The Government called it a “fiscal event” and then a “Growth Plan”. The media called it a “mini-Budget”. It was not though, we were told, officially a Budget. And yet the statement given by the Chancellor on Friday 23 September contained more headline-grabbing tax policy announcements than a normal Budget often would. In fact, it is said that the tax cuts announced are the biggest seen in more than a generation. So, at least where individuals living in England are concerned, lets take a look at some of those cuts.
National insurance – reversal of April 2022 increase
Under Boris Johnson’s Government, a new Health and Social Care Levy was introduced at a rate of 1.25% per year. The levy itself was due to commence as a standalone new tax as from 6 April 2023, with the position for 2022-23 instead dealt with through a 1.25% increase in the rate of national insurance.
The Health and Social Levy has now been abolished. Furthermore, the increase in national insurance for 2022-23 will cease as from 6 November 2022. Hence the increase will last for just seven months.
Income tax – rate on dividends
On the basis that national insurance is only paid by employees, employers and the self-employed, the Johnson Government also uplifted the income tax rate on dividend income by 1.25% as from 6 April 2022.
Consequently, this increase will also be reversed back to the position before 6 April 2022. However, such a reversal will only apply as from 6 April 2023. This is because income tax is calculated annually (whereas national insurance, at least for employees and employers, is generally not) and therefore changing the rate of income tax mid-tax year would result in additional complexity.
Income tax – reduction in the basic tax rate
Under the Johnson Government, the basic rate of income tax was to be reduced from 20% to 19% as from 6 April 2024.
Such a reduction will now apply as from 6 April 2023 instead.
As well as applying to individuals, the basic rate also applies to estates and certain trusts. However, a different basic rate applies to dividend income – and there is no suggestion that it too is being cut (with the exception of the above 1.25% reversal, taking it from being 8.75% for 2022-23 back down to its previous level of 7.5% for 2023-24).
The basic rate also overlaps with both charitable gift aid donations and pension contributions made under the net-pay arrangement. In both cases, it is assumed that the money which the individual is paying (whether as a donation to charity, or a contribution to their pension scheme) is net of basic rate tax. And therefore, in both cases, it is such basic rate tax which the charity or pension provider is permitted to then reclaim from HMRC. Hence at present, for every 80p which is paid, a further 20p can be reclaimed. Consequently, a change in the basic rate should also change how much can be reclaimed by charities and pension providers. However, the Government has said that charities can have four extra years of still being able to reclaim 20% (ie until April 2027), whilst pension providers can have one extra year.
Income tax – abolishment of additional tax rate
UPDATE: 3 October
The Chancellor announced a U-turn on the planned abolishment of the additional income tax rate. The 45% rate (or 39.35% for dividends) will continue to apply (albeit lowered back to 38.1% for dividends as from 6 April 2023, due to the above change in income tax on dividends).
The additional tax rate of 45% (or 39.35% for dividends) will cease to exist as from 6 April 2023.
Thereafter there will only be two tax rates of income tax: the basic rate and the higher rate (albeit still with different percentages applying to dividends). The threshold at which many individuals will first begin to pay the higher rate will remain unchanged at £50,270.
The additional tax rate currently applies to many individuals with gross taxable income is excess of £150,000. It also applies to certain trusts.
Individuals who fall within the higher rate band are entitled to receive their first £500 of interest each year tax-free (it is £1,000 for people who fall within the basic rate band). This means that additional rate taxpayers will also qualify for the allowance as from 6 April 2023, because they too will then fall within the higher rate band.
Stamp duty land tax – increase to the 0% band
Previously the 0% band applied to the first £125,000 of a residential property purchase (unless the purchase is caught by the 3% second home surcharge, or the 2% non-resident surcharge). For first time-buyers meanwhile, their 0% band applied to the first £300,000 of a property purchase (subject to the property being purchased for a maximum of £500,000).
Immediately as from 23 September 2022, these two 0% bands are uplifted to £250,000 and £425,000 respectively. The maximum property price for the latter to apply for a first-time buyer has been increased to £625,000.
This change means that the 2% band which previously applied between £125,001 and £250,000 will no longer exist. The extended 0% band will now sit directly below the 5% band, which continues to apply to consideration between £250,001 and £925,000 (or £425,001 to £625,000 for first-time buyers).
Closure of the Office of Tax Simplification (OTS)
Whilst not a policy announcement, I would finish by also saying that the Chancellor announced that the OTS will be closed. The OTS was created by David Cameron’s Government, to act as an advisor to the Government in relation to simplifying the tax system. Over the past 12 years, they have advised the Government on a range of measures to consider – with the Government duly making the decision on which measures to adopt and which to reject. Now that it will be left to the Treasury (in conjunction with HMRC), it will be interesting to see how their work in simplification will compare to that of the OTS.
How Moore Barlow can help
Alex Wavell works as a private client chartered tax advisor, specialising in inheritance tax and the taxation of trusts. His clients include private individuals and trustees of UK trusts. He advises clients on their succession and estate planning, as well as the potential mitigation of future inheritance tax on death.
Our expert Private Wealth team at Moore Barlow can provide you with peace of mind through supportive legal advice that is tailored to your individual situation.
