So the new Chancellor’s first Autumn Statement has been delivered, and despite the mild weather, it seems freezing is top of the Government’s agenda. Freezing rates and allowances is an easy and politically safe way to raise additional taxes, and its impact will be faster and more dramatic given the current climate of high inflation.
Personal tax allowances and rate bands have been frozen until 2028, up from the previous 2026, and even before this two-year extension, the Institute of Fiscal Studies estimated that this will mean a further 1.7million people will become higher rate taxpayers. Employees and employers’ National Insurance limits have also been frozen.
In addition, the 0% dividend allowance, currently £2,000 per tax year, will drop to £1,000 from 6 April 2023 and £500 from 6 April 2024, pulling in a net £3.03bn in the next six years.
The VAT threshold, currently set at £85,000 of turnover, has also been frozen until 2026, despite critics suggesting this limit was already too low. This will bring many micro and lifestyle businesses into the VAT net, requiring them to charge VAT to their customers.
As was widely leaked in advance of today’s statement, the threshold at which the 45% income tax rate (39.35% on dividends) applies has been lowered from £150,000 to £125,140. This extra 5% will cost someone earning £150,000 an additional £1,243 per annum, although someone earning £1m will also pay the same £1,243 extra.
The additional £140 is to prevent those earning between £100,000 and £125,140 who are already subject to an effective tax rate of 60% owing to the withdrawal of the personal allowance during this band, from suffering an even higher rate on that £140.
But in good news for some, September’s 10.1% inflation figure will be used to uprate both State Pension and Universal Credit, which will be a relief for many on fixed incomes.
While Jeremy Hunt is literally taxing the heat, in the form of additional windfall taxes on energy suppliers, with the scheme extended until 31 March 2028 and an increased 35% rate from 1 January 2023, he also announced that the Government’s support for household energy bills will be less generous than previously announced. Where the average bill was likely to rise to approximately £2,500 from April 2023, this figure is now closer to £3,000.
But in the pursuit of finding things to tax, and mindful of the abuses of the scheme, the R&D tax credit scheme has been reviewed with the Government aiming to “rebalance the generosity of reliefs” from 1 April 2023. From that date, expenditure qualifying for the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20% but the small and medium-sized enterprises (SME) additional deduction will decrease dramatically from 130% to 86%, and the SME credit rate (where companies “sell” losses generated by R&D tax relief) will decrease from 14.5% to 10%. This is expected to generate almost £4.5bn by 2028.
The changes to the R&D tax relief regime are clearly designed to make it less attractive to the rogue agents whose antics have been widely reported in the press in recent weeks. Fleet Street has been rightly decrying the unscrupulous agents who have claimed tax relief for R&D on vegan restaurant menus and blueberry croissants on behalf of their clients and it is clear that HMRC’s processes in dealing with rogue claims have been lax. However, with UK Plc investing far less in R&D than our competitors in the other advanced economies, perhaps reducing the value of the incentive for all companies is not really the most appropriate response to improper claims by a few. Reducing R&D tax relief for companies with up to 500 employees will only hinder efforts to boost the UK’s woeful productivity.
The provision of electric cars by employers have more or less escaped being subject to income tax and class 1A national insurance contributions as a benefit in kind due to the super-low rates that apply compared to those for petrol and diesel cars. Recognising that electric cars are becoming increasing mainstream, the Chancellor proposes to increase the benefit in kind by 1% in each of 2025/26, 2026/27 and 2027/28 when it will hit 5%.
Although there were no announcements made on capital taxes, there were actually some details hidden within the 70 page ‘Green Book’ of measures. While there were no changes to inheritance tax, the nil rate band has also fallen foul to Mr Freeze and the £325,000 band, with us since 2009, is now frozen until 2028, a full nineteen years.
Although the widely tipped increase in the CGT rate did not materialise, the CGT annual exempt amount, currently £12,300, will drop to £6,000 from 6 April 2023 and £3,000 from 6 April 2024. This measure alone is expected to raise £1.6bn by 2028.
There was another change to CGT, which relates to preventing capital gains tax avoidance whereby individuals using the remittance basis were able to convert company shares to a non-UK asset before realising a gain that would not be taxable if the funds were kept outside the UK. This measure is effective from the date of the Autumn Statement, 17 November 2022.
But it could have been worse. Car Crash Kwasi notwithstanding, a number of ‘leaked’ changes did not materialise in the Autumn Statement.
Many commentators were reporting a rise in CGT rates, possibly effective from 2024 to encourage ‘panic selling’ and to provide a swift boost to Treasury coffers. While this did not appear here, CGT rates are not normally changed mid-year, so this may simply be a short reprieve until a March Budget can deliver the killer blow.
There were also no changes to IHT announced. The Treasury did say last year that they were not intending to make any changes, but as we have all seen in recent weeks, anything can change in a heartbeat, so nothing is off the table.
Finally, the top rate of tax remains at 45%. After reports the Jeremy Hunt had been talking to George Osborne, speculation increased that this could be raised to 50% as Alastair Darling had (unsuccessfully) done in 2010. While increasing the burden on higher earners is politically en vogue, the tolerability of a rate beyond 45% had previously been examined, and could have ended up as another embarrassing mistake for a Government scrambling to avoid any more egg on their collective faces.
Overall, this was not an entirely unexpected statement from the new duo at the top, and although the restriction of R&D tax credit is a shame, this is probably the best we could have hoped for in the current economic climate. Roll on March…
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22 November 2023
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