The 2022 Mini-Budget
The new chancellor had previously hinted at far reaching changes and this proved to be the case when his 2022 Mini-Budget, or 'fiscal event' was announced.
He essentially scrapped the majority of those tax rises adopted by his predecessor in favour of tax cuts. Given the soaring levels of public debt this is highly controversial and has been met with a mixed response.
Whilst these policies may appear to benefit many owner managed businesses, whether this gamble will pay off in the long run remains to be seen and we discuss these below.
The 2022 Mini-Budget - tax cuts
As you can see here the government has brought forward the proposed cut in the income tax rate from 20% to 19% by 12 months to 6 April 2023.
Additionally the government were proposing to abolish the additional higher rate of income tax of 45% on income over £150,000 to a single higher rate of 40%, However, following a backlash the government have now capitulated and decided not to abolish the 45% top rate of income tax.
Another major boost for owner managed businesses announced in the 2022 Mini Budget is that the dividend tax rise previously implemented will be reversed in the new tax year.
Therefore from 6 April 2023, the basic rate of dividend tax will be 7.5%, the higher rate 32.5% and the additional rate 38.1%. Interestingly enough, whilst the additional rate of income tax at 45% is being scrapped this does not appear to apply to dividend income.
The rate of tax which applies to overdrawn director's loan which is linked to the higher rate of tax is dividends will revert to it's original level. With careful planning then, it may be possible for owner managed businesses to side-step those tax increases introduced on 6 April 2022.
National Insurance Contributions
Because the reversal of the previous increase will take place in the current tax year (from 6 November 2022) matters are somewhat complex if you are a director as opposed to an an employee. This is because all directors pay National Insurance Contributions based on annual not monthly earnings. To compensate for this different treatment, a hybrid rate will be payable so the net effect is that directors do not pay more National Insurance Contributions than monthly paid employees.
Directors will pay a hybrid rate which works out at 12.73% below the Upper Earnings Limit and 2.7% above the Upper Earnings Limit. Whereas employees will pay 12% and 2% on earnings below and above the Upper Earnings Limit respectively, from 6 November 2022.
The employer's rate of National Insurance Contributions will revert to 13.8% for employee's salary from 6 November 2022 and a hybrid employer's rate of 14.53% will apply to director's salaries.
There will also be a hybrid rate of 14.53% which applies to Class 1A and Class 1B National Insurance Contributions on benefits in kind and PAYE Settlement Agreements respectively.
Finally, if you're a self-employed sole trader or partner then you will pay hybrid rates of Class 4 National Insurance Contributions of 9.73% for earnings below the upper earnings limit and 2.73% above this limit.
The hybrid rates above work on a similar principle to those that will be applied to directors earnings.
The rate of Corporation Tax was previously set to increase from 19% to 25% from April 2023 for companies whose taxable profits were more than £250,000. However, this increase has been scrapped and the rate will remain at 19% for all companies. This is irrespective of whether they may be investment or trading companies and their level of profit.
The 2022 Mini-Budget - IR35 reforms
Possibly one of the most unpopular reforms in recent years was the government's clampdown on IR35 and off payroll in the public and private sector. Despite the legislation for IR35 being implemented over 20 years ago these still appear to be misunderstood by both public and private sectors. This has resulted in widespread confusion and disruption about how and when the rules should be applied.
The reforms introduced in April 2017 and April 2021 for the public and private sector will now be withdrawn from 6 April 2023. Workers providing their services via an intermediary (company) will once again be responsible for determining whether their role is inside or outside the remit of IR35.
The 2022 Mini-Budget - Share Scheme Changes
Company Share Option Plans
The limits on the value of Company Share Option Plans are set to double from £30,000 to £60,000 from 6 April 2023. These share schemes can be a highly advantageous method of rewarding key employees. Company Share Option Plans enable employers to grant share options to directors and employees provided all the right conditions are met.
Those rules which restrict the share classes that can be used by companies granting options under Company Share Option Plans are to be relaxed giving them parity with Enterprise Management Incentives. Currently only one class of shares may be issued if shares options are to qualify for tax advantages under these rules.
Seed Enterprise Investment Scheme
The following amendments to the current rules will take effect from 6 April 2023:
The 2022 Mini-Budget - investor incentives
Businesses setting up in these designated zones will potentially be able to access tax breaks, such as 100% business rates relief, enhanced allowances on plant and machinery and a zero rate of Employers National Insurance for new employees.
The 2022 Mini-Budget - other changes
The Office of Tax Simplification will now be disbanded as the government has decided that a separate body to oversee the process is no longer appropriate and should be handled by the government. It is questionable how effective this independent body has been in simplifying the UK tax system as it appears to be a legacy (some might say vanity project) implemented by a previous chancellor.
The Stamp Duty Residential nil-rate threshold will be increased from £125,000 to £250,000 and the Nil-rate threshold for first time buyers increases from £300,000 to £425,000.
Additionally the maximum amount that an individual is able to to pay for a home which is eligible for the relief above increases from £500,000 to £625,000.
The above limits are perhaps indicative of just how over-heated the residential property market has become in the UK and a cynical person might question how many first time buyers will be in position to benefit from these changes.
These proposals are certainly far reaching and designed to make the UK an attractive environment for businesses to operate in. The chancellor appears to be going for broke in order to ensure the incumbent government wins the next General Election. Whether this gamble pays off remains to be seen. Certainly the foreign currency markets appear to be have the jitters and because of this we wouldn't recommend any business trips or holidays to the US at the moment!
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