As ever, the Government’s detailed plans emerge over time, but we have set out below our immediate thoughts on Chancellor Rishi Sunak’s Spring Statement.
There was considerable speculation about whether the Chancellor would reverse last autumn’s announcement about the 1.25% rise in National Insurance Contribution (NIC) rates. Despite pressure to do so from all sides, the rise remains and will eat into employees’ take-home pay, as well as increase costs for business. The rise also extends to dividend tax, so it affects investors too.
What are the changes to National Insurance Conribution?
The Government’s major concern has clearly been to give a degree of protection to those at the bottom of the economic scale. In the near term, the Chancellor has done this by tinkering with NIC thresholds.
Presently, employees pay NIC at 12% (rising to 13.25% in April 2022) on earnings between £9,568 and £50,270, and 2% on earnings above £50,270. The £50,270 upper limit was sensibly aligned with the higher rate tax threshold a while ago, whereas the lower limit remained stubbornly below the income tax personal allowance. By sorting out this anachronism the Chancellor has effectively raised the tax threshold for the lowest paid.
The Treasury’s official papers have said nothing about the employer threshold, so the assumption must be that this remains at £8,840 above which employers pay NICs at 13.8% (rising to 15.05% in April 2022).
Generally, NICs are levied per pay period and the new thresholds will apply from July this year to allow for the necessary updating of systems. The self-employed, however, pay NICs on an annual basis under self-assessment. For them the new threshold will be a time-apportioned calculation, being 13 weeks at the old rates and 39 weeks at the new ones, resulting in a slightly reduced benefit from the new threshold in 2022/23.
Many proprietors of owner-managed businesses take a salary that is sufficient to get an NIC credit (the employer threshold) but is less than the threshold for paying employee contributions. Aligning the NIC threshold with the personal allowance will widen the gap between the employee and employer thresholds, allowing for a wider range of salaries up to £12,570 without employee NICs.
A basic tax cut
Maintaining a well-worn path of announcing good news but deferring its implementation, the Chancellor has announced a 1p reduction in the basic rate of tax to 19%, taking effect in April 2024, for the 2024/25 tax year. This was probably the most direct way to assist those who are not necessarily the most financially precarious but who will be feeling the inflationary squeeze. Nevertheless, the expected average savings of £175 two years hence will cut little ice when this year’s fuel and utility bills roll in.
Basic rate tax has been charged at 20% since 2008/09 and we’ve all got rather used to an easy grossing up calculation for things like pension contributions; contribute £80 and HMRC adds another £20 to make a gross contribution of £100. After 6 April 2024, we’ll need to contribute £81 to get the same gross pension contribution.
The Tax Plan: A promise of more to come?
The Chancellor went on to announce a ‘Tax Plan’, part of which is to introduce measures to boost growth and productivity. Successive governments and chancellors have tried to solve the UK’s productivity deficit with subsidies for research and development (R&D) and investment. It remains to be seen whether this Chancellor’s plan to ‘cut and reform taxes on business investment’ will succeed where others have not.
As to specifics, there will be a business rates exemption for certain forms of green technology from next month and, from April 2023, reform of R&D credits to extend the range of qualifying research to include vital data storage and pure maths research. Otherwise, businesses can expect to be asked to engage with the government as it formulates its plan.
Alongside the plans to help with the cost of living and raise productivity, the Chancellor raised the spectre of tax reform in the Spring Statement Tax Plan. Given a desire to make the system ‘simpler, fairer and more efficient’, he notes that there are over 1,000 tax reliefs and allowances in the tax system. In the run-up to this statement, there were debates about this Chancellor’s status as a ‘low-tax’ Conservative chancellor, so he may be looking for reforming opportunities. In the meantime, we will be keeping an eye on announcements and looking for the impact of any changes on our clients.
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Tax laws are subject to change and taxation will vary depending on individual circumstances. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested. This article does not constitute advice and you should seek professional advice.