a general election due within the next two years there will be pressure to continue to deliver good news all round.
However, with the economy on the brink of (if not already in) recession and inflation continuing to rise, the path ahead is not an easy one to navigate and there is a real worry that the tax cuts on top of the energy support packages will only further increase inflationary pressures.
The other ‘elephant in the room’ is how much this is all going to cost? There were no forecasts from the Office for Budget Responsibility (OBR) as we would usually expect with a Budget, although the Chancellor has commissioned a forecast before the end of the calendar year. With the combined cost of energy packages and tax cuts expected to run into the hundreds of billions of pounds, it is clear that a big bet has been placed that the changes announced today will go a long way to delivering the growth required to cover the costs.
In her campaign, Liz Truss promised a full review of taxation – which would include Inheritance Tax. There have been a number of consultations over recent years considering potential changes to the capital taxes, none of which have resulted in the government taking any significant action and that continued in this Mini Budget.
Interestingly, Kwasi Kwarteng confirmed a commitment to simplify the tax system, but at the same time announced that he would wind down the Office of Tax Simplification – the body that undertook much of the simplification work over recent years – preferring to bring the task ‘in-house’. The areas that are likely to be addressed in the future – Inheritance Tax, Capital Gains Tax and pension tax relief - are complicated and aren’t going to necessarily solve the problems at the top of the Prime Minister’s ‘in tray’, or probably help her win the next election. Understandably these have therefore been deferred to a future budget, or indeed Government.
Read the full set of announcements and measures that may affect you, including the energy support plan.
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