Spring Budget 2023 key points

15 March 2023 • HMRC

The 2023 Spring Budget was announced today, here are the key points for your information.

Jeremy Hunt opened his first full Budget speech by declaring that it was a ‘budget for growth’. He emphasised that this would be ‘long term, sustainable, healthy growth’. The Office for Budget Responsibility reported that there is unlikely to be any growth in 2023, but the UK is likely at least to avoid a recession.

There were some striking headlines on tax: the abolition of the limit on tax favoured pension savings and the introduction of unlimited 100% deductions against profits for company investment in new plant were more generous than most predictions. There were measures to encourage ‘economically inactive’ people back into the workforce, ranging from increasing the provision of free childcare to the introduction of ‘returnerships’ – apprenticeships for people over 50.

Significant points

• Personal tax rates and allowances on income and capital gains, and National Insurance Contributions, confirmed for 2023/24 as announced in the Autumn Statement

• Pension savings thresholds significantly increased: from 6 April 2023, Annual Allowance rises from £40,000 to £60,000 and Lifetime Allowance Charge is abolished; maximum tax-free lump sum remains 25% of Lifetime Allowance, i.e. £268,275

• Confirmation of corporation tax rate increase from 19% to 25% from 1 April 2023 on profits over £250,000 and marginal rate of 26.5% on profits between £50,000 and £250,000

• ‘Super-deduction’ for plant and machinery bought by companies up to 31 March 2023 replaced by 100% first-year allowance for qualifying capital expenditure, without upper limit, for three years from 1 April 2023

• Energy Price Guarantee retained at £2,500 for the average household for another 3 months to 30 June 2023

• Significant expansion of free childcare provision to be phased in from April 2024

Personal tax

Tax rates and allowances – 2023/24

The Autumn Statement included the announcement that the main personal allowance and the 40% threshold will remain at their 2022/23 levels until the end of 2027/28. This represents a tax increase where income rises from year to year. For example, a person with a salary of £50,270 would pay £7,540 in income tax in 2022/23; if their income increases by 10% to £55,297 in any of the years to 2027/28, all of the increase will be taxed at 40%, and they will pay £9,551.

The income level above which the personal allowance is tapered away remains £100,000; it will be reduced to zero when income is £125,140. For 2023/24, this is also the threshold for paying 45% tax (reduced from £150,000). For someone earning over £150,000 purely in salary, this represents a tax increase of £1,243. The amount varies if income includes dividends, which are subject to different rates.

The High Income Child Benefit Charge continues to apply to the higher earner of a couple where one receives Child Benefit and either of them has income of more than £50,000. The clawback of the benefit creates a high effective marginal rate of tax until it is all withdrawn once income reaches £60,000.

Scottish rates and allowances – 2023/24

The Scottish Parliament sets its own tax rates and thresholds for Scottish taxpayers for non-savings, non-dividend income. Up to 2022/23 the Scottish rates included a starter rate that was 1% below the basic rate in the rest of the UK, and intermediate, higher and top rates that were 1% above the rest of the UK equivalents. As shown in the table, the Scottish Budget in December 2022 increased the higher and top rates for 2023/24 by a further percentage point to 42% and 47%, and matched the rest of the UK’s cut in the top rate threshold to £125,140. The Welsh Government has similar powers for Welsh taxpayers, but has not varied the main UK rates.

Dividend income

The dividend allowance exempts some dividend income from tax, although it still counts towards the higher rate thresholds. For 2023/24, the allowance is reduced from £2,000 to £1,000, and it is to be reduced again to £500 for 2024/25. This increases the tax liabilities of those with dividend income above those levels, and will also require more people to file tax returns to declare those tax liabilities.

The tax rates on dividend income over £1,000 remain unchanged from the tax year 2022/23. The ordinary rate, paid by basic rate taxpayers, is 8.75%; the upper rate is 33.75% and the additional rate is 39.35%. These rates apply across the UK.

The 33.75% rate also applies 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.

Pension contributions

The generous tax reliefs given to registered pension funds are limited in amount by two main rules: the Annual Allowance (AA) and the Lifetime Allowance (LTA).

The AA has capped the amount that can be put into a tax-favoured pension fund at £40,000 a year, which is reduced where the person earns over £240,000 a year down to a minimum of £4,000 (at an earnings level of £312,000 or above). Contributions made above the AA by either the individual or their employer are subject to a tax charge.

This has caused difficulties particularly for employees in final salary schemes, where the rules calculate a ‘deemed contribution’ based on their accrued pension benefits at the beginning and end of the year. This can produce unpredictable and substantial tax charges, and has been blamed for some senior doctors deciding to retire early.

From April 2023, the AA is increased to £60,000; the taper will begin at £260,000, and the minimum AA will be £10,000. There is also an increase in the Money Purchase Annual Allowance, which applies where someone has started to draw taxable benefits from a money purchase pension scheme and then wishes to make further contributions: this will also be increased from £4,000 to £10,000.

The LTA has capped the total amount that can be saved in a tax-favoured pension scheme. It was introduced in 2006 at £1.8 million, but had been reduced several times and in 2022/23 stands at £1,073,100. The Autumn Statement provided for this to be frozen along with other allowances until the end of 2027/28. If the pension fund value exceeds the LTA when benefits are first taken from the fund, and again at age 75, the excess has been subject to a tax charge – 25% if the excess is left in the fund to be drawn as taxable income, and 55% if it is drawn out as a lump sum.

Taking pension benefits

The minimum age at which people can first access their tax-advantaged pension scheme benefits is currently 55, but will be increased to 57 with effect from 6 April 2028. That increase will affect those who were born on or after 6 April 1973. In spite of speculation that this might be raised again, no announcement was made in the Budget.

Inheritance tax

The Autumn Statement fixed the IHT nil rate band at £325,000 until the end of 2027/28. Holding the threshold at the same amount for 19 years (from 6 April 2009) will bring far more people into the scope of the tax. However, the £175,000 ‘residential nil rate band enhancement’ on death transfers can reduce the impact where it applies. A married couple may now be able to leave up to £1 million free of IHT to their direct descendants (£325,000 plus £175,000 from each parent), but the rules are complicated, and the prospect of the nil rate band being fixed for another 5 years increases the importance of proper IHT planning.

Corporation tax

On 1 April 2023, the Corporation Tax rate will increase from 19% to 25% for companies with profits over £250,000. Since 1 April 2017, 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 that have been under common control at any time in the previous 12 months, whether UK resident or not.

Companies with an accounting period that straddles 31 March 2023 will time apportion the profits of that period to be taxed at the two different rates. For example, a company with a 30 September 2023 accounting date that makes a large profit on a transaction before 31 March 2023 will pay 25% tax on 6/12 of it. If a short accounting period is ended on 31 March 2023, that large profit will all be taxed at 19%.

Value Added Tax

The VAT registration and deregistration thresholds will remain frozen at their present levels of £85,000 and £83,000 until 31 March 2026. This will tend to require more businesses to register for the tax as they grow, and therefore represents a small tax-raising measure.

Capital allowances for plant and machinery

The March 2021 Budget introduced enhanced allowances for qualifying expenditure on plant and machinery (P&M) incurred from 1 April 2021 to 31 March 2023 by companies. They can claim:

• a ‘super-deduction’, providing allowances of 130% on new P&M investment that would ordinarily qualify for 18% writing down allowances (WDAs) in the main capital allowance pool;

• a first-year ‘special rate allowance’ of 50% on new P&M investment that would ordinarily qualify for 6% WDAs in the special rate pool (e.g. integral plant in buildings).

Company Share Ownership Plans (CSOPs)

As announced in September 2022, the limit on the value of shares that can be subject to CSOP options when granted to employees will be doubled to £60,000 with effect from 6 April 2023, along with some other relaxations to align the rules better with Enterprise Management Incentive (EMI) scheme options and to enable more companies to use the schemes.

Other measures

Cost of living support

The Energy Price Guarantee (EPG), which limits the amount that energy suppliers can charge consumers, will be maintained at £2,500 for a further 3 months: it will increase to £3,000 on 1 July 2023 rather than 1 April. The EPG restricts the standard tariff that can be charged so that the amount payable by an ‘average household’ should not exceed the stated figure; the actual energy bills of individual households will vary.

The Chancellor also confirmed, as expected, that the 5p cut in fuel duty will be retained for the next year, and the rate will be frozen for the second year running. This will save the average motorist £200 over the period when compared with the increases in duty that were originally planned.

Childcare

The Chancellor announced significant increases in free childcare in order to encourage more people to enter or re-enter the workforce. However, the new provision will not be available immediately. From April 2024, working parents of 2 year-olds will be able to access 15 hours of free childcare per week, benefiting parents of up to 285,000 children. This will be extended to working parents of 9 month to 2 year-olds from September 2024, benefiting parents of up to 640,000 children. From September 2025, all eligible working parents of children aged 9 months up to 3 years will be able to access 30 free hours per week. These provisions will apply for 38 weeks a year.

Making Tax Digital

HMRC confirmed in December that Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) will be delayed by a further two years, until April 2026. The new legislation will come into effect in April 2026 for businesses, self-employed individuals and landlords with gross income over £50,000, and in April 2027 for those earning over £30,000.

If you have any questions

To discuss how these changes may impact your own situation, please get in touch with your usual Warrener Stewart contact or email us on info@warrenerstewart.com