I am tasked again with extracting from the Spring Budget the points that are relevant to our clients. The overriding theme of Jeremy Hunt’s second financial statement was a drive for economic growth, featuring expansion of the tax-advantaged Investment Zones and tinkering with the Research and Development credits which are already undergoing fundamental changes. However, the desire to encourage more of the population into work was loud and clear.
The weeks leading up to Budget Day are always filled with rumour and speculation, and a reversal of the upcoming increase in Corporation Tax, whilst popular, was perhaps more of a wishlist item than a serious expectation, since the legislation to bring the increase into effect has already been written. Mr Hunt was keen to emphasise that the new rate of tax would apply to only 10% of companies. However, whilst that comment may be statistically correct, it perhaps fails to acknowledge the fact that all but “micro” companies are likely to have profits within the £50,000 to £250,000 profit bracket where the effective tax rate is in fact, going to be 26.5% on the profits in excess of £50,000.
In acknowledging the ending of the super deduction, which takes 130% of the cost of equipment off profits, full expensing of capital expenditure on equipment for the next 3 years was announced with a flourish. This was perhaps to deflect from the fact that the 25% tax rate remains in place. Again, this may be a headline-grabbing “giveaway” but as the majority of companies do not spend anywhere near the current £1 million annual allowance for capital expenses, it is likely to be relevant only to that 10% of companies referenced when discussing the 25% tax rate. For most of our clients this measure is irrelevant.
Concern that the shrinking workforce is going to hinder meaningful growth was clear and there were a number of initiatives aimed at tapping into the “economically inactive” population. Spending targeted at getting those with young families back to work was the main thrust of the policies but, in what was perhaps the most striking announcement, the lifetime limit on the amount that can be saved into a pension fund tax free is to be abolished.
This limit came into force in 2006 at £1.5 million and has gradually been reduced to its current level of £1.07 million, with particularly harsh rates of tax applying to excess funds. This cap has been headline news for some time given the practical implications for the NHS but has, until relatively recently, been viewed as a problem only for the particularly wealthy. The announcement was dressed up as confronting a problem for retaining workers, but is likely to be of limited relevance at the current time because the majority of pension pots are nowhere near the threshold. However, concern has been growing for the younger generation of pension savers who will need ever bigger pots to fund them through retirement. Although in the short term there will be few who benefit from this cut, this should be seen as a positive move for the future workforce.
The freezing of allowances and tax brackets had been announced some time ago and will be going ahead as expected. To recap, this leaves us with the tax free personal allowance for income at £12,570 for the foreseeable future, but being restricted when income exceeds £100,000. The dividend allowance is being halved to £1,000. In a change from April 2023, the point at which you start paying tax at 45% is reduced from £150,000 to £125,000, adding up to £1,250 to the annual tax bill of anyone with income over £125,000. Standard rates of income tax remain unchanged at 20%, 40% and 45%, but the rates of tax that apply to dividend income still include the additional 1.25% that was added for the NHS levy from April 2022, giving 8.75%, 33.75% and 39.35%.
National Insurance rates for employees have already returned to the standard rates of 12% for earnings under £50,270 and 2% for those in the higher rate tax bracket, with employer contributions reduced to 13.8% on salary and benefits, continuing into the new tax year. The rates that apply to the self employed have also returned to their previous levels.
Pension funding remains extremely efficient for all taxes. As noted above, the scrapping of the lifetime allowance for pension pots was headline grabbing, but the cap had been an issue for some time, so was as close to a dead cert for change as you get on Budget Day. The only real surprise was that the cap is to be abolished altogether. Currently the first 25% of capital drawn from a pension pot is free of tax, but a limit of £268,275 on the tax free sum is to be introduced from 6 April 2023.
More good news on the pension front was the increase in the annual cap on the amount that can be paid into a pension fund from £40,000 to £60,000. The income threshold at which the allowance will be restricted also increases from £240,000 to £260,000 and the minimum allowance has returned to £10,000, which is welcome all round for those who are trying to maximise their pension savings.
When detailing plans for innovative industries, Hunt mentioned that the Autumn statement will include “measures to unlock productive investment from defined contribution pension funds”. This may mean an opportunity for pension funds to invest in high growth companies, but that does not sit comfortably with protecting the value of pension funds, so it will be interesting to see the detailed proposals in due course.
The speech on Budget Day gives a high level overview of the proposals and, as always, the devil is in the detail, but detail was also thin in the post-speech press releases which included a number of proposals for consultation. We can expect more information to come out over the next few weeks and we will of course keep you updated with any developments that are relevant.
The Chancellor was working hard to spin the positive news on the economy, stressing that projections of growth and inflation were much better than previously expected. There was little in the way of surprises or concerns for our clients which is perhaps something to take as a win after the past 12 months.
On a personal note, as my new commute to work has developed a number of potholes since we moved office, I was delighted to see the additional £200 million earmarked for fixing the roads!
As always, if there is anything you would like to discuss in relation to the Budget please do give us a call.