Autumn Budget 2022

There are few changes here, see personal tax for changes to dividend and company cars.

R&D Tax Credits

Some minor reducing of allowances

This is coming out of widespread fraud in this sector, with large volumes of questionable claims.   Politicians like to announce R&D money, but much of it seems to go towards projects which would have gone ahead without subsidy, so essentially wasted. There seemed to be very little political will to reform this area.

Already Announced

Corporation Tax Rate

Corporation Tax up to 25% from April 2023 on profits over £250,000

Small profits rate of 19% for profits under £50,000

‘Tapering’ between the two bands, which means profits between £50,000 and £250,000 are paid at 26.5%.

This has been in, cancelled, and brought back again since the summer.  Hunt didn’t mention this embarrassing episode in his speech.  The changes mean the benefits of using a limited company are reduced, but for most situations the balance has not yet tipped towards a partnership or sole trader position. It does however make company pension contributions a lot more attractive.

SDLT Threshold

As widely signalled the temporary expansion of the nil rate SDLT band to £250,000 will end in March 2025.

This is quite helpful for those buying smaller properties, or looking to change ownership.  The 3% additional rate will still apply.

Worth reminding you of:

60 Day Report and Pay

If you sell your let property any Capital Gains Tax needs to be reported and paid within 60 days of the sale, unless you sell during  February or  March and we can file your 2022/23 tax return before the 60 day clock runs out.

Tax Free Dividend Band

Reduces from £2,000 to £1,000 April 2023, and £500 April 2024

The impact of this depends on your situation.  For our clients who take the majority of their income in dividends, it is a relatively modest £131 per annum from April 2024 as this allowance omits the “first £2,000” ie those taxed at basic rate.  For those with PAYE income into the additional rate the cost will be as high as £590.

As noted below, dividend rate rises have not been reversed.

Tax Free CGT Allowance

Reduces from £12,300, to £6,000 April 2023, and £3,000 April 2024

This heavily reverses the previous strategy of exempting small gains.   The impact in terms of taxes for say a higher rate landlord paying the 28% tax band would be a maximum of £2,604.  For those with share investments the maximum cost of this measure is £1,860, but does mean many more fiddly computations around share portfolios.

Additional Rate of Tax

The starting point for the 45% band drops from £150,000 to £125,140

This is a one off cost of £1,243 to anyone with an income over £150,000.  The “what he hasn’t done” is slightly more interesting as we still have  the claw back of personal allowances over £100,000, so your marginal rates of income tax are 40% to £100,000, 60% to £125,140, dropping back to 45% over £125,140.   This “big bump” in tax rates is pulling in more and more tax payers and often avoided using pension contributions.  This area is very hard to reform as any changed would benefit those earning over £100,000 which politically is going to be a difficult sell whatever party you are representing. Like those before him, Hunt has ignored the issue.

Company Car Benefit in Kind

The BIK band for electric vehicles rises from 2% to 3% from April 2025 and by April 2026, 5%

This impacts those driving an electric company car.   The benefit in kind rate is applied to the list price of the vehicle, and you and your employer are taxed on the computed benefit.    I have been expecting to see this increase, the only surprise really is it isn’t sooner and in steeper steps  given the very generous position at the moment.

Already Announced

Frozen Personal Tax Allowances from 2022

All bands for Income taxes to be frozen until April 2028

As reported previously, with inflation rampant (the old measure RPI is now 14%, and the ‘preferred’ CPI rate is 11.1%) the impact of “fiscal drag” is much more pronounced.  In particular by fixing allowances longer term it hugely flatters forecasts of the point when tax receipts will magically exceed revenues in a few years time, a game that has been played for such a long time it ceases to have any credibility.  It also  allows a “big ticket” increase just before the next election. You the voter are of course not supposed to spot this. I discuss further down the impact of fiscal drag.

NI & Dividends Taxes

NI rates have changed so many times this year, it is hard to keep up, so to recap where we are:

Key rates from 6th November 2022:

• Employee’s NI  12% (basic rate),  and 2% (higher rate)
• Employer’s NI 13.8% 
• Class 4 NI (self employed), 9% 

So if we ignore the utter mess in 22/23, we are back to 21/22 rates

Dividend Taxes however have moved:

• Basic rate, 7.5% (2021/22), and rises to 8.75% (2022/23)
• Higher rate, 32.5% (2021/22)  to 33.75% (2022/23)
• Additional rate 38.1% (2021/22) to 39.35% (2022/23)

So in short, dividend taxes, originally risen to match NI don’t get reversed.

Capital Gains Tax 

No changes announced other than to tax free band

This is still “news” following the Office for Tax Simplification report in November 2020. It was widely expected that this area would be significantly reformed given the historic low rate of CGT at just 10% for basic rate tax payers, and 20% for higher rate on investments other than property, which is at 18% and 28% respectively.

The expectation is that rates would be moved up to approaching the normal marginal rates with the potential for the reintroduction of indexation allowance which adjusts the base cost of the asset for inflation.

Some Key Allowances for 2023/24, based on what we know at the moment. This may change in March 2023.

• Employees NI Threshold remains at £12,570
• Employers NI Threshold remains at £9,100

What hasn’t changed? Below I list some major allowances, and in brackets [date of last change, what the rate would be if it kept place with inflation, and % effective reduction]

• Personal allowance stays at £12,570 [Apr-21, £14,408, 15% reduction]
• Higher rate threshold stays at £50,270 [Apr-21, £57,621, 15% reduction]
• Corporation Tax stays at 19%, but goes up for profits over £50,000 from April 2023 [Apr-17, £61,322, 23% reduction]
• VAT threshold frozen at £85,000 to 2025/26 [Apr-17, £104,247, 23% reduction]
• Mileage stays at 45p for business use of private car under 10,000 miles, and 25p for additional miles [Apr-11 & Apr-02, 61p & 42p, 35% & 70% reduction]
• IHT threshold remains at £325,000 [Apr-09, £476,919, 47% reduction]
• £100,000 threshold for loss of Personal Allowance remains (frozen since 2010) [Apr-10, £141,480, 41% reduction]

Anyone reading this far will have seen lots of commentary in the press about “fiscal drag” which is putting up taxes by doing nothing other than leaving tax thresholds such as the personal allowance unchanged, rather than moving them up in line with inflation.

In most of the past 20 years when inflation was under 5% this was quite a subtle revenue raiser and I have run for some time a list of “things that never go up”, but with inflation now at 11% and rising, this is really making a significant impact on the taxes you pay.

The impacts are slightly awkward to explain, but arise within “blocks” , and affects those “going up a band” in their taxes, such as the non-tax payer starting to pay income tax or the basic rate payer paying some tax at higher rate.  The impact for tax payers in the middle of a band is however the same, so a £60,000 income earner will experience the same stealth tax rises as a £80,000 earner as both are already in the higher rate band, and both are paying higher rate on the same slice of income which if allowances were uprated by inflation would be paid at basic rate. This means the tax rise is regressive, that is to say lower tax payers pay more extra tax as a percentage of their income, than higher rate tax payers do.

This is a moving target so hard to explain in general terms, but based on inflation from April 2019 to October 2022 only , this is the impact on just income tax, ignoring NI

Between the omitted bands maths is more complicated but this gives you an idea of the real term tax increase by simply doing nothing.  I would mentally double this for the likely impact to March 2024 with a further 18 months inflation.  Doing nothing is a very lucrative option for the Chancellor.

With our 4th Chancellor in just over 4 months, just making the March 2023 statement would seem like an achievement.

I normally start with some background, and indeed in honor of Cop27 I will recycle this comment from KK 2 months ago:

“As far as inhospitable times to be a chancellor go, he has probably one of the hardest starts you can imagine, and I seem to have said that every time we had a new Chancellor all the way back to Darling.  Rampant inflation. Huge public deficit. Economy bloodied from Brexit and the economy probably already in a major recession. At the same time we have the requirements for bottomless funding for energy prices (without taxing those making super profits), public services with major funding issues, he is still needing to fund major infrastructure projects such as HS2 and deal with significant real terms benefits pay-outs on pensions. So am I going to go easy on him? Well no.”

That all seems to apply to Hunt, right down to being in a tougher position than his predecessor.

As background, Hunt is very much in the wealthy family/expensive schooling/Oxbridge PPE degree mode, albeit Charterhouse and not Eton.  No city career but has actually founded a decent size business Hotcourses so clearly has some genuine business background which might well prove helpful in his new role.  This main aim is really to  “not rock the boat” given the disastrous fiscal statement in September which  I said last time out must be either bonkers or so brilliant I didn’t understand it.  Turns out the financial markets thought it rather bonkers, which is somewhat ironic given KK’s belief in the markets, they just didn’t believe in him.

So how was the speech?  Quite frankly the usual political rubbish.  He cherry picked statistics, spouted platitudes and tried to distance inflation and the current recession (which he actually admitted existed) on anything but policies of government.  Whilst many of the external shocks we have faced in the past few years have not been within their control, the fact remains the UK is badly underperforming compared to our peers in terms of the basics of GDP, inflation and other key statistics.  All major economies have all faced the same issues.   Very little stands out for me worthy of comment, apart from his opening phrase “we are honest” which got a big laugh from the opposition benches, just before he landed into “spending rises” which are blatant real terms cuts.  If inflation is running at 11% and you get a 5% budget increase that is a cut, not a ‘record increase’ to anyone but a politician.

Stepping back slightly, all the changes taken as a whole make running a small business less tax efficient compared to a few years ago, and the difference to employment taxes  narrowed.  By choosing to freeze bands rather than raise the headline rate of taxes means the very wealthy see virtually no change to their taxes, whilst those in the middle to bottom bear the brunt of the changes.  Dropping the CGT bands seems rather pointless, as this just means a large volume of small returns will be due collecting not much tax. Raising the rate is really the only credible policy, but would of course hit Tory donors.

One thing I think they ought to have been braver on is the pension increase.  Going to the full 10% seems and odd choice as that permanently locks that level in, and whilst they would have been some political grumbles at (say) 5%, prioritising pensioners over every other sector in the economy who are facing real terms cuts seems wrong headed, but I am sure our clients drawing pensions may disagree.

Anyway, that is all for now. Let us all hope this is the last one of these until March.

I normally publish the following tables to give typical extraction strategies undertaken by small Limited Companies. These give the maximum director’s bonus and dividend combinations for company directors to each key “stop” point, of (a) staying basic rate; (b) preserving child benefit; and (c) loss of personal allowance at £100,000 gross income.

This is getting more complex as time goes on, so please treat this as a “loose guide” as your circumstances may of course be different.

The standard salary amount for single director firms for 2023/24 will remain at £9,100, but increase from £11,908 to £12,570 if you have two directors, or one director and an employee. The comps are all based on single director set ups.

Directors Wishing to Stay Basic Rate

Increase in tax: £87 for no extra drawings

Directors Wishing To Retain Full Child Benefit

Increase in tax: £87 for no extra drawings

Directors Wishing To Preserve Personal Allowances

Increase in tax: £87 for no extra drawings

Alternative Way of Looking at Extractions for Your Limited Company

Your gross income (dividend+salary+other income) should be:

£50,000 if you want to keep all your child benefit

£50,270 if you want to stay basic rate

£100,000 if you want to preserve all your personal allowance

£125,140 if you want to avoid the additional (45%) rate of tax

You can then use the following rules of thumb for how much tax to keep back: