Budget Review 2022

National Insurance Bands 

The Employees NI band is rising to the personal tax threshold of £12,570 for 2023/24, and partially for 2022/23.

But the Employers NI, crucially does not move and remains at £9,100.

This means in practice that sole directors won’t be able to change their strategy of paying salaries to the Employee’s NI threshold of £9,100 for 21/22 without having a small quarterly NI payment.

If you have two employees (or directors) then you can take advantage of the Employer’s Allowance which covers the Employer’s NI, and enables a much larger salary of £12,570 for each director for 2023/24.

However in the coming year 2022/23 this takes effect from July only. I would suggest you pay April to June at £823.33 and raise that to £1,047.50 from July until it’s is clear how the annual director’s scheme rules might apply.    Updated: directors on the annual scheme can pay £992.33 per month (for two directors) to come to a total of £11,908 for 22/23.  If you are doing your own PAYE and this triggers NI, you are probably not using the director’s annual scheme.

 

Employer’s Allowance 

The annual Employers Allowance which covers Employer’s National Insurance rises to £5,000 from £4,000

This covers about two and half employees for their NI between the £9,100 starting rate for employers and the £12,570 for employees.

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 means 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 pension contributions a lot more attractive.

No new changes

Already Announced, but worth reminding you of:

30 Day Payment Deadline for CGT now 60 days

From April 2020 all sales of residential property have to be notified and CGT paid within 30 days of sale, but this has been extended to 60 days.

Extra 2% SDLT for Non-Resident Landlords

From 1 April 2021 the landlord’s additional rate of 3% SDLT rose to 5% for non-residents.

Corporation Tax Increase

For landlords considering incorporation please see Small Company section for details of the Corporation Tax moving to 25%.

National Insurance Bands 

The tax free band for employees rises to £1,047 a month from £823 in July 2022.

But crucially income tax bands remain frozen until just before the next election.

The NI band raise is worth about £30 per month to most employees, but your frozen income tax bands will cost you about £15 a month in real terms (ie after inflation) and higher rates of NI mean any saving vanishes if you earn over £27,000 per annum.  For everyone else your tax bill went up.

Already Announced

Higher Rates of NI & Dividends Taxes

NI increased by 1.25% from April 2022:

• Employee’s NI up to 13.25% from 12% (basic rate),  and 2% to 3.25% (higher rate)
• Employer’s NI up from 13.8% to 15.05%
• Class 4 NI (self employed), up from 9% to 10.25%

Dividend Taxes also rise

• Basic rate, 7.5% to 8.75%
• Higher rate, 32.5% to 33.75%
• Additional rate 38.1% to 39.35%

The £12billion raised (about 10% of HS2) is allegedly for social care, but the reality is that tax from all sources is one “pot” and any allocations are purely theoretical.

The NI increase is particularly odd in that it will (from April 2023) be a brand new tax Levy, computed very similarly to NI, but extended to those over the pensionable age who don’t normally pay it. The extra amount raised from this extension will be a pittance, but means a huge amount of technical effort behind the scenes to collect this new tax.

It would have been technically very simple to raise income tax which also has a much broader base. The election promises for “no tax rises” seem to be long forgotten therefore it seems odd to invent a new tax on income rather than just raising income taxes.

It’s worth noting the effective rates of taxes on PAYE incomes are now 33.25% (basic rate to £50k) and 42.35% (higher rate to £150k), 52.35% (additional rate over £150k).

The taxes on pensions and savings are 20% / 40% / 45%.

Some further reading here

Frozen Personal Tax Allowances from 2022

All bands for Income taxes to be frozen until April 2025/26.

With inflation on the rise this is “fiscal drag” in action, increasing taxes in real terms (ie post inflation) by £19billion over 4 years by doing nothing. In particular by fixing this until 2025/26 this flatters forecasts and allows a “big ticket” increase just before the next election. You the voter are of course not supposed to spot the sleight of hand.

Capital Gains Tax 

No changes announced.

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 2022/23.

• Employees NI Threshold increases from £9,568 to £12,570
• Employers NI Threshold increases from £8,840 to £9,100
• Self employed Class 4 NI threshold increase from £9,568 to £11,908

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 pace with inflation, and % effective reduction]

• Personal allowance stays at £12,570. [Apr-21, £13,263,  6% reduction]
• Higher rate threshold stays at £50,270. [Apr-21, £53,041  6% reduction]
• Personal CGT allowance frozen at £12,300 until 2025/26. [ Apr-20, £13,355, 9% reduction]
• VAT threshold frozen at £85,000 to 2023/24. [Apr-17, £99,795  17% 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 & 45p, 36% & 81% reduction]
• IHT threshold remains at £325,000. [Apr-09 £488,191, 50% reduction, mitigated by £125,000 new allowance]
• £100,000 threshold for loss of Personal Allowance . [Apr-10, £142,594  43% reduction]
• Pension annual allowance £40,000. [Apr-16 £48,615, 22% reduction]
• Pension lifetime limit £1,073,100 [Apr-20, £1,165,150, 9% reduction]
• Dividends allowance £2,000 [Apr-18, £2,272, 14% reduction]
• Trading allowance £1,000 [Apr-17, £1,174 17% reduction]
• Personal savings allowance (basic rate) £1,000 [Apr-16,  £1,215 22%]

This is the 4th run out for Rishi. In the first one he fixed personal allowances to inflation and stated there would only be one budget a year. In the second (having forgotten about one budget a year) he ditched the personal allowance index linking, and fixed them until 2025. In his third he raised NI rates by 1.25%, and in this one he has back tracked and put up NI thresholds to partially compensate. Whilst events have been dramatic, he seems not to have learnt about painting himself into a corner and has rather rashly announced his pre-election 19% rate of income tax from April 2024 two years early, and seems quite frankly not to be far from his starting point after all those changes.

In the House today Rishi was flanked by Boris wearing a Ukraine badge and Priti Patel (no badge) smirking her way through proceedings. Rishi started as if he was already PM talking about world events and how tough he has been on sanctions, but conveniently forgetting how most of the sanctions  have been on “mates terms” allowing assets to be rapidly shuffled away before biting. No doubt the £2million invested by Russian donors to the Conservatives during Boris’s tenure was well spent.

The speech was at least mercifully brief and missing most of the tedious re-announce re-announce and re-announce that comes with it. Rishi has partially reversed his 1.25% tax hike on NI by reducing the starting band for NI, which does have the effect of reducing the impact of NI on the lowest paid but it would have been neater to swallow his pride and just scrap it as a bad idea. Instead we are landed with another long term complexity to the tax system. In particular this goes further than simply a rise in NI, it is a whole new tax from April 2023 with a different tax base, all for money which he clearly doesn’t need as he had room to make other cuts.

I also have to mention the Chancellor’s ridiculous claim that it was impossible to reverses the 1.25% on NI due to the alleged resulting reduction on spending and health care. This is a blatant lie. There is no genuine connection between any tax and any spending. Both are fully independent, there is no real life hypothecation in national tax receipts. This is 100% political.

The main theme of this budget is of course fiscal drag – that is to say raising taxes by doing nothing due to inflation. Even if your wages are frozen, having your allowances increased with inflation is a “pay rise” in cash terms. If you are lucky enough to have a pay award in line with inflation, if tax thresholds are frozen then you will be paying proportionally more in tax. The underlying official statistics are stark. Total taxes as a % of GDP 2019/20, 33%. By 2026/27 (forecast) 36.3%. I don’t recall our tax reducing chancellor mentioning that fact, instead he made the curious claim of increasing spending, lowering taxation and reducing the deficit.  Its a shame his own statistics don’t back that up.

Overall we therefore have a reduction in the spending power of the general public. The OBR state “household disposal income is falling at its fastest rate since the 1950’s” albeit that is of course mainly due to fuel price rises, but also by higher taxation as its mainly hitting working families who pay NI.

So there we have it, the “tax cuts” that are really tax rises, and not a whiff of actually taxing those with money, such as the energy companies awash with cash (Labours windfall tax is claimed to bring in £3billion, or half the NI rise) or those with capital gains or large PAYE earnings.

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 2022/23 will increase from £8,840 to £9,100, or £11,908 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: £446 for no extra drawings.

Directors Wishing To Retain Full Child Benefit

Increase in tax: £443

Directors Wishing To Preserve Personal Allowances

Increase in tax: £1,068

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

£150,000 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: