Highlights of the Spring Statement
While the October Budget included a number of tax increases the Spring Statement was mainly about tax cuts. I’ve pulled together and explained what I believe are key take aways.
Basic Rate of Income
The Chancellor announced that he intends to cut the basic rate of income tax from 20% to 19% from 6 April 2024. This costs over £5 billion a year and therefore has a significant effect on the public finances. The promise is conditional on the government continuing to meet its ‘fiscal rules’ – borrowing going down and not being required for day-to-day.
Tax Rates and allowances 2022/23
As announced a year ago, the income tax rates and bands and the main allowances are frozen at their 2021/22 levels until the end of 2025/26, instead of the usual inflation-linked increases each year. Although this means that someone with the same income will pay the same tax year on year, the effect of inflation on salaries and business profits means that this represents a significant tax increase over the period.
Two other thresholds remain fixed as they have been since they were introduced: the income levels at which the High Income Child Benefit Charge begins to claw back Child Benefit receipts (£50,000 since 2012/13) and at which tax-free personal allowances are withdrawn (£100,000 since 2010/11). These measures create a higher marginal tax rate in the income bands £50,000 – £60,000 (for those in receipt of Child Benefit) and £100,000 – £125,140 (as the personal allowance is reduced to nil). Inflation brings more people each year within these charges.
Dividend Income
The tax rates on dividend income over £2,000 will increase for the tax year 2022/23. The ordinary rate, paid by basic rate taxpayers, will rise from 7.5% to 8.75%; the upper rate becomes 33.75% (from 32.5%) and the additional rate 39.35% (from 38.1%). These rates will apply across the UK. The addition of 1.25% to each rate is related to the increases in National Insurance Contributions and the introduction of the Health and Social Care Levy and is intended to ensure that individuals who work through companies and take their profits as dividends rather than salary cannot avoid paying the charge.
The 33.75% rate will also apply to tax payable by close companies (broadly, those under the control of five or fewer shareholders) on ‘loans to participators’ that are not repaid to the company within 9 months of the end of the accounting period, where the loan is advanced on or after 6 April 2022.
National Insurance Contributions
The thresholds above which employers’ and employees’ National Insurance Contributions (NIC) become payable were set to increase from 6 April in line with inflation in 2022/23, an increase of about £300 a year to £9,880. In a surprise move, the Chancellor announced that they will further rise in July 2022 to match the level at which income tax starts to be payable – an annual figure of £12,570. This is a tax cut of £6.25 billion, a very significant figure, and will save employees up to £356 over a full year.
Because NIC on wages and salaries are calculated on individual payments, it is possible to change the thresholds in the middle of a tax year in this way. The delay is considered necessary to allow software providers to update their products so employers can calculate the NIC correctly. Thresholds for self-employed people are set for the tax year as a whole, and the 2022/23 Lower Profits Limit (LPL) for Class 4 NIC will be determined by apportioning £9,880 from April to July and £12,570 from July to the end of the year. The resultant figure is £11,908, above which Class 4 NIC will be payable on business profits.
Employment Allowance
The Employment Allowance reduces employers’ NIC for small businesses employing at least two people being paid above the Class 1 NIC Secondary Threshold, if the total employers’ NIC bill did not exceed £100,000 in the previous year. The Chancellor announced an immediate increase in this tax relief from £4,000 to £5,000, taking effect from 6 April 2022. If you are a client of Women Who Count we will automatically apply this allowance to your payroll.
Health and Social Care Levy
As announced on 7 September 2021, a new Health and Social Care Levy will be charged to raise £13 billion a year – dwarfing most of the other figures in the Budget policy decisions. In 2022/23, this will be achieved by raising the rates of NIC; in 2023/24, the levy will be formally separated from NIC and collected separately by HMRC, and will also apply to earnings of individuals who are above State Pension age and are therefore not liable to NIC.
From 6 April 2022, Class 1 NIC paid by employers and employees, and Class 4 NIC paid by self- employed people, will increase by 1.25%. This means that employees will pay 13.25% from the primary threshold up to the upper earnings limit and 3.25% above that; employers will pay 15.05% on all earnings above the secondary threshold. Self-employed people will pay 10.25% on earnings between the lower and upper profits limits, and 3.25% above the upper limit. The NIC rates will revert back to their previous levels from 6 April 2023 when the separate levy is introduced.
Working from home
During the pandemic, HMRC has been more generous than usual in allowing claims for tax relief by employees who have been required to work from home. This has covered exemption of some payments by employers to meet the extra costs incurred in relation to a home office, and also direct claims by employees for tax relief on some costs not reimbursed by employers. This relaxation applied for the tax years 2020/21 and 2021/22, but the normal rules will be restored for 2022/23.
Corporation Tax
As announced in March 2021, the Corporation Tax rate will remain at 19% until 31 March 2023. It will then increase to 25% for companies with profits over £250,000. Since 1 April 2015, all corporate profits have been taxed at the same rate; the ‘small profits rate’ that was familiar before that will be reintroduced at 19% for companies with profits of up to £50,000. Between £50,000 and £250,000 there will be a tapering calculation that produces an effective marginal rate of 26.5% on profits between these limits, but an average rate on all profits of between 19% and 25%. The limits will be divided between companies under common control.
VAT – Reduced rate for hospitality and entertainment
No further changes have been announced relating to the reduced rate of VAT that has applied to qualifying supplies by hospitality, leisure and entertainment businesses to help offset the impact of the pandemic. The rate reduced from 20% to 5% in July 2020, and increased to 12.5% with effect from 1 October 2021. It will revert back to the standard 20% rate on 1 April 2022.
VAT – Default surcharge
The rules for late payment of VAT will be reformed for return periods beginning on or after 1 January 2023 (delayed from the intended introduction of the new rules on 1 April 2022). Default surcharge will be replaced by interest on late payment and separate penalties for late filing of returns. It is interesting to see this delay shown in the government’s accounting as a cost – implying that they believe the new system will raise more money than the old.
Business rates
In the Autumn Budget, the government announced several measures to reduce the burden of business rates in England:
- freeze the business rates multiplier for a second year, from 1 April 2022 to 31 March 2023
- introduce a new temporary business rates relief for eligible retail, hospitality and leisure properties for 2022/23, giving 50% relief up to a £110,000 per business cap
- extend transitional relief for small and medium sized businesses, and the supporting small business scheme, for 1 year, restricting increases in rates bills, subject to subsidy control limits
The government will reform the system of business rates by increasing the frequency of revaluations from 5 years to 3 years, starting in 2023.
In October, the Chancellor announced an intention to introduce reliefs, also in 2023, where occupiers incur certain types of expenditure on improvements, including eligible plant and machinery used in onsite renewable energy generation and storage. In the Spring Statement, he announced that this would be brought forward by a year to April 2022.
Cost of living support
As widely predicted, the Chancellor cut fuel duty on petrol as a response to increases in the cost of living. From a range of possibilities, he chose to limit the reduction to one year from 6pm on 23 March 2022, set at 5p per litre. As VAT is charged on top of the duty, this should in total reduce the tax by 6p per litre. The price of fuel has already gone up by several times that amount since the start of the war in Ukraine, so this will only have a limited impact on overall costs. However, it is expected to save the average motorist about £100 a year, at a cost to the Exchequer of nearly £2.4 billion.
Mr Sunak made no changes to the measures announced in February to help people impacted by higher energy bills. These involve a £200 rebate on bills in the autumn, which will be recovered at £40 a year over the following 5 years, and a £150 rebate on Council tax bills for people with houses in Bands A to D. This rebate is not repayable. Local authorities will also be given funds to make grants to people who are in need but not eligible for the central government scheme. This is described as a ‘£9 billion support package’, but the majority of it is a loan rather than an outright grant.
Tax avoidance and evasion
Hidden in the government’s costings are significant extra amounts of money described as ‘HMRC: investment in compliance’ and ‘DWP: investment in compliance’ (over £500 million in 2022/23, rising to over £1.2 billion in 2026/27). This ‘investment’ is expected to bring in £3 billion of extra tax over the next five years and savings in the benefits system of a similar amount. The HMRC staff will ‘provide greater support to taxpayers seeking to pay off accrued tax debts’ and ‘tackle the most complex tax risks, ensuring large and mid-sized businesses pay the tax they owe’. The DWP effort will be directed at preventing and detecting fraud and error, and collecting more debt.
