Contrary to the name, the measures announced by the Chancellor Kwasi Kwarteng in the ‘mini-budget’ were far from mini and represented a significant change to the government’s strategy.
The announcement of such large and far-reaching tax changes has sent shockwaves through the country and the markets. So, what does the mini-budget mean in terms of change and how will this affect taxpayers in the UK?
The basic rate of Income Tax was reduced from 20% to 19%, a change the government estimates will benefit more than 31 million taxpayers1 from 6th April 2023. In addition, the reduction of National Insurance contributions by 1.25%, reversing the increase on 6th April 2022, will be felt by a similar audience but employees should see the immediate effects of the National Insurance reductions in their November pay.
One of the biggest surprises from the budget was the abolishment of the additional rate of tax at 45% for anyone earning more than £150,000, again from April 2023. The top rate of income tax will now be 40% for income exceeding the basic rate tax threshold.
The abolishment of the additional rate of tax also means that all higher rate taxpayers will now benefit from a Personal Savings Allowance of £500. This was previously not available to additional rate taxpayers. Savers will not pay tax on interest accrued up to this limit.
The 1.25% increase in dividend tax rates that came into effect on 6th April 2022 has also been reversed. With the additional rate no longer in force, from 6th April 2023 dividends over the £2,000 dividend allowance will be taxed at 7.5% for basic rate taxpayers and 32.5% for higher rate taxpayers. Investors will benefit from this change.
It is worth noting that there were no changes to the personal allowance of £12,570 or basic rate band of £37,700. These remain frozen until the 2025/26 tax year.
In addition to the National Insurance changes for employers, businesses also had news of a reversal of the Corporation Tax rate hike due in April 2023 to 25%, retaining at the 19% rate. This announcement may be welcomed by clients with Investment Companies or those considering them.
Those wishing to purchase properties will save up to £2,500 with the announcement that the Stamp Duty Land Tax (SDLT) nil-rate threshold has been increased by £125,000 to £250,000, or £425,000 for first-time buyers. This came in with immediate effect. The threshold value of properties purchased by first-time buyers qualifying for the enhanced nil-rate threshold was also increased to £625,000.
No changes were announced to Inheritance Tax or Capital Gains Tax, though it was previously announced that the Nil Rate Band, the Residence Nil Rate Band and the Capital Gains Tax allowance will be frozen until 5th April 2026.
There was also an announcement of support to extend the use of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) to beyond 2025.
Given the Income Tax changes, individuals may consider making pension contributions whilst the 20% basic tax relief and 45% additional rate tax relief are still available. Whilst additional rate taxpayers only have until the end of the current tax year, there is a transitional period for basic tax relief to remain at 20% until the end of the 2023/24 tax year for pension schemes that give tax relief at source. Funding a pension before the changes could be particularly effective for those able to make larger pension contributions making use of carry forward annual allowances.
For the remaining tax year, business owners drawing dividends from their companies should consider the future changes carefully when planning how and when to draw their profits. It may be more efficient to wait until the new rates are implemented in the new tax year if they can. The same can be said for those who can alter when they receive income from certain sources. However, this will depend on the level of dividends and income and your need for it, so careful consideration should be made.
We are awaiting clarification regarding how the abolishment of the additional tax rate will affect trusts. The trust rates for discretionary trusts are currently equivalent to the additional rate of tax which is to be abolished.
Whilst we have highlighted some planning areas to consider, we would urge clients not to act too hastily. There have been indications that there will be further tax changes to come from the Chancellor later this year, with a full budget expected in November. However, given the reactions to the recent announcements, it feels like it is very much still a fluid situation.
Sources:
1 The Growth Plan 2022: Factsheet on Income Tax
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