Crucial to keep up with fast-paced changes in taxation
Fall-out from the government’s mini-Budget has seen back-tracking on some previously planned changes and it is vital to keep up-to-speed with tax changes, as a wait-and-see approach could see individuals and corporations missing out on tax planning opportunities
Tax cuts and financial support for energy costs to tackle the cost-of-living crisis dominated the proposals set out in the Chancellor’s so-called mini-Budget in September.
Designed in response to the impact on energy supplies arising from the conflict in Ukraine and the continuing pressure on the UK’s economy from the coronavirus pandemic, Chancellor Kwasi Kwarteng positioned his radical plans as the kick-starter needed for higher economic growth and a precursor to further tax cuts, but the response from financial markets and beyond was both fast and brutal.
The fall-out was unprecedented and has already triggered a U-turn on a proposed cut in income tax for top rate tax payers. The negative reception may see further concessions from the Chancellor, but we cannot ignore the implications for taxpayers by adopting a ‘wait and see’ approach.
We need to act to take advantage where we can with the proposals, as they stand – whether for house buyers, residential landlords or businesses – and take regular pulse checks to respond and keep pace with any further changes.
Many aspects of the Chancellor’s plan involved walking backwards on taxation previously set out to fund future social care and to tackle the high levels of borrowing triggered by the Government’s support for individuals and businesses during the Covid-19 pandemic. This walk-back saw the Chancellor cancelling the recent 1.25% rise in national insurance contributions and scrapping the intended rise in corporation tax set for April 2023. This would have seen a tapered increase in the basic rate of corporation tax from 19% to 25% for those with profits between £50,000 and £250,000, with those companies having profits above £250,000 paying the full higher rate of 25%.
The budget outlined by Chancellor Kwarteng also included a fast-forward on plans outlined for the future, which had been made contingent on balancing the books on national debt. This included the planned cut in the basic rate of income tax from 20% to 19%, intended to be introduced in 2024 and now set to start in 2023.
Other tax concessions designed to drive up innovation and skills and to encourage investment towards a high productivity economy included a rise in the limit for Seed Enterprise Investment Schemes and the annual business investment allowance for plant and machinery.
It can be hard to keep pace with tax changes even in ‘normal’ times. So while we are in exceptional times, it is more important than ever to keep informed about potential tax breaks and where opportunities may be closing as well as keeping on top of tax rises on the horizon. It’s no longer an annual update that’s needed, but regular dialogue with professionals who can help you keep on top of the changes.
Where are the opportunities in the mini-Budget?
- Home buyers
First time buyers will not pay stamp duty (SDLT) on the first £425,000 of the purchase price, up from £300,000. As well as this increase in the nil rate threshold, the overall value of property on which first time buyers can claim relief is also increased: from £500,000 to £625,000.
All home buyers will benefit from the doubling of the SDLT nil rate band, from £125,000 to £250,000.
These changes took immediate effect from the announcement on 23rd September 2022.
The saving for first time buyers is significant, particularly for those in the South East where property prices are higher. For example, a property costing £600,000 for a first time purchaser would have involved stamp duty of £20,000 before this change, where the bill now is £8,750. And all buyers will benefit from the increased nil rate band, with a saving of £2,500 on purchases at £250,000 and above.
With mortgage rate rises, these savings may feel less valuable, particularly with all the other challenges ahead for individuals, but the early introduction of the reduction in basic rate income tax to 19p in the £ from next April is at least one bright star in the sky.
- Landlords and non-residents
Residential landlords will benefit from the saving on stamp duty when purchasing additional buy to let property in future, although the additional home surcharge remains at the same level. The higher rate paid for additional homes – whether for secondary use by the buyer or as buy to let properties – will continue to be charged at three percentage points above the standard residential rates.
Non-UK residents will also benefit from the increased nil rate band, but the non-resident surcharge on residential property will continue at two percentage points above standard residential rates.
Landlords who are operating through a limited company will also benefit from the cancellation of the planned rise in corporation tax.
These savings may not be enough for residential landlords already dealing with the tax relief changes of recent years, which changed how costs are offset against rental income, and the meltdown in the mortgage market triggered by the mini-Budget. Many may be forced into tough decisions, particularly when you consider that figures suggest that fixed rates have risen by an average of 68% compared with last December: that’s going to be a significant challenge for any landlord looking for a new deal.
For all limited companies, the rate of corporation tax will remain at 19%, bringing significant savings for those with turnover above £50,000.
All businesses with employer NIC liabilities will also benefit from the ending of the 1.25% social care surcharge in National Insurance contributions, with a reduction in the amount they contribute towards national insurance as an employer.
Any business investing in plant and machinery will be able to take advantage of 100% tax relief on up to £1million worth of investment. The Annual Investment Allowance had been raised to this limit temporarily but was scheduled to return to £200,000 in March 2023.
Companies will also be able to raise higher amounts of investment under the Seed Enterprise Investment Scheme (SEIS), up to £250,000 in future, and with a doubling of the individual investor limit to £200,000. The gross asset limit has also been increased to £350,000 and companies up to three years old will be entitled to apply, up from two years.
Share options also get an uplift, with the Company Share Option Plan (CSOP) allowing options of up to £60,000 for employees, double the current limit.
In terms of company taxation and investment options, these increased reliefs and opportunities will be welcomed across the board.
The expansion of SEIS is important for both start-ups and young companies and the investors who support them. Wider criteria should help more young companies and start-ups to tap into SEIS funding, leading to growth and employment opportunities, and investors will welcome the tax relief increase.