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Emergency Budget 2022/23

28 September 2022 • HMRC News, Warrener Stewart Edinburgh, Warrener Stewart London, Warrener Stewart News

Here's the key points from the recent Emergency Budget 2022/23 plus a summary of the corporation tax and personal tax changes:

Key points

  • Reversal of the April 2022 increase in National Insurance rates with effect from 6 November 2022
  • Cancellation of the Health and Social Care Levy that was to be introduced in April 2023
  • Cancellation of the 1.25% addition to dividend tax rates that was introduced in April 2022, with effect from April 2023
  • Basic income tax rate cut to 19% a year early, from April 2023
  • Abolition of 45% rate of tax on incomes above £150,000 from April 2023
  • Cancellation of planned corporation tax increase to 25% in April 2023: the rate will remain 19%
  • Increases in thresholds for Stamp Duty Land Tax with immediate effect
  • From April 2023, repeal of the ‘off-payroll working’ measures introduced in 2017 and 2021
  • Confirmation of energy cost support packages

Further details on the personal tax and corporation tax updates are below.

Corporation tax

Rate of tax

As widely expected, the Chancellor confirmed that the planned increase in the main rate of corporation tax from 19% to 25% will not now take place on 1 April 2023, reducing government revenue by an estimated £67 billion over the next five years.

Reform of basis periods

The Chancellor did not mention any changes in the planned reform of basis periods for taxation of profits of unincorporated businesses and partners in Limited Liability Partnerships (LLPs). In spite of concerns expressed by some that businesses may not be ready, taxation of profits arising in the tax year will be introduced in 2024/25; 2023/24 will be a transitional year for moving from the old to the new basis of assessment. Any self-employed trader, partnership or LLP with an accounting date other than 31 March or 5 April should consider the effect of this change as a matter of urgency.

Personal tax

Rates and allowances

In March 2022, Rishi Sunak announced his intention to cut the basic rate of income tax from 20% to 19% from 6 April 2024. This was costed at over £5 billion a year and was said to be conditional on the government continuing to meet its ‘fiscal rules’ – borrowing going down and not being required for day-to-day spending. Kwasi Kwarteng has brought the cut forward by a year to 6 April 2023. For someone earning over the 40% threshold of £50,270, this will mean a reduction in income tax of £377 in 2023/24.

The Chancellor also announced that the 45% rate of tax that applies to income above £150,000 a year will be abolished from 6 April 2023, leaving only the basic rate of 19% and the higher rate of 40%. The additional rate was introduced at 50% by the Labour government in 2010 and was cut to 45% in April 2013. The cost of this tax cut is estimated at about £2 billion a year.

These cuts will not automatically apply in Scotland, where tax rates on non-savings, non-dividend income are set by the Scottish Parliament. The Scottish Government will receive additional funding in respect of the basic rate tax reduction and take its own decision whether to pass it on to taxpayers by reducing rates.

The Welsh Assembly also has the right to set its own tax rates for non-savings, non-dividend income, but has so far kept to the main UK rates.

Dividend income

For the tax year 2022/23, the tax rates on dividend income over £2,000 were increased to correspond to the increases in National Insurance Contributions and the planned Health and Social Care Levy. The ordinary rate, paid by basic rate taxpayers, rose from 7.5% to 8.75%; the upper rate (for higher rate taxpayers) is 33.75% (from 32.5%) and the additional rate (for those with income above £150,000 a year) is 39.35% (from 38.1%). These rates apply across the UK.

These increases will be reversed with effect from April 2023. Combined with the abolition of the additional rate of income tax, this means that there will only be rates of 7.5% and 32.5% on dividend income above £2,000 in 2023/24. This tax cut costs an estimated £1 billion a year, and is estimated to benefit 2.6 million taxpayers by an average of £345 in 2023/24.

Personal allowances

Contrary to some expectations, no announcements were made about the possible unfreezing of the income tax rate bands and the main allowances. Chancellor Sunak fixed them 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 (apart from the cuts mentioned above), the effect of inflation on salaries and business profits means that this will represent a significant tax increase over the period. Based on estimates made in March 2021, government receipts for 2025/26 were forecast to rise by £8 billion because of this. The significant increases in inflation since then suggest that the effect of freezing will be substantially higher.

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.

Pension contributions

No changes were announced to the main rules on tax relief for pension schemes and pension contributions. The reduction of the basic rate of income tax affects people who pay contributions to personal pension schemes where the scheme provider claims a credit for basic rate tax on the contribution: at a basic rate of 20%, a contribution of £800 is topped up by the government with £200 to make £1,000, but this falls to £188 and £988 with a 19% tax rate. The government has announced a one-year transitional period that will allow pension schemes to claim at 20% in 2023/24.

Capital Gains Tax and Inheritance Tax

No changes were announced to these taxes. The Inheritance Tax nil rate band remains fixed at £325,000 until the end of 2025/26.

National Insurance

From 6 April 2022, the rates of Class 1 NIC paid by employers and employees, and of Class 4 NIC paid by self-employed people, were increased by 1.25 percentage points. This means that employees pay 13.25% from the primary threshold up to the upper earnings limit and 3.25% above that; employers pay 15.05% on all earnings above the secondary threshold. Self-employed people pay 10.25% on earnings between the lower and upper profits limits, and 3.25% above the upper limit. These increases were a temporary measure for the tax year 2022/23, pending the introduction of a separate Health and Social Care Levy (HSCL) to be paid by the same people on the same income from 6 April 2023.

The Chancellor has decided to cancel the HSCL altogether, and to cancel the increases in NIC from the earliest practicable date – 6 November 2022. It is recognised that some payroll software may not be able to deliver the reduction to the old rates in time for the November payroll, but affected employees should receive a rebate retrospectively with their December payments.

In March 2022, Chancellor Sunak moderated the effect of the increase by significantly increasing the primary threshold at which employees’ contributions start, to match the level at which income tax starts to be payable – an annual figure of £12,570. Once again this was done ‘as soon as practicable’, taking effect on 6 July. Although this increase in the threshold was explicitly intended to give relief for the effect of the increase in rates, the threshold has not been reduced again following the cancellation of the rate increase.

Because NIC are calculated on individual payments of wages and salaries, it is possible though complicated – to have different rates and thresholds applying in different parts of a tax year. Thresholds and rates for self-employed people are set for the tax year as a whole, and the computation of Class 4 NIC is therefore even more complicated. The figures for both the threshold (£11,908) and the rates (9.73% and 2.73%) are described as ‘blended’ based on fractions of the year before and after 6 July and 6 November.

The cost to the Exchequer of reversing the NIC increase for five months of the current tax year is nearly £7 billion; the cancellation of the HSCL will mean a reduction in expected revenues of approximately £17 billion each year going forward. The government estimates that 28 million taxpayers will pay an average of £330 a year less tax as a result. In spite of this very significant reduction in revenue, the Chancellor stated that funding for health and social care – which the HSCL was supposed to provide – will be maintained ‘at the same level as if the levy was in place.'

Charities

Reductions in the basic rate of tax are not generally favourable to charities, because they depend on claiming back basic rate tax paid by donors under Gift Aid. If the donor gives the same net amount, the charity is entitled to a smaller tax credit. The current rate of tax credit will be maintained for four years, until April 2027, to reduce the impact on the income of charities. 

Other measures

Energy costs

The Chancellor began his speech with what he described as the issue most worrying the British people – the cost of energy. He did not announce any new measures, but summarised the support that has already been announced: the Energy Bills Support Scheme, which will provide a £400 nonrepayable discount to eligible households to help with their energy bills over the coming winter, and a new Energy Price Guarantee, which will reduce the unit cost of electricity and gas so that a typical household in Great Britain pays, on average, around £2,500 a year on their energy bill, for the next 2 years, from 1 October 2022. The Energy Price Guarantee limits the amount a customer can be charged per unit of gas or electricity, so the exact bill amount will continue to be influenced by how much energy the consumer uses.

There are further measures to support businesses, and different arrangements for people on different types of energy supply contracts. The Chancellor noted that the volatility of the energy market meant that it was not possible to be sure of the cost to the government of this support, but it is estimated to be £60 billion over the next six months.

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

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