Rishi Sunak has delivered his mini-budget last week, the two big tax changes surrounding the funding of COVID recovery were already known, with the introduction of the Health and Social Care Levy and the Corporation Tax changes coming in from April 2023.
Sunak’s opening remarks
Rishi Sunak opened by highlighting the war in Ukraine and said Britain’s economic strength underpinned freedom and liberty. The chancellor said he would respond to the conflict by building a stronger, more secure economy for the UK.
“The actions we have taken to sanction Putin’s regime are not cost-free for us at home. The invasion of Ukraine presents a risk to our recovery as it does to countries around the world,” he said.
The invasion of Ukraine certainly puts an additional burden on the UK economy, but consumers were already facing significant pressures from inflation and energy prices, as well as Sunak’s tax rise. Using the war in Ukraine to set the tone for the statement looks like the beginning of an election strategy to at least partly attribute the pain of the cost of living to the war, as a way of swerving political blame for the growth slowdown which was predicted well before Russia invaded.
Labour is using ‘high tax, low growth’ as its mantra to attack the Tories. Since the Conservatives entered government, the UK has experienced the biggest downgrade in the growth of any big economy. Sunak uses these figures as a way to emphasise the difficult choices made in the rest of the statement. Again, he links them directly to the Ukraine crisis, saying choices to sanction Putin’s regime was not cost-free.
Cost of living
- The chancellor said the OBR forecast that inflation would average 7.4% this year.
- Fuel duty will be cut for only the second time in 20 years, by 5p a litre for a full 12 months.
- Sunak said the fuel duty cut was worth £5bn and would take effect from 6pm on Wednesday.
- The government will cut to zero a 5% VAT rate for households installing solar panels, heat pumps or insulation.
- Sunak said he would double the government’s household support fund to £1bn.
- The chancellor said forecasts from the Office for Budget Responsibility showed the economy would grow by 3.8% this year.
- GDP would grow by 1.8% next year, 2.1% in 2024, 1.8% in 2025, and 1.7% in 2026.
- In October, the OBR had forecast growth of 6% f0r 2022 as the UK economy recovered from the Covid pandemic.
- The economy grew by 7.5% in 2021, after a fall of 9.4% in 2020 – the biggest decline for a century – during the first wave of the pandemic.
What are the tax changes?
Health and Social Care Levy - a 1.25% rise in Employers’ and Employees’ National Insurance (NI), Class 4 Self Employed NI and Dividend Tax (DT) from April 2023. For the first 12 months, this is an increase to existing NI/DT rates.
From 6 April 2022, the tax rates that will apply to dividends will be 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate), dividends will continue to be taxed as the top slice of an individual’s income. All individual taxpayers will continue to be entitled to the tax-free dividend allowance of £2,000 per year.
Corporation Tax – the main rate rises to 25% from 19% from April 2023 – so a 6% increase. Businesses with profits below £50k will still pay 19% and there will be a taper for businesses with profits between £50k and £250k.
Income Tax – no change to rates. The Chancellor has committed to reducing the basic rate of income tax from 20% to 19%, but not until 6 April 2024.
National Insurance Contributions (NICs)- The annual level at which employees and the self-employed start to pay NICs was due to increase from £9,568 to £9,880 from 6 April 2022. This increase will go ahead but be further uplifted to £12,570 from 6 July 2022, effectively aligning the point at which an individual starts to pay NICs with the £12,570 income tax personal allowance.
However, the implementation is a little convoluted – for employees, the change comes from 6 July 2022 to allow time for payrolls to update, and for the self-employed, there is an apportioned threshold for 2022-23 with 3/12ths of the old threshold and 9/12ths of the new one. With the starting NIC threshold for the self-employed and company directors computed on an annual, this will set a pro-rata sum of £11,908 for the whole of the tax year to 5 April 2023, before increasing to £12,570 in the tax year to 5 April 2024.
- For the self-employed, some individuals will find that they no longer need to pay Class 2 NICs from April 2022. The small profits threshold will be set at £6,725 as planned but the requirement to pay Class 2 NIC will only apply to those with self-employed profits over £11,908.
From 6 April 2023, Class 2 NIC will only be payable by those with profits over £12,570.
- Employers’ NIC – No changes have been made to the annual level at which employers’ NIC start to apply; namely £9,100 for most employees in the tax year to 5 April 2023.
- However, the Employment Allowance, which allows eligible businesses to reduce their employer NIC cost, will increase from £4,000 to £5,000 for the tax year to 5 April 2023.
- Capital Gains Tax – no changes to rates, no major changes to allowances/exemptions. Annual exemption is frozen.
- Inheritance Tax – no changes to rates, no major changes to allowances/exemptions. Nil Rate Bands are frozen.
- Value Added Tax – no changes to rate or registration/de-registration
- No extension has been granted to the leisure and hospitality sector for use of the reduced 12.5% VAT rate on eligible supplies including food, non-alcoholic beverages and hotel and holiday accommodation. The VAT rate applied to these supplies will revert to 20% from 1 April 2022 as planned.
The UK is to see the biggest fall in living standards since records began, more than anything seen in the post-war period. The chancellor had to act but few think it will be enough. The cut to fuel duty was one of the only actions well trailed by Treasury sources before the statement, after a concerted campaign by Conservative MPs and tabloid newspapers. But, in a nod to the divide still raging in the party, there is a net zero sweetener: a VAT cut to help households install energy efficiency devices.
- Sunak said borrowing in the current financial year, 2021-22, would be 5.4% of GDP, and would fall to 3.9% next year.
- In cash terms, the OBR estimated the budget deficit – the gap between spending and income – would be £127.8bn in 2021-22, and £99.1bn next year.
- In its previous forecasts in October, the OBR had estimated borrowing would be 7.9% of GDP, or £183bn in cash terms, in 2022-23.
- The chancellor said debt service costs would rise to £83bn in the next fiscal year, the highest level on record.
- Public sector net debt was forecast to be 95.6% of GDP in 2021-22, and then to fall gradually to 83.1% of GDP by 2026-27.
“We should be prepared for the economy and public finances to worsen potentially significantly,” Sunak said.
With higher-than-predicted receipts for the Treasury in a number of areas prompting lobbying for public spending, Sunak has continually stressed to MPs that the counter is the cost of the UK’s enormous borrowing, with March the third month in a row to break monthly debt interest records.
- Sunak said the planned 1.25-percentage-point rise in national insurance contributions must remain, as a “dedicated funding source” for health and social care.
- However, he announced he would increase the threshold by £3,000 this year, up from a planned rise of £300. This equalises the national insurance contributions threshold with the personal income tax allowance of £12,570.
- He calls it a £6bn personal tax cut for 30 million people, and the largest single personal tax cut in a decade.
It looks like a partial U-turn when a full U-turn would be unpalatable. As welcome as the change to the threshold will be, particularly for middle-income families, Sunak’s claim that the national insurance rise is definitely hypothecated for health and social care looks dubious, given it looks like the funding settlement will not actually be reduced.Source: Blick Rothenberg. Shows impact of NI surcharge in April and change in NI threshold in July for employees
- Sunak announced changes to research and development tax credits, saying the generosity of reliefs for business investment would be increased to boost UK productivity.
- The chancellor said “something is not working” with UK investment in productivity.
- He said the government would cut tax rates on business investment in the autumn budget.
- The chancellor said he would increase the employment allowance for small businesses to £5,000 – a tax cut worth up to £1,000 for half a million small firms starting in two weeks’ time.One of Sunak’s mantras is the need to work towards a high-productivity economy. He is right to conclude that something is not working and promises more action at the autumn budget to cut business taxes, the first of a number of “jam tomorrow” promises to try to rebuild his image as a tax cutter.
- Sunak said the basic rate of income tax would be cut from 20% to 19% in 2024.
- He said it would not be responsible to make such a tax cut right now, given the uncertainty in the economy.
- “Tax cuts must be paid for, they must be prioritised and they must fit the economic circumstances of the time,” he said.
- The chancellor said it would be the first cut in income tax for 16 years.
First reported in the Guardian on Monday, Sunak has gambled that the fiscal position will be stable enough for him to start to cut taxes by 2024. But it looks like very odd choices by a government that says it speaks for working people – and there is likely to be significant scrutiny of the choices here: a NICs rise of 1.25 percentage points paid by workers, and a cut to income tax paid by everyone.
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Tax Bands and Allowances
This is the Governments table of Rates and Allowances
Other Significant Taxation Announcements
Here is the rundown on other significant announcements which are likely to be of interest to our clients:
- Basis Period Reform – this will affect sole traders and partnerships who don’t prepare their business accounts by 31 March/5 April. It’s been deferred from April 2023 to April 2024 and with some additional spreading options.
- Minimum Pension Age – is rising from 55 to 57 from 2028. This is the age at which benefits can be taken from Private Pensions – don’t confuse it with State Pension Age.
- National Living Wage – goes up from £8.91 to £9.50 for the over 23s from April 2022.
This is a brief review of last week’s announcements, and more detail will inevitably seep out over the coming weeks. We have set out below the optimum salaries and tax bands if you are a company director paid with a salary and then dividends.
Company Directors – Setting the best level for your salary for 22/23
A: If you run your own payroll
You will need to set your salary at £11,908 (up from £9,568) gross per annum or £12,570 (same as £12,570 last year) gross per annum depending on your individual circumstances and pay the net salary and taxes as they are calculated. See below for additional guidance.
B: If we process your payroll
We will soon email you the March quarter’s payroll. There WILL be some National Insurance payable to HMRC this quarter. Details of how and what to pay will be with the payroll reports, please check these reports when you receive them. Whilst there is some NI due this is lower than the combination of corporation and dividend taxes and is part of your tax planning. Do not forget to pay for this.
To minimise the taxes due, you should set your 2022/23 take-home salary at:
- If you currently have a standing order paying £797.34 salary from the company to you each month, then you should increase this to £992.33. Note because the chancellor has split the National Insurance bands there will be a small amount of Employers National Insurance due in March 2023 similar to this year and we will let you know this amount in due course.
- If you have a £1,017.48 net salary this should be increased to £1,040.19
We will process your 2022/23 payroll at the new levels indicated above. When you receive the first quarterly payslips please check that these agree to the payments you are making and if not, let us know of any discrepancies so they can be adjusted.
- If your salary is now £992.33 per month you can then take £2,662 of dividends per annum tax-free. There is then tax payable at 8.75% on the next £35,700 of dividends. The dividend tax rate then increases to 33.75%.
- If your salary is £1,040.19 per month you can then take £2,000 dividends per annum tax-free. There is then tax payable at 8.75% on the next £35,700 of dividends. The dividend tax rate then increases to 33.75%.
If you have other income this will reduce the banding accordingly:
- The 33.75% band continues until your total income reaches £100k then the % rises again.
Top Tax Director/ Shareholder tips to consider:
- If you have not already, you may want to transfer some shares to your spouse to reduce dividend tax.
- If you are the sole director/employee and take on another employee who is paid at the level where NIC is due, you should increase your salary to £12,570 per annum as this will reduce taxes as you can claim the Employer’s NI allowance.
The Marriage Allowance
The Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner. If they earn more than you, this reduces their tax by up to £252 in the tax year. To benefit as a couple, the lower earner must have an income of £12,570 or less. Also, neither of you can be a higher rate taxpayer.
Pension Payments 2022/23
If you are considering making a further personal pension payment, you may wish to do this before 5th April 2022 as it will extend your basic rate tax band and allow additional tax relief. There are various limits and rules surrounding pensions and if you are considering making a large contribution then you need to check you comply.