Tax cuts, tax rises and U-turns

The ‘new’ Government held a mini-budget on 23^rd September, which resulted in Sterling falling against the Dollar and an increase in the rate of interest paid by the Government to finance its deficit.

The mini-budget included several tax cuts, including the reversal of increases by the previous Chancellor, which hadn’t yet been implemented. The new Chancellor was then forced to backtrack on some of his announcements, before resigning and being replaced by Jeremy Hunt. At the time of writing Prime Minister Liz Truss has just resigned, and we await our third PM of the year.

It is easy to have lost track of all the tax changes, so here we will try to summarise the position as it now stands in late October:

Capital Allowances

For several years we have had a temporary Annual Investment Allowance (AIA) limit of £1 million, which meant most farmers can obtain 100% tax relief on all machinery and equipment purchases. This was due to reduce back to £200,000 in April 2023, but the Chancellor announced that £1 million will be the new permanent AIA limit.

Corporation Tax

Rishi Sunak, the former Chancellor, had announced an increase in the standard rate of Corporation Tax from 19% to 25%, to take effect from April 2023. The rate payable by small companies was to remain at 19%. However, the new Chancellor, Kwasi Kwarteng, announced that this will not now take place so all companies will pay 19%. Jeremy Hunt then reinstated the increase, so the standard rate will be 25% from April 2023 as planned.

National Insurance

Similarly, Rishi Sunak announced a temporary increase in National Insurance contributions (NICs) of 1.25% from 6^th April 2022 which would then be replaced by a new Health and Social Care Levy (HSCL) of 1.25% in April 2023. The 1.25% extra NICs will be scrapped in November 2022, and the HSCL will not now be introduced.

Income Tax on Dividends

The rate of income tax on dividends increased by 1.25% at the same time as the National Insurance increase. This was to discourage small businesses from converting their businesses into companies to avoid NICs. Kwasi Kwarteng announced that these increases would be cancelled but Jeremy Hunt reinstated them. This means that from April 2023 a basic rate taxpayer is liable at 8.75%, a higher rate taxpayer at 33.75% and an additional rate taxpayer at 39.35%. These changes reduce the tax savings from partnerships converting to companies.

Additional Rate of Income Tax

The most controversial aspect of the mini-budget was the proposal to scrap the 45% rate of Income Tax from 6^th April 2023. This would have resulted in anyone with income over £150,000 paying a top rate of 40%. The adverse reaction to the announcement led to a swift U-turn, and the additional rate of tax will remain at 45%.

Basic rate of Income Tax

This was the other headline announcement of the mini-budget whereby the basic rate of tax was due to reduce by 1% to 19% from 6^th April 2023. Jeremy Hunt reversed this proposal so the basic rate will remain at 20%. It is worth remembering that basic rate taxpayers are going to be worse off in real-terms, as Rishi Sunak had previously frozen both personal allowances and the basic rate band until April 2025, when normally both of these increase by inflation each year.