In just 30 minutes, Kwasi Kwarteng delivered a financial statement that reversed years of socio-centric policy. The changes will benefit the highest earners and business in a bold but untested bid to stimulate wide economic growth. In a world which has experienced unprecedented change over the last few years, this stance is a big gamble which will be unpopular with a lot of voters and could see the new Truss Government dethroned in the next election.
This Budget is a real departure to what has gone before. Middle class England, who have all too often in recent years taken the burden of fiscal changes, clearly benefit from the announcements. However, the real winners are investors, high earners, and growth creators. While this may provide a boost to the economy to some degree, it will drive a greater divide between the wealthy and poor at a time when with so much worldwide uncertainty we are more at risk of social unrest.
The Government had already pre-announced the decision to reduce the rates of National Insurance contributions (NICs) by 1.25% in November and reverse the Health & Social Care Levy which was to be introduced in April 2023. The increase to NICs had only been in place since April 2022 and is a move that has been criticised for mostly benefitting those who are the higher earners. The 1.25% added to tax on dividends will also be reversed from April 2023 meaning that the highest taxpayers benefit from a 6.85% reduction to the headline rate of tax on their dividends.
Consistent with this theme, the Chancellor also announced that he will bring forwards the planned 1 percentage point cut to the basic rate of Income Tax by 12 months to April 2023.
The additional rate of Income Tax (the headline 45% rate) will also be removed from April 2023 so that the top rate returns to 40%. It is designed to improve the competitiveness of the UK and encourage entrepreneurialism to support economic growth. Businesses should therefore consider deferring bonuses and declaring dividends until after the tax cuts have come into force.
The cap currently applicable to banker’s bonuses will be removed so that they will no longer be limited to 100% of their fixed pay (or 200% of fixed pay with shareholder approval).
In 2017 and 2021 there were significant reforms to off-payroll working where workers provided their services via an intermediary such as a personal service company. However, from April 2023 we will revert to the old position whereby the taxpayer will need to determine their employment status in order to pay the appropriate amount of tax and National Insurance. This is a big reversal to previous policy where such arrangements were increasingly being seen as securing the individual involved an unfair tax advantage. This change is therefore clearly aimed at reinvigorating entrepreneurism and allowing individuals to benefit from their enterprise.
Energy Price Guarantee (EPG)
The EPG will cap the price consumers pay for electricity and gas and is expected to reduce the average household bill to £2,500 per year for a period of two years from October 2022. A temporary six-month scheme will also provide a discount on wholesale gas and electricity prices this winter for businesses and charities.
Stamp Duty Land Tax (SDLT) – Individual transactions
For transactions completing on or after 23 September, the Government has cut SDLT by up to £2,500 for residential property purchases. The maximum saving for first-time buyers is even greater now at £11,250. Like the extension to the last Stamp Duty holiday the cut is given by increasing the point at which the tax is payable. Now, the first £250,000 of the price is exempt for home movers and the first £400,000 is exempt from first-time buyers. Before today, only the first £125,000 was exempt for home movers and £300,000 for first-time buyers. The cap for partial first-time buyer relief will also be lifted from £500,000 to £625,000. The £2,500 is universal: buyers of second homes and buy-to-lets also benefit. And buyers of multiple dwellings (possibly annexes) will get the benefit more than once. In contrast to the previous holidays, however, this cut is not time limited. The aim is to grow the housing market.
Like the other mini-Budget announcements it is a big risk. If it works, it will warm up the parts of the economy connected with the housing market at a time when the Bank of England is trying to cool down the economy. It will also drive-up house prices, meaning that the saving will be enjoyed by sellers rather than buyers. We worry that buyers tempted by the tax cut will suffer when interest rates rise further, as they are predicted to. Those tempted by the last SDLT holiday have already started to leave fixed-rate mortgages and are bearing the increased cost of borrowing. Will the measure create a house price bubble that will burst? If so, this will (more than) reverse any growth promoted by it.
SDLT – Investment Zones
A new Stamp Duty relief will be given for purchases of land and buildings in Investment Zones – special areas to be designated benefitting from tax incentives and “planning liberalisation”. The main condition that needs to be met for the Stamp Duty relief appears to be a commitment from the buyer to develop the land either into commercial or residential property. More detail is expected soon. The measure will be wider than freeports relief, which is limited to commercial use and instead will mimic SDLT disadvantaged areas relief (since abolished). Unlike many measures announced today, the relief will not apply from today. However, if the experience with freeport relief is anything to go by, expect the process of designating the areas to be relatively rapid.
As promised by the Prime Minister, the proposed ‘higher rate’ of corporation tax of 25% from April 2023 has been cancelled to further the Government’s plan to boost investment and growth. This will be welcome news to many large corporates saving them, the Treasury say, £18.7 billion per year by 2026/27. However, absent from the headlines is that only 10% of UK corporates were expected to pay this ‘higher rate’. The vast majority of UK companies are unaffected by the change, and they will no doubt wonder where this Government’s priorities lie.
Small and medium enterprises will be cheered that the threshold of the Annual Investment Allowance (AIA) will be “permanently set” at £1 million, allowing 100% capital allowances on up to £1 million of certain capital spend each year, rather than reverting to £200,000.
For large companies that have taken advantage of the 130% super-deduction, which was designed to encourage businesses not to delay capital expenditure until the 25% tax rate had been introduced, the cancellation of the 25% tax rate is a double bonus, as they have received tax relief at very nearly 25% during this time for their capital expenditure. The 130% super deduction will end in April 2023 though, as planned and this will no doubt encourage accelerated spend on certain larger capital items and projects.
Alongside these general changes to capital allowances, the Government has announced a number of time-limited (10 years) tax reliefs for businesses locating in “New Investment Zones”. This includes not only an unlimited 100% first year allowance on qualifying capital expenditure but also an enhanced Structures and Buildings Allowance (SBA) of 100% over five years. The precise details of how this latter proposal will work are yet to be announced but it represents a radical change from the norm. Outside these Investment Zones, the SBA is worth only 3% of the cost of the building.
Disappointingly, there was no reference at all to a more fundamental reform to tax relief on capital expenditure. An announcement had been expected following a “call for evidence” from HMRC earlier this year, but it seems that the new “permanent” £1m AIA threshold is the Government’s simple response. However, the question remains as to how permanent this threshold will be and what longer term confidence UK business has in this Government’s pledge to boost investment? The evidence of the last 15 years is a history of inconsistent tax policy on investment and the time is ripe for greater reform and more focused incentivisation.
The Government has also announced some helpful changes to the Seed Enterprise Investment Scheme (SEIS) with the aim of increasing private sector investment. From April 2023, companies will be able to raise up to £250,000 of SEIS investment, an increase from the current limit of £150,000. The gross asset limit will also be increased to £350,000 allowing more companies to qualify for the scheme.
The Company Share Option Plan (CSOP) rules are also being made more generous, including a doubling of the value of the shares under option that can be granted to employees from £30,000 to £60,000. These changes will be effective from April 2023.
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