Budget Overview
The UK income tax adjustments proposed in the mini budget were set to take effect in April 2023, however subsequent announcements show they are no longer going to proceed:
Originally, the basic rate of income tax was planned to fall from 20% to 19%. Hunt has since stated that this will remain at 20%.
The highest rate of income tax, planned to be 40% on incomes over £150,000 will now be changed to 45%.
Reforms to R&D tax reliefs
The Autumn Statement proposes cuts to SME R&D tax reliefs.
The UK’s research and development (R&D) tax credit system will undergo a number of changes, according to Chancellor Jeremy Hunt, including a reduction in the deduction and credit rates for the SME programme.
Hunt informed lawmakers during his Autumn Budget statement on Thursday that the credit rate would be cut to 10% and the deduction rate for the SME scheme would be decreased to 86%.
The rate of the separate R&D expenditure credit will rise from 13% to 20%, according to Hunt’s announcement.
Income Tax Additional Rate Threshold from 6 April 2023 – Stealth taxes and rising costs
The Income Tax additional rate threshold (ART) will be lowered from £150,000 to £125,140, the income level at which an individual will not have any Personal Allowance, because £1 of the Personal Allowance is withdrawn for every £2 of income above £100,000 from 6 April 2023.
Tax Band Freezes
Chancellor Jeremy Hunt will freeze the income tax personal allowance at £12,570 until April 2028. Anyone who earns more than this will pay more tax.
He is also freezing the threshold at which people start paying higher rate tax for the same period. They were already frozen until 2026. Freezing the thresholds means that tax bands stay the same, even as people’s pay goes up.
As wages rise, people pay tax on a larger proportion of their earnings, and more people move into higher tax brackets. This is sometimes called fiscal drag.
The government’s freeze on income tax thresholds will see some workers’ tax bills rise by the equivalent of a 3.5% hike in the headline rate of tax, according to analysis by investment platform AJ Bell.
Someone on a salary of £50,000 will pay just under £59,000 in income tax over the six years of the threshold freeze, the research found. The total tax bill will be more than £9,000 higher than it would have been if tax thresholds had been uprated with inflation during that time, illustrating the damaging effect of fiscal drag on earnings.
The freeze does not only hit higher earners, as the average £33,000 earner will also see an equivalent 2% increase to a base rate of 22%.
Changes to Corporation Tax
Recent changes have also been made to the Corporation Tax policies for the upcoming year. Rate increases were first announced in the government’s Autumn 2021 budget, then they were abandoned in the mini-budget for September, and now they are being implemented after all.
For businesses reporting income over £250,000, corporation tax will increase to 25% on April 1, 2023.
Corporation Tax for businesses with profits under £50,000 will remain at 19%, with marginal relief providing a steady increase for companies in the middle.
Are there any changes to IR35?
Plans to reverse the IR35 changes have now been abandoned, but what does it actually mean? The government said in September that they intended to change who is in charge of assessing IR35 status. This was altered back in October, so virtually nothing has changed.
Health & Social Care Levy
The Health & Social Care Levy has resulted in a temporary 1.25% increase for some types of National Insurance since April 2022.
It was planned that the following year, it would become a stand-alone fee that, unlike NI, would have been owed by people who were past the State Pension age. It also had an impact on dividend tax, raising the tax rate by 1.25%.
This was cancelled as of September 2022, according to the government’s mini budget. In fact, the government is still planning to abolish the charge. Some forms of National Insurance (NI) will alter in November 2022, but the dividend tax hike will continue.
How will this impact National Insurance?
From November 6, 2022, the National Insurance increase of 1.25% will be repealed.
Taxpayers over the State Pension age won’t have to worry about the levy because it won’t be implemented in April 2023.
It’s important to note that the maximum salary that directors can accept while still remaining tax-efficient is unaffected by the changes to NI because it isn’t impacted by National Insurance.
What do the changes mean for dividend tax?
Dividend tax was originally included in the government’s announcement to repeal the levy, but this is no longer the case. This means that even though National Insurance rates are going back to their previous levels, the additional 1.25% dividend tax that was implemented in April will still be in effect.
Beginning in April 2023, the dividend tax increase of 1.25% will still be in place.
Increase to the annual investment allowance
One kind of capital allowance is the Annual Investment Allowance (AIA). When businesses invest in long-term assets that they anticipate staying in the business for more than a year, they can use these allowances to claim tax relief.
With AIA, you can deduct the entire asset’s value from your profits before taxes in the financial period that you purchased the item, resulting in lower tax payments.
Prior to a temporary increase to £1 million as part of the Covid recovery plan, you could only claim the AIA up to a maximum of £200,000 per year. The AIA threshold has now been permanently raised to £1,000,000 and is anticipated to remain in place through March 31, 2023, rather than being lowered as originally planned.
Stamp Duty Land Tax Changes
The changes that were previously announced in September, which raised the threshold for paying Stamp Duty Land Tax, were confirmed in Jeremy Hunt’s speech.
The starting point for SDLT on the purchase of a residential property increased as of September 23, 2022:
From £125,000 to £250,000
From £300,000 to £425,000 for first-time buyers (up to a maximum property value of £625,000)
But it’s important to remember that the only places where Stamp Duty Land Tax is applicable are in England and Northern Ireland. This has been replaced in Scotland by the Land and Buildings Transaction Tax and in Wales by the Land Transaction Tax.
The devolved Welsh and Scottish governments will each receive funding to distribute, though it is not yet clear exactly what each government will do with it.
The creation of new investment zones in the UK
In addition, the mini budget included funding to promote growth in certain UK regions, and Hunt later announced that these initiatives would move forward. Over a 10-year period, the zones are anticipated to offer a variety of tax breaks and incentives, including:
- 100% Business Rates Relief
- For businesses investing in equipment to be used in the designated investment zone, enhanced capital allowances offer a 100% first-year allowance.
- A complete reduction in stamp duty and land tax on the purchase of land and structures for new residential construction as well as for commercial use or development.
- Employers will also receive relief on their National Insurance Contributions to help boost employment in these zones (NICs). This indicates that they will pay zero-rate employer NICs on the salaries of new hires who spend at least 60% of their time working on the tax site. Up to £50,270 in annual earnings will be exempt from paying NICs; thereafter, employers will be subject to regular NIC charges.
