The Chancellor of the Exchequer made his Spring Statement against a background of inflation expected to peak at more than 8 per cent and to still be above 6 per cent at the end of 2022, leading to the biggest cost-of-living squeeze on record despite a tight labour market and expected flat GDP in the second half of the year. The Chancellor’s announcements will go a little way to easing the burden on many households over the rest of this year and included the following tax measures.
Personal tax measures
Basic rate of income tax rate cut from April 2024
Many assumed that there may be a surprise in store for taxpayers given the apparent secrecy surrounding the Spring Statement measures compared to previous fiscal events. Advance notice of an intended cut in the basic rate of income tax from 20 per cent to 19 per cent from April 2024 may grab headlines but it certainly does not benefit everybody.
The Chancellor will undoubtedly have to field questions as to why a measure to help taxpayers in 2024 is being announced now, when there are strong calls for more immediate financial support for individuals affected by the current cost-of-living crisis. It is a prudent but arguably overly cautious approach when the nation’s tax receipts from income tax, National Insurance contributions (NICs) and capital gains tax for the period April 2021 to February 2022 were £43.2bn higher than they were in the same period a year earlier.
Working through the details of the proposed income tax cut, it is clear that some individuals will benefit more than others. In particular, the benefits of the tax cut may not be enjoyed by many business owners, as it will not apply to dividend income, albeit it remains to be seen whether a similar reduction in tax rates applicable to dividends falling into the basic rate tax band will be announced before April 2024. Without such a change, a business owner receiving dividends in a tax year of £50,000, will be around £440 worse off personally from 6 April 2024 than they are now if they received the same level of income. Similarly, those with dividend income of £100,000 each year will be over £1,000 worse off compared to their current position. Please note that these figures do not take into account the planned rise in the main rate of corporation tax from 1 April 2023, which will have already applied to profits in the company where relevant.
There are also peculiar anomalies in relation to investors and how their income will be treated under these proposals. On one hand, landlords receiving rental income appear to be able to benefit from the income tax cut without suffering the Health and Social Care Levy that will apply by that time. In contrast, someone receiving income from a portfolio of shares will be subject to the levy whilst also not benefitting from the income tax cut. Pensioners relying on dividend income might therefore be more adversely affected than property investors.
There are clearly unexpected, and perhaps unintended, consequences from cutting income tax in this way. Whilst it is a positive step change to have a forward-thinking plan on the tax system, the current draft feels a little rushed.
Increase in National Insurance primary threshold and lower profits limit
The Chancellor announced an increase in the annual NICs primary threshold and lower profits limit from £9,880 to £12,570 from 6 July 2022, to align with the income tax personal allowance, simplifying the tax code and bringing a welcome saving for employed and self-employed earners.
However, although this change, in isolation, supports earners, employees earning more than £41,389 and self-employed individuals earning more than £34,182, will still see an increase in their overall NICs in 2022/23, due to the 1.25 percentage point increase previously announced, which still goes ahead from 6 April 2022 as planned (to be replaced by the 1.25 per cent Health and Social Care Levy from April 2023). Furthermore, the need for time for payroll software providers to prepare for the change means the increase in NICs comes into effect from April 2022 but the benefit of the threshold changes won't be felt until July 2022.
Business tax measures
Although there was no announcement of the windfall tax on North Sea oil and gas producers opposition parties have been calling for, the Chancellor announced a number of business tax measures, setting a clear direction of travel with the aim of boosting growth and productivity, including the following.
- The employment allowance (which enables businesses with employer NICs costs of up to £100,000 per year to reduce their employer NICs) will be increased from £4,000 to £5,000. The increase will come into effect from 6 April 2022 and is expected to result in 3 per cent of all UK businesses having no NICs liability at all.
- Research and development (R&D) tax reliefs for companies will be expanded to cover costs relating to ‘pure mathematics’, to support the growing volume of R&D underpinned by mathematical advances. The change will come into effect from 1 April 2023 and is expected to benefit sectors such as artificial intelligence, quantum computing, robotics, manufacturing and design.
- R&D tax reliefs currently cover costs incurred by UK companies overseas; however, as part of the changes to R&D tax reliefs previously announced, the Government intends to revise this aspect of the regime. The Chancellor announced that, notwithstanding this impending reform, where it is necessary for R&D to take place overseas (eg where the required conditions for research are not available in the UK or regulatory/legal requirements mean the activity must be undertaken outside the UK), this expenditure will continue to qualify for relief.
Limited details regarding the above changes to the R&D tax regime are currently available and further announcements regarding these measures are expected later in the year.
The Chancellor also announced reviews of existing business tax regimes, whereby:
- the Government will consider reforms to the capital allowances regime to support future business investment, in particular given that the ‘super-deduction’ (a temporary, enhanced first year capital allowance for companies) will end from April 2023;
- he intends to increase the generosity of the R&D expenditure credit (RDEC) regime for large companies, with further announcements regarding this measure expected in the autumn of 2022 as part of the wider ongoing review of R&D tax reliefs, which may also include further measures to tackle abuse of the separate regime for R&D tax relief for small and medium-sized enterprises; and
- the Government will review the company share option plan regime (a type of tax-advantaged share scheme) to assess whether it should be reformed to support businesses as they grow beyond the scope of other tax-advantaged share schemes.
Additionally, the Chancellor reiterated a number of previously announced measures, including:
- the increase in the annual investment allowance (AIA) for qualifying capital expenditure from £200,000 to £1m until 31 March 2023; and
- that R&D tax reliefs will be reformed to cover cloud computing and data costs associated with R&D from April 2023.
Indirect tax measures
The Chancellor announced reform of the VAT reliefs on the supply and installation of energy saving materials in residential accommodation from 1 April 2022. While some of these products are at present eligible for a 5 per cent reduced rate, this current relief is narrow in scope, meaning that many homeowners have been paying VAT at the full rate of 20 per cent on energy saving installations in recent years, at a time when material costs are increasing at a significant rate.
Firstly, a temporary zero rate of VAT will apply to energy saving materials and their installation for a five-year period, running from 1 April 2022 until 31 March 2027. Installations of insulation, solar panels, draught stripping, central heating and hot water system controls, heat pumps, and wind and water turbines in domestic dwellings and in relevant residential buildings (such as care homes) will be eligible for the zero rate. Unless the Government decides to extend the zero rate beyond the planned five-year period, the 5 per cent reduced rate of VAT will then apply from 1 April 2027.
These changes essentially aim to reinstate a previous VAT relief that was significantly restricted in 2019, after a European court ruling that reduced rates should only be available to certain social groups. The Government will remove the current limitation of the relief to residential accommodation occupied by the over 60s or people receiving state benefits and abolish a requirement that the service element of the supply must account for over 60 per cent of the total cost of the installation. Wind and water turbines are also reinstated to the list of energy saving materials eligible for relief, which had been removed as a result of the European court decision.
As VAT in Northern Ireland must remain in line with EU legislation and case law, the zero and reduced rates will apply in Great Britain only. Unless and until the Government can negotiate an extension to Northern Ireland, the Chancellor has confirmed that the Northern Ireland Executive will instead receive additional funding.