On 27 October 2021, Chancellor Rishi Sunak gave his second Budget speech of the year. As significant tax changes had been announced in the March Budget, this was widely expected to be more about spending than taxation. Many of these spending plans had been announced before the Budget, earning the Chancellor a rebuke from the Deputy Speaker.
Despite the huge costs of Covid, the Chancellor announced a 3.8% annual increases in spending for all government departments. He also said that he would start reducing taxes by the end of the current Parliament, due in 2024.
Basis period reform
Basis period reform is to take place from 6 April 2024. This is a radical change that will see the end of traditional basis periods for income tax. It will also end overlap relief. The new system is called “tax year basis”
At present, the self-employed pay tax in arrears under what is called the current year basis. The new provisions will see the self-employed pay tax on the profits earned during the tax year, regardless of the accounting date. It will bring the self-employed into line with employees, landlords and investors.
The change starts to take effect in the tax year from 6 April 2023 to 5 April 2024. In this year, tax will be charged on the profits under the old basis, plus profits earned from the day after the accounting date to 5 April 2024 minus overlap relief. This means that taxpayers with accounting dates early in the tax year could find themselves with very large tax bills for that year. The government is considering allowing that additional tax to be paid over five years. The tax year basis starts from 6 April 2024.
These transitional arrangements differ markedly from 1994 when the income tax system moved from previous year basis to current year basis. Then, the government dealt with taxing two years in one year by taking the average of the two years. This allowed many tax planning opportunities which the government is clearly not prepared to allow again.
The HMRC press release states that the change takes place from 2023 with 2022/23 as the transition year. It is assumed that the Budget book has given the correct dates.
Income tax rates
Income tax rates are unchanged from what has been previously announced. The individual savings account (ISA) limit remains at £20,000, and the junior ISA limit remains at £9,000.
It is reaffirmed that sole traders and landlords have an extra year to prepare for Making Tax Digital. This will now be introduced from 6 April 2024, except for general partnerships from 6 April 2025.
Health and Social Care Levy
A new levy, the Health and Social Care Levy, will apply from 6 April 2023. The funds raised for the levy will be ring fenced to meet health and adult social care costs. Payment of the levy is linked to earnings on which a qualifying National Insurance contribution is payable. This is a Class 1 (employee’s and employer’s) contribution, a Class 1A contribution, a Class 1B contribution and a Class 4 contribution. The levy is payable at the rate of 1.25% on the earnings on which a National Insurance contribution would be due.
However, unlike National Insurance contributions, an individual’s liability to pay the Health and Social Care Levy does not come to an end when the individual reaches state pension age.
Additional changes mean that from October 2023, a cap is introduced on the amount that an eligible person will have to contribute to the costs of personal care over their lifetime. This is to be set at £86,000.
An Accounting Gem can advise on the impact of the Levy and what the costs cap will mean for you.
Dividend tax increases
As part of the funding plan for health and social care, dividend tax rates are similarly increased by 1.25% from 6 April 2022.
If you operate your business through a personal or family company and you extract profits in the form of a small salary plus dividends you will typically pay little or no National Insurance. As the Health and Social Care Levy is linked to National Insurance contributions, where this low salary strategy is adopted, you will either not pay the levy or pay it at a low rate. To address this and to ensure those operating through a personal or family company contribute towards health and social care costs, dividend tax rates are being increased by the amount of the levy.
From 6 April 2022, the ordinary dividend tax rate will be 8.75% (currently 7.5%), the upper dividend tax rate will be 33.75% (currently 32.5%) and the higher dividend tax rate will be 39.35% (currently 38.1%).
The increase in the dividend tax rates will also impact on your profit extraction strategy. As the increase does not come into effect until 6 April 2022, it may be useful to review your dividend policy for 2021/22 to decide whether it is worth taking more dividends in 2021/22 to take advantage of the current, lower, rates. Whether this is beneficial will depend on your personal circumstances. An Accounting Gem can help you decide.
The increases in the dividend tax rates will also affect you if you receive dividends from investments in shares.
Capital gains tax
Capital gains tax rates are unchanged. The 30-day time limit for reporting disposals of UK property is extended to 60 days. This change applies from 27 October 2021. The 30-day limit has proved to be too short in practice.
National insurance rates for 2022/23 will be increased by 3.1%, apart from the upper earnings limit for class 1 national insurance paid by employees and their employers, and the class 2 and 3 rates. These are all unchanged.
The normal minimum pension age is to rise from 55 to 57 from 6 April 2028, as previously announced. This is the minimum age at which a pension scheme member may take benefits. The change does not affect police or other uniformed bodies. It does not change provisions allowing people to take benefits because of ill health. The age increased from 50 to 55 in 2010. The increase to 57 is in line with the increase in state pension age from 66 to 67 in 2028.
Emergency powers are to be given to ministers to allow income tax and national insurance reliefs to deal with disasters and national emergencies.
Annual investment allowance
The annual investment allowance (AIA) is a capital allowance that allows a business to deduct 100% of expenditure on most plant and machinery from its taxable profits. Since its introduction in 2008, it has applied at seven different limits ranging from £25,000 to £1 million. The limit was due to revert from £1 million to £200,000 on 1 January 2021. In March, this change was deferred by one year to 1 January 2022. It has now been deferred again to March 2023. This means that the annual investment allowance is £1 million for all periods from 1 January 2019 to 31 March 2023.
Super-Deduction
A company may claim 130% of expenditure under the new super-deduction for expenditure between 1 April 2021 and 31 March 2023. So AIA is only claimed when the super-deduction cannot be. As the super-deduction has no monetary limit, this is only likely to apply when the super-deduction cannot be claimed. This applies to expenditure by businesses that are not companies, such as partnerships and sole traders, and to company expenditure outside the two-year window for super-deduction.
Cross-border loss relief
Cross-border loss relief is abolished from 27 October 2021. This means that the limited right to claim UK tax relief for overseas losses is the same for EU countries as for non-EU countries.
Business rates
Business rates are retained despite calls for them to be replaced, particularly for shops which are disadvantaged compared to online retailers. Many shops now pay no rates because of many reliefs already announced. Several changes were announced.
First, premises will be revalued every three years rather then five years.
Second, from April 2023, businesses will have a one-year exemption for any improvements they make. So if a hotel adds bedrooms, or a shop expands its premises, it will have a year before it pays the higher rate. Third, there will be a new green investment relief such as when a business premises installs solar panels. There are some further changes such as providing transitional relief when a revaluation leads to a large increase.
Business rates are calculated by multiplying the rateable value by a “multiplier”. This is a lower figure where the rateable value is below £51,000. From 1 April 2020, the multiplier in England (outside City of London) has been 0.512, or 0.499 for small businesses (if they pay rates at all). These rates were not increased for 2021/22, and are again not increased for a further year to April 2023.
The hospitality sector, which was given a one-year holiday from business rates, will have a 50% reduction in rates for another year, 2022/23, to a maximum amount of £110,000.
Indirect tax
VAT
VAT rates are unchanged. There are some specific changes in rules. An interim second-hand margin scheme is to be introduced in Northern Ireland for used motor vehicles supplied from Great Britain. The VAT exemption for dental prostheses imports is extended to include treatment by dental technicians.
Vehicle excise duty
Vehicle excise duty rates (road tax) for heavy goods vehicles are not increased for 2022/23. Rates for cars, vans and other vehicles are increased in line with inflation.
Research and development
Research and development attracts generous tax relief. A business can claim up to 230% of the expenditure against taxable profits. For companies not yet making profits, this allowance can be exchanged for a cash payment of 13%.
The scope of research and development is widened to include data and cloud computing costs.
Despite these generous reliefs, much of this research and development is not benefiting the UK. So tax reliefs will “refocus the reliefs towards innovation in the UK”. There will also be changes to prevent abuse of the relief. Further details will be published later.
Residential property developer tax
A new residential property developer tax is introduced from April 2022, as previously announced. The tax is charged on profits that companies and corporate groups derive from UK residential property development. The tax is 4% on profits Exceeding £25 million a year. The sums raised will be applied to building safety remediation, such as removing fire-risk cladding.
Tax Evasion
HMRC is being provided with an additional £292 million over three years to tackle tax evasion. A further £55 million is allocated to tackle abuse of the coronavirus schemes. HMRC also receives additional funding to make the tax computer system more comprehensive and robust.
Non-tax matters
There were some significant announcements in non-tax matters.
The national living wage rate increases by 6.6% to £9.50 an hour. This is paid to all workers aged 23 and above. Other national minimum wage rates are:
• 21 to 22 years old: from £8.36 to £9.18
• 18 to 20 years old: from £6.56 to £6.83
• 16 to 17 years old: from £4.62 to £4.81
• apprentice rate: from £4.30 to £4.81
The recovery loan scheme is extended to 30 June 2022 to ensure that lenders continue to support small and medium-sized businesses.
Spending commitments include £5.9 billion of capital expenditure for the National Health Service, although this includes money already announced. There are also large commitments for education, justice, defence, housing, local government, energy, employment, environment and transport. Many spending plans are given in detail such as better roadside toilets for lorry drivers and a new Beatles centre in Liverpool.
If you need any information or advice on any of the announcements please call An Accounting Gem on 01473 744700
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