On 23 September the Chancellor of the Exchequer delivered the mini budget / growth plan. The M&G Wealth technical team look at what was said and what that means when financial planning for clients.
• Corporation Tax changes scrapped
The planned changes to corporation tax that were due to take effect on 1 April 2023 has now been scrapped.
What did the chancellor say?
Under the previous government’s plans, the rate of Corporation Tax was to increase from 19% to 25% from April 2023 for firms making more than £250,000 profit, around 10% of actively trading companies.
Companies making between £50,000 and £250,000 would also face a rise in Corporation Tax, with the rate increasing incrementally from 19% to 25% depending on how much profit a firm was making. For the remaining 70% of actively trading companies, those who make profits of £50,000 or less, Corporation Tax was to remain at 19%.
The government has now cancelled this planned increase. Rather than rising to 25% from April 2023, the rate will remain at 19% for all firms, regardless of the amount of profit made.
What does this mean for planning?
This is good news for limited companies with profits over £50,000. There were complexities in the effective rate of corporation tax for companies with profits between £50,000 and £250,000 which have an effective rate of 26.5% for profits in that bracket, before the flat 25% rate applied for profits above £250,000.
This will therefore increase post tax profits that can be invested by businesses or paid as dividends. Bearing in mind that pension contributions by employers (that meet the wholly and exclusively rule) will continue to be an allowable deduction when working out profits.
This coupled with the dividend taxation reverse (covered below) could lead to more profit being released to shareholders.
• Dividend tax increase for 2022/23 to be reversed in 2023/24
The current 1.25% increase on the previous tax years dividend rate has been reversed.
What did the chancellor say?
The government will reverse the 1.25 percentage point increase in dividend tax rates from April 2023.
This will benefit 2.6 million dividend taxpayers with an average saving of £345 in 2023-24 and additional rate taxpayers will further benefit from the abolition of the additional rate of dividend tax. This will support entrepreneurs and investors across the UK to drive economic growth.
What does this mean for planning?
Simply put for those receiving dividends they will get more net of tax, this coupled with the scrapping of the corporation tax changes could lead to more dividends with less tax to pay. With the abolition of additional rate of dividends tax this will also increase the tax efficiency for all in the UK with an adjusted net income above £150,000 (as dividend tax remains a non-devolved issue).
• Basic rate of income tax reduction from April 2023
What did the Chancellor say?
The government will bring forward the 1 percentage point cut to the basic rate of income tax to April 2023, 12 months earlier than planned. This will apply to the basic rate of non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland; the savings basic rate which applies to savings income for taxpayers across the UK; and the default basic rate which applies to non-savings and non-dividend income of any taxpayer that is not subject to either the main rates or the Scottish rates of income tax
What does this mean for planning?
Reducing the basic rate of income tax from 20% to 19% will be welcome by those in receipt of non-savings, non-dividend income in excess of the personal allowance. For most people however it doesn’t provide much in the way of planning opportunities as salary and pension income are normally paid regardless of the prevailing tax rates that apply. An individual drawing pension income from their drawdown pot has the flexibility to take more pension income to take advantage of a lower tax rate. But how does this compare to leaving it within the pension wrapper with the tax advantages this provides? That said there are a couple of areas that should be highlighted which will be impacted by the change.
Pension Contributions
For those that are paying basic rate tax in the rest of the UK (the tax rates in Scotland and Wales are unaffected by the change), this will result in an increase to take home pay. It will however make the cost of saving into a pension more expensive. Under the current system paying £100 into a pension costs £80 for a basic rate taxpayer. After the change is effected this £100 in a pension will cost £81.
However, there is a transitional period for 2023/24 for relief at source (RAS) pensions schemes that will continue to permit schemes to claim 20% relief*. This will create a new variant of the net pay anomaly as basic rate taxpayers in net pay schemes will now be 1% worse off that their RAS counterparts. Therefore, those making contributions to net pay schemes may want to consider paying more this year if they can (being mindful of any employer matching that may be gained or lost by doing this). If they’re paying more than any employer matching that is available (such as non-matched employers AVC contributions), they may want to consider a RAS scheme for next tax year.
The impact of this will not apply to those in Scotland and Wales. Scotland can set its own rates and bands, Wales can only set their own rates (and cannot alter the bands). Therefore any changes to basic rates of taxation will need to come from those devolved governments.
*A four year transition period for Gift Aid relief will apply, to maintain the income tax basic rate relief at 20% until April 2027.
Savings income/Investment Bond Gains
The reduction in basic rate tax will reduce the tax payable on any savings income received. With interest rates still relatively low this will not necessarily result in a rush to cash but remember that chargeable gains from investment bonds are also classed as savings income. For offshore bonds this does represent a slight benefit where gains fall within the basic rate band.
UK investment bonds will also benefit from the 1% reduction in basic rate tax but the situation is a bit more complicated. Life funds pay a special corporation tax at a rate equivalent to basic rate of tax for individuals. Dividends received by the fund from the underlying investment are exempt and will remain so. However capital gains and other income such as interest and rental payments will now be taxed at 19% as opposed to 20%. Reducing the basic rate will therefore reduce the internal taxation of onshore bonds.
There is another knock on effect of the basic rate changing as the tax credit received by the policyholder when a chargeable gain arises is also linked to basic rate tax. This means instead of receiving a tax credit of 20%, policyholders will receive a tax credit of 19%. The tax credit will continue to satisfy any basic rate tax liability that that would have been due so overall it doesn’t change the liability of the policyholder, but it does mean the return from the underlying investment will have suffered less tax.
Top slicing relief for when a gain takes the policyholder into a higher tax bracket will be unaffected by the change although there is a minor impact on top slicing with the removal of additional rate tax.
• Abolition of additional rate tax
What did the chancellor say?
He said abolishing the additional rate of tax will simplify the tax system and make the UK more competitive. It will reward enterprise and work, it will incentivise growth, it will benefit the whole economy and the whole country.
What does this mean for planning?
The additional rate of income tax will be removed from April 2023 and will apply to the additional rate of non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland. This change does not affect Scottish taxpayers as the rates (and bands) are devolved in Scotland for non-savings, non-dividend income.
So this is a good thing for those with adjusted net income above £150,000 living in England, Wales and Northern Ireland. Financial planners with clients in this bracket should consider whether the client has scope to make further pension contributions that can still attract 45% tax relief while they can as from April 2023 the highest marginal rate relief will be 40%.
The additional rate for savings, dividends and the default rates will also be removed from April 2023, and this change will apply UK-wide.
A consequence of this all savers will now have at least a £500 Personal Savings Allowance (PSA). Currently those with adjusted net income below the basic rate threshold have a PSA of £1,000, higher rate taxpayers get a PSA of £500 but additional rate taxpayers don’t qualify for the PSA.
The PSA applies to savings income and investment bond gains. This may create an advantage for additional rate taxpayers from next year for top slicing relief calculations for investment bond gains.
Currently additional rate taxpayers don’t benefit from top-slicing relief. However, from April 2023 they will have a PSA of £500. If they have savings income below £500 then it will mean some of the gain will benefit from the PSA which in turn will result in some top-slicing relief. That seem unusual but it’s a quirk of the top-slicing rules since the PSA was introduced.
It’s also good news for those receiving dividends across the whole UK as the additional rate for dividends will be removed (as this is not a matter under control of devolved governments).
• National Insurance (NI) rate changes
What did the chancellor say
The government is reducing NICs rates by 1.25 percentage points from November and cancelling the Health and Social Care Levy coming in from April 2023.
This will save 28 million taxpayers an average of £330 a year. This measure will also make it cheaper for businesses to employ more staff being worth an average of £9,600 for over 900,000 businesses.
What does this mean for planning?
Perhaps the most complex issue for to keep abreast of this year. We had a new effective band for the Primary Threshold (PT) for NI when this was altered on 6 July 2022. Now with rates changing from 6 November 2022 this means that for those earning between the PT and Upper Earnings Limit (UEL) will pay an effective rate of NI for the year of 12.73% (which applies on the effective band between £11,908 of earnings to £50,270). For those above the UEL the effective rate will become 2.73% for the year. And for employers, the effective rates for NI contributions will become 14.53%.
So an effective reduction for the year of 0.52% for all.
• National Insurance (NI) contribution relief for employers in investment zones
To drive higher growth, the government will help expand the supply side of the economy. The Growth Plan sets out action to unlock private investment across the whole of the UK, cut red tape to make it quicker to deliver the UK’s critical infrastructure, make work pay, and support people to get onto the property ladder. New Investment Zones will provide time-limited tax reliefs, and planning liberalisation to support employment, investment, and home ownership.
What did the chancellor say?
If a business hires a new employee in the tax site, then on the first £50,270 they earn the employer will pay no National Insurance whatsoever.
What does this mean for planning?
Perhaps not that much, although if you do have employer clients that will be in a new investment zone looking to hire an employee it’s worth highlighting this relief.
SEE ALSO: This information is also covered in a webinar Q&A from M&G Wealth
