Income Taxes
The key change to income taxes and national insurance, the new health and social care levy, was announced several weeks before the Budget. This Budget brings no other significant changes, and with the Chancellor’s stated aim to reduce taxes by the end of this Parliament the risk of further rate changes seems to be receding. The Government is, however, planning a further set of announcements on tax administration and maintenance later this autumn.
Health and Social Care Levy
As previous announced, a new 1.25% health and social care levy will apply to employment and self-employment income from April 2022.
Although it has been introduced as a new tax, it will initially be collected by increasing national insurance contribution rates for employees, employers and the self-employed by 1.25%.
It will not apply to Class 2 or Class 3 contributions.
From April 2023, once HMRC has updated its systems, the levy will be distinct from national insurance contributions, and it will then also apply to individuals above the state pension age who are working.
Income Tax
The income tax rates and bands, as well as the main allowances remain frozen at their 2021/22 levels, and they will continue to do so until the end of 2025/26.
Whilst this means that an individual with the same income will pay the same tax year-on-year, the impact of inflation on both business profits and salaries will continue to result in a notable tax increase over the period.
National Insurance
The upper earnings limit and upper profits limit for class 1 and class 4 national insurance contributions will remain aligned with the higher rate threshold for income tax until 5 April 2026.
Class 2 and Class 3 national insurance contributions will increase in line with inflation, to £3.15 and £15.85 per week respectively for the 2022/2023 tax year.
Dividend Income
The tax rates on dividend income over £2,000 will increase for 2022/23, with the ordinary rate increasing from 7.5% to 8.75%, the upper rate increasing from 32.5% to 33.75% and the additional rate moving from 38.1% to 39.35%.
High Income Child Benefit Charge (HICBC)
The HICBC applies to anyone with an income over £50,000 who receives Child Benefit, or whose partner receives Child Benefit. In a recent tax case, it was found that HMRC could not raise a ‘discovery’ assessment where a person had not been aware they were liable for this charge and had not been asked to file a tax return.
To combat this, the law will be amended with retrospective effect to enable HMRC to collect the charge in these circumstances.
Savings and Pensions
ISA Annual Subscription Limits
The annual subscription limits for ISA, junior ISA, and child trust funds, currently £20,000, £9,000, and £9,000 respectively, will remain unchanged for the 2022/23 tax year.
Pension Contributions
The tax reliefs for pension contributions remain unchanged, with the Lifetime Allowance* frozen at its 2020/21 level of £1,073,100 until the end of 2025/26.
*The Lifetime Allowance is the maximum amount that an individual can save in pension schemes offering tax relief before extra tax charges arrive on drawing benefits and at the age of 75.
Access of Pension Benefits
At present, the minimum age at which most individuals can first access their tax-relieved pension scheme benefits is 55. This will be increased to 57 with effect from the 2028/29 tax year and will therefore affect individuals born on or after 6 April 1973,
Payroll and Employee Incentives
No significant changes relating to payroll and employee incentives have been announced for the 2022/23 tax year.
National Living Wage (NLW) and National Minimum Wage (NMW)
The NLW will increase to £9.50 per hour for individuals aged 23 and over, with other rates of NMW also rising, by different percentages as recommended by the Low Pay Commission.
Company cars and fuel
With effect from 6 April 2022, the taxable benefit value for company vans will increase by the September 2021 Consumer Price Index (CPI). The taxable fuel benefit value for company cars and vans will increase by the same percentage.
Business Taxes
The Chancellor has confirmed the Government’s commitment to encouraging investment in the UK and has proposed several changes in support of this.
Reform of income tax basis periods
Legislation will be introduced to change the way in which trading income is allocated to tax years.
The purpose of this reform is to simplify the system by aligning the way the self-employed and partners in trading partnerships will be taxed on profits arising in a tax year, with other forms of income, such as property and investment income.
At the moment, profits or losses disclosed on tax returns filed by self-employed individuals are most commonly based on a business’s set of accounts ending in the tax year (known as the ‘current year basis’). Whilst this does allow self-employed individuals to defer the tax payment date in the early years of trading, it creates a fair amount of complexity where there are ‘overlap profits’ i.e. where profits are initially taxed twice.
From 2024/25, the ‘current year basis’ will be replaced with a ‘tax year basis’, which will require self-employed individuals with an accounting date that differs to the end of the tax year (31 March or 5 April), to apportion profits or losses from different accounting periods, to fit in with the tax year.
There will be a transition year in 2023/24 and during this period all businesses will have their basis period moved to the end of the tax year, and any overlap relief given. This means that these businesses could see their profits accelerated into an earlier tax year which in turn, will increase their tax liability for the transition year. As this will likely impact cashflow, particularly during January 2025, when the outstanding balance for 2023/24 is payable.
To mitigate this impact, any excess profits in the transition year will be spread over a period of five years, however businesses may elect to forego the spreading and pay the balance at the beginning of 2025.
Extension of Annual Investment Allowance (AIA)
The temporary increase of the AIA to £1 million will be extended to 31 March 2023. Previously it had been due to return to the permanent level of £200,000 after 31 December 2021.
Residential Property Developer Tax
A new residential property developer tax (RPDT) will be introduced from April 2022 and will apply to the profits of companies carrying out UK residential property development (RPD) activities.
RPD companies will be subject to RPDT at a rate of 4% on RPD profits above the annual allowance of £25 million per year, per group.
This tax will ensure that the largest developers make a fair contribution to support the funding of building safety remediation.
Cultural Tax Reliefs
The Government will extend museum and galleries exhibition tax relief for two years, until 31 March 2024, as well as increase the rate of theatre, orchestra and museums and galleries exhibition tax relief.
It will also allow film production companies to obtain film tax relief in specific circumstances where films are released online as opposed to in cinemas.
The Government will also introduce legislation, effective for companies entering production after 31 March 2022, to better target the reliefs and safeguard them from abuse.
Research and Development Tax Relief
Following consultation with the R&D tax incentive schemes, two significant changes have been announced:
- The expenditure relating to cloud computing and data will be included as eligible spend; and
- The wider scheme will be reformed to better support and incentivise innovation that takes place in the UK.
In addition to these, other changes will be made to target abuse and improve compliance.
Full details of these changes are expected to be announced in late Autumn.
New Economic Crime Levy
A new Economic Crime Levy will be introduced for accounting periods starting from 1 April 2022 and will apply to entities regulated under the Money Laundering, Terrorist Financing and Transfer of Funds Regulation 2017.
Small business (with UK revenue less than £10.2million) will be exempt, with medium, large and very large businesses expecting to pay between £5,000 and £15,000, £30,000 and £50,000 and £150,000 and £250,000, respectively.
The charge will be a fixed annual fee calculated according to the size band of a business, which will be determined based on UK revenue*.
*UK revenue is calculated as turnover plus other amounts recognised as revenue under generally accepted accounting practice, with appropriate adjustments for non-UK activities.
The amounts raised will be used to fund Government initiatives introduced as part of the 2019 Economic Crime Plan to help tackle money laundering.
Cross-Border Relief for Groups
To maintain and enhance its role as a global investment and business centre post Brexit, the UK plans to make it possible for companies to re-domicile to the UK by moving its place of incorporation here without the need for a new corporate identity.
This will bring new investment and growth opportunities to the post-Brexit UK economy, as well as allow continuity of business and reduce administration.
To facilitate re-domiciliation, the Government is considering any required changes to tax laws, to prevent importation of foreign losses to offset profitable group entities already within the UK.
Other Announcements
This section covers other points raised prior to, and in, the Budget that may be of interest.
- Effective 1 April 2022, Government will include legislation in the Finance Bill 2021/22 to establish a new tax regime for qualifying asset holding companies.
- The Government will legislate mandatory disclosure by large businesses of any uncertain tax treatments in their income tax (including PAYE), VAT or corporation tax returns. Companies will only need to notify HMRC where the tax advantage is anticipated to be more than £5 million for a 12-month period.
- The Government intends to legislate for tax reporting to be made digital by 2024/25.
Capital Taxes
In contrast to expectations, changes to capital taxes were minimal in this Budget, with only one noteworthy amendment.
Deadline Extension for Sales of UK Property
For completion dates on or after 27 October 2021, the deadline for reporting and paying Capital Gains Tax on the sale of UK residential property, will be extended from 30 days to 60 days after completion.
VAT and Indirect Taxes
Registration threshold
VAT registration and deregistration thresholds will remain the same as their present levels of £85,000 and £83,000 until March 2024.
Reduced rate
Furthermore, there have been no further changes announced to the reduced rate of VAT that has applied to qualifying supplies by hospitality, leisure and entertainment businesses. The rate reduced from 20% to 5% in July 2020 and increased to 12.5% with effect from 1 October 2021. It will revert to the standard 20% rate on 1 April 2022.
VAT Free Zone Model for Freeports
The VAT free zone model will be updated to include a VAT exit charge in specific circumstances. The changes include:
- Implementation of a free zone VAT exit charge where there is no qualifying onward supply, or there is a breach of customs procedures; and
- Amendments to existing VAT legislation.
Second-hand margin scheme for motor vehicles
This measure will extend the second-hand margin scheme for motor vehicles purchased in Great Britain and sold in Northern Ireland.
The interim arrangement, which will apply retrospectively from 1 January 2021, will allow motor vehicles registered in the UK prior to 1 January 2021 to be available for sale under the VAT margin scheme in Northern Ireland.
Other Measures
Business Rates
The Government has committed to:
- freezing the business rates multiplier for a second year, from 1 April 2022 to 31 March 2023
- introducing new temporary business rates relief for eligible retail, hospitality and leisure properties for 2022/23, giving 50% relief up to a £110,000 per business cap, and
- extending transitional relief for small and medium-sized businesses, and the supporting small business scheme, for 1 year, restricting increases in rates bills, subject to subsidy control limits.
Alcohol Duty Reform
Government intends to simplify and rationalise the taxation of alcoholic drinks, including a 5% reduction on duty for various drinks sold in pubs, and a relief for small producers of drinks below 8.5% ABV. Duty on drinks with an alcohol content above 11% however, can expect to see an increase down the line.
Apprenticeship Funding
The Government will continue to meet 95% of the apprenticeship training cost for employers that do not pay the Apprenticeship Levy. The £3,000 apprenticeship hiring incentive payment (per new hire) has been extended by four months to 31 January 2022.
Universal Credit
Two measures will be introduced that are intended to benefit Universal Credit recipients:
- The taper rate at which extra earnings leads to a reduction in benefits will reduce from 63% to 55%, and
- The work allowance will increase by £500 a year.
These measures are intended to take effect not later than 1 December 2021. They will benefit some qualifying claimants by more than the £20 per week.
Recovery Loan Scheme
The Recovery Loan Scheme will be extended until 30 June 2022.
The following changes will apply to all offers made from 1 January 2022:
- The scheme will only be open to small and medium-sized enterprises,
- The maximum amount of finance available will be £2 million per business, and
- The guarantee coverage that the Government will provide to lenders will fall to 70%.
Freeports
Freeports, which are special areas within the UK’s borders where different economic regulations apply, will be introduced.
Eligible businesses in Freeports will enjoy a range of tax incentives, such as enhanced capital allowances, relief from stamp duty and employer national insurance contributions for additional employees. These tax reliefs are designed to encourage the maximum number of businesses to open, expand and invest in our Freeports which in turn will boost employment.
The English Freeports announced so far are East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames. The first tax sites have been designated at Humber, Teesside and Thames, and those Freeports will begin initial operations from November.