Tax: A “mini-budget” with big changes

The new Chancellor, Kwasi Kwarteng, presented his “mini-budget” on 23 September. Described by the Government as “The Growth Plan 2022”, many of the Chancellor’s announcements were merely a reversal of changes made by his predecessors, but described as being part of an effort to “support investment, innovation and economic growth” in the UK.

Described by some commentators as a budget to support the wealthy, and immediately having a negative impact on the value of the pound, the “mini-budget” was anything but mini. There are a number of changes that both individuals and businesses should be aware of.

Individuals

Income tax and NI contributions

It was announced that from April 2023, the additional 45% rate of income tax would be removed in England, Wales and Northern Ireland and replaced by a single higher rate of income tax of 40%. The additional rate applies to individuals with income of more than £150,000, and so would have cut income tax for around 660,000 of the highest earning individuals in England, Wales and Northern Ireland. Income tax rates and bands are devolved in Scotland and Nicola Sturgeon had announced there were no plans for the Scottish Government to follow suit.  There was huge public backlash, and on 3 October a U-turn was announced, and the proposal was scrapped.

The Government has reversed the 1.25% increase to national insurance from 6 November 2022. The increased contributions only came into effect on 6 April 2022 after being introduced by previous Chancellor Rishi Sunak. This reversal will benefit all national insurance paying employees and employers, including those in Scotland.

Stamp duty land tax

With effect from budget date, the Chancellor announced a doubling of the stamp duty nil rate band from £125,000 to £250,000, meaning that residential property buyers in England and Northern Ireland will not be required to pay stamp duty on the first £250,000 of a property’s value. The threshold for first-time buyers has also been increased from £300,000 to £425,000.

Again, these changes do not apply to the equivalent land and buildings transaction tax in Scotland, and it will be interesting to see if the Scottish Government provides similar changes to residential LBTT tax rates.

Businesses

Corporation tax

The most notable corporation tax change announced by the Chancellor was the cancellation of the planned corporation tax increase, meaning that corporation tax will remain at 19%. [Update: this change was reversed by Jeremy Hunt following his appointment as Chancellor on 14 October, so the increase will come into force.] The Chancellor also cancelled the reduction in the annual investment allowance, meaning that businesses will now benefit from full tax relief on the first £1 million spent on qualifying plant and machinery each year.

The Government’s hope is that these tax savings will encourage greater UK investment spend – it remains to be seen whether the amount of investment generated matches the amount of tax saved by business in the UK.

Employment tax

Again, the Chancellor announced a reversal of previous changes made to the off-payroll working (IR35) rules. The IR35 rules require that employment taxes be paid by a person who provides services to a business through an intermediary if that person would otherwise have been regarded for tax purposes as an employee of the engaging business.

From 6 April 2021, engaging private sector businesses, rather than the engaged individuals, became liable for determining whether the IR35 rules apply, operating PAYE and paying employers’ national insurance contributions for contractors falling within the scope of the rules. The IR35 regime is not being repealed, but liability for determining whether the rules apply and to pay any employment taxes will be shifted back to the individual’s intermediary from April 2023. Although this is a positive change for engaging businesses, there is likely to be frustration at the amount of time and expense spent in complying with the rule change initially. The Government has also noted that it is keeping IR35 compliance under review, so there may be further changes.

Conclusion

Although the measures announced in the mini-budget have promised billions of pounds of tax savings to promote UK growth, the Government is expected to borrow billions of pounds to pay for these savings. As a result, shortly after the budget was delivered, the pound fell to a record low against the dollar and in a bid to seek to restore market stability and avoid further interest rate rises, the Bank of England engaged in a short-term measure of buying gilts. Mortgage interest rates are also at a 14 year high following the mini-budget. At going to press, the Chancellor is due to deliver his medium-term fiscal plan on 23 November but has faced calls to bring this forward. Time will tell whether he remains committed to delivering further tax cuts as part of that plan.