MINI BUDGET SEPTEMBER 2022: THE GOVERNMENT’S PLANS FOR GROWTH
Released On 26th Sep 2022
Chancellor reveals his plan for growth
The week leading up to Chancellor Kwasi Kwarteng's 'Mini Budget' may have been a short one due to the Queen's funeral, but the new government managed to fill it with a stream of policy announcements.
Before Mr Kwarteng stood up to make his statement on 'The Growth Plan' much of what he had to say about energy support for businesses and households' bankers' bonuses, investment zones and reversals to NICs had already been announced. The government also said that the Chancellor's statement would not be subject to a forecast from the Office for Budget Responsibility. However, this did not stop the media from dubbing this event a Mini Budget.
The Growth Plan set out a new approach to the economy built around three central priorities:
- reforming the supply-side of the economy
- maintaining a responsible approach to public finances
- cutting taxes to boost growth.
National Insurance contributions
In September 2021 the government published its proposals for new investment in health and social care in England. The proposals were intended to lead to a permanent increase in spending not only in England but also by the developed governments. To fund the investment the government introduced a UK-wide 1.25% Health and Social Care Levy based on the National Insurance Contributions (NICs) system but ringfenced for health and social care.
The Health and Social Care Levy Act provided for a temporary 1.25% increase to both the main and additional rates of Class 1, Class 1A, Class 1B, and Class 4 NICs for 2022/23. From April 2023 onwards, the NIC rates were intended to revert back to 2021/22 levels and be replaced by a new 1.25 Health and Social Care Levy.
However, the new Chancellor has decided to:
- reverse the temporary increase in NICs from November and
- cancel the Health and Social Care Levy completely.
The Health and Social Care Levy was expected to raise around £13 billion a year to fund health and social care and the Chancellor has confirmed that funding will be maintained at the same level as if the Levy was in place, funded from general taxation.
Comment
According to the government, not proceeding with the Levy will reduce tax for 920,000 businesses by nearly £10,000 on average next year.
For SMEs, the government predicts that the savings will be around £4,200 on average for small businesses and £21,700 for medium sized firms from 2023/24.
In addition, it will help almost 28 million people across the UK save £330 on average in 2023/24, with an additional saving of around £135 on average this year.
More detail for employees and employers
The changes take effect for payments of earnings made on or after 6 November 2022, so;
- primary Class 1 NICs (employees) will generally reduce from 13.25% to 12% and 3.25% to 2% and
- secondary Class 1 NICs (employers) will reduce from 15.05% to 13.8%
The effect on Class 1A (payable by employers on taxable benefits in kind) and Class 1B (payable by employers on PAYE Settlement Agreements) NICs will effectively be averaged over the 2022/23 tax year, so that the rate will generally be 14.53%
Comment
The government hopes that most employees will receive the NICs reduction directly via the payroll in their November pay but acknowledges that some will have to wait until December or January, depending on the complexity of their employer’s payroll software.
More detailed for the self-employed
Following the principle detailed above, the changes to Class 4 NICs will again be averaged across 2022/23, so that the rates will be 9.73% and 2.73%.
Income tax
Income tax rates
The government had previously announced that there would be a cut in the basic rate of income tax, from 20% to 19%, from April 2024. This is now being accelerated so that it takes effect from April 2023.
Comment
The government states that this reduction is worth over £5 billion for workers, savers and pensioners. Also, that 31 million taxpayers will benefit in 2023/24, with an average gain of £170.
In addition, to ‘incentivise enterprise and hard-work and simplify the tax system’, the government will abolish the 45% additional rate of income tax from April 2023. Consequently, there will be a single higher rate of income tax of 40%.
Comment
These changes will generally apply to taxpayers in England, Wales and Northern Ireland. It remains to be seen what the Scottish government will do in relation to the setting of rates on non-savings income.
There are a number of tax consequences which stem from these changes. One of them is the amount of tax relief given at source on pension contributions and Gift Aid donations. This is currently given at the basic rate of 20%. The government has stated that there will be a four-year transition period for Gift Aid relief to maintain the income tax basic rate relief at 20% until April 2027. This will support almost 70,000 charities and is worth over £300 million. However, there was little comment on pension contributions other than that there will also be a one-year transitional period for Relief at Source pension schemes to permit them to continue to claim tax relief at 20%.
Dividends
From April 2023:
- the dividend ordinary rate of 8.75% will reduce to 7.5%
- the dividend upper rate of 33.75% will reduce to 32.5% and
- the dividend additional rate will be abolished.
As corporation tax due on directors' overdrawn loan accounts is paid at the dividend upper rate, it will also reduce to a 32.5% charge for loans made on or after 6 April 2023.
These changes will apply in Scotland as the rules on dividends apply to the whole of the UK.
