Following Chancellor’s Kwasi Kwarteng Mini budget speech last week, it seems that it was a ‘Mini’ budget in name only, as big changes were unveiled as a package of tax cuts aimed at addressing the rising cost of living and delivering future growth. Read our summary of the wider points that were not necessarily in the headlines and how they may affect you:
- Basic rate tax cut from 20% to 19% from April 2023
Initially scheduled for April 2024, this has now been brought forward 12 months. This is estimated to save £5bn a year, with an average gain of £170 in 2023-24, according to the government. This will benefit all taxpayers (estimated to be over 31 million people), helping to fight the cost-of-living crisis faced by many and should hopefully encourage more spending to stimulate the economy further with the looming recession.
This also has an impact on pension contributions as tax relief will now be reduced to 19%. Pension schemes that operate the relief at source method for claiming tax relief (personal pensions, stakeholders, SIPPs) will still be able to claim 20% basic rate relief until 2024. While this may seem inconsequential, the compounding impact over a working lifetime means people could miss out on thousands of pounds over the long term and end up with a smaller pension.
If you are a basic rate taxpayer and still have scope to make additional pensions contributions before the end of the 2023/24 tax year, please contact us if you would like to discuss this further.
- 45% additional tax relief scrapped from April 2023
One of the more surprising announcements was the scrapping of the 45% additional tax rate which is applied on taxable income over £150,000. This means all income over the basic rate band (£37,700) and the personal allowance will be taxed at 40%. For dividends this will be 32.5%. This will deliver substantial tax savings to the UK’s highest earners as someone earning £200,000 will see their tax bill reduced by £2,500.
This also means that additional rate taxpayers will start to benefit from a personal savings allowance of £500, meaning they will be able to earn up to that amount in saving interest without it being taxed. Currently additional rate taxpayers do not have any personal savings allowance.
On the other hand, this could be harmful for higher earners’ pension savings as the maximum tax relief falls from 45% to 40%. Those in a position to do so may want to make additional pension contributions before April 2023 to make sure they benefit from the maximum tax relief. Again, please talk to us if this is of interest to you.
- Allowances and thresholds
No new announcements were made relating to the personal and basic rate band. These will stay at £12,570 and £37,700 respectively until 2025/26 but could be changed in future Budgets before then.
Gift Aid will be transitioned from 20% to 19% over 4 years, despite the income tax rate changing in April 2023. Therefore the income tax rate relief for Gift Aid will remain at 20% until 2027.
- Dividend tax rate to be cut by 1.25% from 2023
The 1.25% increase to income tax on dividends, introduced in April this year, will be reversed from April 2023. Those who pay tax on dividends will save an average of £345 next year. Following the removal of the additional rate, 32.5% will be the maximum rate paid on dividends after April 2023.
It is still unclear how the removal of the additional rate of tax will impact trusts and whether their tax rates will also change. Presently trustees pay tax on trust income and dividends at a rate equivalent to the additional rate (45% on income and 39.35% on dividends). The Autumn Statement from the Chancellor is likely to have further details.
In line with the above changes, the standard rate band for trusts will fall for the first £1,000 of income from 20% to 19% from 6th April 2023.
- The increase to National Insurance has been reversed to help pay for social care reforms
The 1.25% rise in National Insurance contributions, which took effect earlier this year, will be reversed on 6th November. This could save top earners around £1,800 per year whilst those on the lowest incomes will be about £7 better off. According to the Treasury, people will save £330 a year in 2023-24 on average.
The threshold from which workers start to pay National Insurance rose to £12,570 (from £9,880) in July 2022 and this threshold will be retained at this level for the 2023/24 tax year.
- The plans to increase corporation tax to 25% have been scrapped.
Corporation tax rates were expected to increase from 19% to 25% from April 2023. The rate of corporation tax will remain at 19% and the reintroduction for businesses of tapering relief with profits under £250,000 has also been abolished.
Seed Enterprise Investment Schemes (SEIS)
- The maximum investment into SEISs will be doubled from £100,000 to £200,000 from April 2023
These types of schemes offer generous tax breaks of up to 50% and aim to help fund young start-up companies and encourage entrepreneurism. The investment subscription will be doubled to £200,000 providing more tax break opportunities for the highest earners.
Stamp Duty Land Tax (SDLT)
- Stamp Duty Land Tax threshold for residential properties will be doubled
Effective from the date of the Mini Budget last week, the threshold for stamp duty Land tax will be doubled to £250,000 so no tax will be due for purchases less than this. First time buyers also benefit as they will pay no tax on purchases under £425,000 (increased from £300,000). This only applies to properties of £625,000 or less.
If you would like to further information on the above or discuss how these points might affect you personally, please contact your adviser at Headley. We’ll be very happy to talk to you.
We look forward to continuing to work with you and help you enjoy life enriched
Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. This update is provided strictly for general consideration only and is based on our understanding of current law and HM Revenue & Customs practice. No action must be taken, or refrained from, based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.
Sources for some of the topics in this newsletter – Guardian.com, professionaladvisor.com, moneysavingexpert.com and Abrdn.com