Budget update – spend now and tax cuts later?

Friday, October 29th, 2021

At Copia Wealth & Tax we aim to keep our clients well informed and so we have analysed the Budget delivered on 27th October and set out the key points of interest.

As ever, there may be more devils in the detail, but if you need to discuss any of the points set out below, then please contact the Copia Team.

The Chancellor continues to have to tread a fine line between raising taxes to start paying down the massive Government borrowings but at the same time stimulating economic recovery and saving jobs so has gone for a bit of a spending spree now on the back of a better than expected post-COVID recovery, but with promises of cuts in tax in the future (probably just before the next election!).

National living wage increase to £9.50 per hour

The increase in the hourly rate for the National Living Wage (NLW) will be greater than inflation for those aged twenty-three or over, to £9.50 an hour. This means an employee working a 35-hour week would earn £17,290 a year if on NLW. With the 1.25% increase in employers NIC previously announced to 15.05% on earnings over £9,100 a year, this means a further cost to employers of £1,233 over and above the NLW increase meaning the cost to an employer of an employee on NLW would be £18,523 a year before pension costs.

Freezing of income tax rates and personal allowances

The basic rates of income tax and higher rate tax will remain at 20% and 40% respectively, and the 45% additional rate continues to apply to income over £150,000.

As announced back in March, the personal allowance and higher rate threshold have been frozen at £12,570 and £50,270 until 2025/26. 

A reminder of the September announcement that, from 6 April 2022, dividend income will be taxed at 8.75%, 33.75%, and then 39.35%, depending upon whether the dividends fall into the basic rate band, higher rate band, or the additional rate band. The first £2,000 of dividend income continues to be tax-free. The summary of the economic impact published on Budget Day suggests that these rates are to remain in place until 2025/26.

Changes to National Insurance thresholds

The 1.25% increase in the rate of National Insurance Contributions (NICs) paid by workers and employers announced in September to provide extra funds for Health and Social care will go ahead from 6 April 2022. From 2023/24 onwards, this will become a new Health and Social Care Levy.

Some NIC thresholds have been increased In line with inflation. For 2022/23, employees and the self-employed will start paying NICs at £9,880 and pay at 10.25% (self-employed) and 13.25% (employees) up to £50,270. The Upper Limit will be frozen in line with the income tax higher rate threshold and a new 3.25% rate will apply to earnings or self-employed profits in excess of £50,270.

Employer NIC contributions will rise to 15.05% will apply to earnings in excess of £9,100 a year for 2022/23.

Extension to annual investment allowance

The Chancellor announced yet another extension in the 100% Annual Investment Allowance (AIA) until 31 March 2023. The 100% relief was scheduled to revert to £200,000 on 1 January 2022. This deduction is available to unincorporated businesses as well as limited companies and the equipment does not have to be new.

A reminder that this tax allowance is not as generous as the 130% super-deduction announced in the March Budget which is available to limited companies when new plant and machinery is purchased between 1 April 2021 and 31 March 2023.

Reform of business rates and 50% discount for retail and hospitality businesses

The Government continue to move towards a fairer system of Business Rates and will provide new reliefs for investment and improvements to business premises to restrict rates increases as a result of improving the property. 

Further support was announced for businesses and jobs in the retail, hospitality, and leisure sectors via a 50% discount in business rates up to £110,000.

High Street businesses have to operate at a significant disadvantage to online retailers who generally pay lower Business Rates, and controversially, often pay less corporation tax. The Government will consult shortly on bringing in an Online Sales Tax which may help level the playing field.

R&D Tax relief changes announced

R&D tax relief will be reformed from April 2023 to support modern research methods by expanding qualifying expenditure to include data and cloud costs, and to focus tax relief on innovation conducted in the UK. HMRC will continue to target abuse of this generous tax relief and improve compliance as there have been examples of unscrupulous claims being made.

Doubling of cultural tax reliefs

For some time, eligible companies engaged in the production of qualifying theatrical productions, orchestral concerts, and museum and gallery exhibitions could claim an additional tax deduction in arriving at their profits. In a similar way to R&D tax relief, where that additional deduction results in a taxable loss, the company can surrender those losses for a payable tax credit.

This relief was doubled in the Budget for the costs of the production/performance incurred between 27 October 2021 and 31 March 2023.

Residential developer tax to fund cladding replacement

From 1 April 2022, the Government will introduce a new tax on company profits derived from larger UK residential property developers. The tax will be charged at 4% on profits exceeding an annual allowance of £25 million and will be used to help fund the costs of cladding replacement following Grenfell.

Increase in time to report and pay CGT on residential property disposals

Many were expecting substantial changes to capital gains tax in the Autumn Budget, particularly as the Office of Tax Simplification (OTS) had suggested that CGT rates should be aligned with income tax rates.

The Government has accepted the board the Office of Tax Simplification (OTS) recommendation that the existing 30-day reporting and payment deadline should be increased to 60 days. This will be a welcome change for property owners and their tax agents and will affect residential property disposals that complete on or after 27 October 2021.

Expected changes to capital gains tax following OTS suggestions that CGT and income tax rates should be aligned did not thankfully materialise in the Budget.

Entrepreneurs will also be relieved that CGT Business Asset Disposal Relief continues resulting in a 10% CGT rate on the first £1 million of lifetime gains.

No changes to pension tax relief

There was also speculation that the Chancellor would restrict the tax relief for saving into a pension to basic rate only. Thankfully, that has not happened in this Budget and the key limits remain unchanged. The annual pension input limit for most taxpayers remains at £40,000 which covers both individual and employer contributions. The lifetime pension allowance which dictates the size of the individual’s fund has been frozen at £1,073,100. 

ISA limits are frozen again

The adult ISA annual subscription limit for 2022/23 will remain unchanged at £20,000 and the Junior ISA limit remains at £9,000 a year.

Our team is here to help

The Chancellor spent more time talking about increases to public spending than changes to taxes and many of the mooted changes, particularly to CGT and pension relief, did not materialise and there were few changes to headline tax rates over and above those already announced.

Also, ten percent tax rate remains available on business disposals and full tax relief on pension contributions so if you need to discuss how to take advantage of either of these or any other matters, please call the team here at Copia Wealth & Tax today on 01902 783172 and one of our specialists will get back to you. Alternatively, if you prefer, just click HERE to contact us via the form on our website.

We very much look forward to hearing from you.