Table of Contents
Editor’s note: The scrapping of the 45% income tax rate has been reversed following an announcement by the government on 3 October 2022. Corporation tax will rise to 25% in April 2023 following a government announcement on 14 October 2022. This article has been updated to reflect that.
Extraordinary times call for extraordinary measures.
And so it was that, on 23 September 2022, the Chancellor announced The Growth Plan 2022 policy paper.
Referred to popularly as the mini-Budget, the intention is to combat the cost of living crisis for both individuals and businesses.
In this article, we take a dive into the measures from the perspective of businesses—everything from corporation tax to capital investment and payroll.
Here’s what we cover:
The Energy Bill Relief Scheme (EBRS), announced a few days before the mini-Budget, is covered in detail in a separate article here on Sage Advice.
Corporation tax rise cancellation—update
In April 2023, corporation tax was set to change. It would rise for a minority of businesses.
This change was announced way back in the 2021 Spring Budget, and was to be implemented two years after to allow businesses time to prepare.
Corporation tax was set to rise to 25% based on an upper profits threshold of £250,000. Only around 10% of corporation tax-paying businesses are at this level, according to the government.
Smaller businesses with profits under £50,000—around 70% of total businesses, according to the government—were set to stay at the 19% main rate. A tapered rate was to be applied to businesses with taxable profits between £50,000 and £250,000.
In the mini-Budget, all of these changes were abandoned.
However, following an announcement from the Prime Minister on 14 October 2022, this decision was reversed and corporation tax will rise to 25% in April 2023.
What this means for your business
When is a tax cut not a tax cut?
When it’s a pending increase that’s been cancelled.
While this cancellation is something to be thankful for, as of April 2023 businesses continue to face the same corporation tax rate that’s been in place since 2017.
As mentioned above, the majority of businesses wouldn’t have moved to the higher rate anyway (or even the tapered rate).
Notably, there was no mention in the mini-Budget of how long we can expect the 19% rate to continue. This rate is among the lowest in Western countries, as the government is keen to point out. But this also means corporation tax is forever in the crosshairs of any future government keen to raise revenue.
Still, there should be at least another whole year of the 19% main rate as of April 2023.
This will provide stability for businesses, no matter what, and should allow space to plan around growth, or just plan for continuance in difficult circumstances.
Income tax reductions
The Chancellor took out his carving knife and made some of the biggest changes in a generation:
- Basic rate cut to 19%: This had been planned for introduction as of the 2024/25 tax year. The Chancellor has brought it forward to April 2023. It affects only England, Wales and Northern Ireland because Scotland has its own income tax-setting powers (and already has a starter rate of 19%).
- No more 45% additional rate: In the mini-Budget, the Chancellor announced that as of April 2023, the 45% tax rate for taxable income over £150,000 would be removed. It would have left three tax bands: a 0% rate (up to £12,570), a 19% Basic Rate (£12,571 to £50,270) and a 40% Higher Rate (£50,271 and above). However, on 3 October 2022, the government announced that the 45% tax rate won’t be scrapped for those earning more than £150,000. This affects England, Wales and Northern Ireland.
No change to tax bands or the tax-free personal allowance was mentioned in the mini-Budget.
What this means for your business
Many people reading this are likely to be employees of some kind and, of course, any income tax cut will be welcomed. Nearly everybody will benefit from the 1% cut to income tax between £12,571 and £50,270.
For employers, a focus on pay rises inspired by the cost of living crisis might be alleviated by the fact workers are taking home more in their pay packet each week or month thanks to these tax cuts.
This needs to be considered in tandem with the National Insurance changes (see below) that return even more to the bottom line of employee payslips.
Remember that these changes don’t come into effect until April 2023.
With the cost of living crisis showing no signs of slowing, the coming months are going to present challenges for everybody—including businesses.
Many businesses are utilising employee financial well-being measures such as salary advance schemes to give their people the support they require.
National Insurance reduction and Health & Social Care Levy reversal
April 2022 saw Class 1 National Insurance contributions (NICs) for both employers and employees rise, both being boosted by 1.25%.
This meant employer NICs rose to 15.05%, from 13.8%.
Employee NICs rose to 13.25% for pay of £1,048.01 to £4,189 per month, up from 12%.
Self-employed rates rose in a corresponding way.
Class 2 contributions rose to £3.15, from £3.05. Class 4 rates rose to 10.25% for taxable profits between £9,568 and £50,270 (previously 9%), and 3.25% for anything above £50,270 (previously 2%).
All these rises are cancelled as of 6 November 2022. Effectively, rates revert to the 2021/22 levels.
Notably, the increase in the NIC Primary Threshold introduced on 6 July 2022 is not being reversed, which means employees who were pulled out of paying NICs at that time remain so.
As of April 2023, the 1.25% employer/employee NIC increases were to be baked into an independent and new tax called the Health and Social Care Levy (HSCL).
This has now been entirely cancelled.
However, the Employment Allowance increase introduced in April 2022 has not been cancelled. This allowance means businesses with NICs of less than £100,000 can claim back up to £5,000 (up from £4,000 previously before April 2022).
The government points out that this Employment Allowance increase, combined with the cancelled Class 1 NIC increases/HSCL cancellation, will mean 40% of businesses will not pay any NICs as of 6 November 2022.
What this means for your business
The cancelled Class 1 Employer NICs mean total wage bills for businesses become a little less expensive as of November 2022.
Meanwhile, employees get to take home a little more in their wages.
As consumer affairs guru Martin Lewis pointed out when the NIC rise was first announced, the 1.25% rise equated to an effective 10.4% rise in the National Insurance most employees pay.
Combined with the income tax cuts mentioned above, the net result is that the pressure employers face when it comes to pay rises is at least partially reduced.
If nothing else, employers have more collateral to discuss with employees during such discussions.
For payroll managers, there’s some practical work required to configure payroll software to effectively revert to the 2021/22 Class 1 NIC rates for earnings after 6 November 2022.
Because of the short time span, it may be necessary to apply the NIC cuts later in the tax year and backdate them, in which case employees should be made aware as soon as possible.
If in any doubt about what to do, speak to your payroll software vendor’s customer support team.
Self-employed people will also see Class 4 NIC cuts, but it’s not yet clear how this will be applied for the 2022/23 tax year.
The government explains: “Self-employed people and company directors will pay a blended rate of National Insurance – taking into account the changes in rates throughout the year – when they submit their annual self-assessment return.”
The fixed weekly Class 2 NICs for self-employed individuals were not changed with the mini-Budget.
Annual Investment Allowance higher rate made permanent
Back in January 2019, the Annual Investment Allowance (AIA) was temporarily raised from £200,000 to £1m. After several extensions, this was finally due to end at the end of the 2022/23 tax year.
The good news is that the £1m allowance will now continue “permanently”, to quote the government.
The Annual Investment Allowance is a form of capital allowance that allows organisations to offset the cost of certain plant and machinery investments against their tax bill.
Notably, AIA is available in addition to the standard capital allowance main and special rate pools.
What this means for your business
Put simply, and as with his predecessors, the Chancellor is trying to encourage growth within businesses. And it’s very hard to argue with such a generous capital allowance.
Need new computer equipment for undertaking your trade? The AIA is one option for paying for it. If you need specialised machinery or equipment, then the AIA should cover it.
Larger businesses can really go to town with expansion plans.
It should be noted that, unlike with other capital allowances, the AIA doesn’t cover cars to be used in businesses.
It’s also worth noting that the AIA isn’t just for big businesses.
Sole traders can make use of it, too. You’ll need to be using accrual-based accounting, though, and those with lower profits should use writing down allowances in whole or alongside the ASA (speak to an accountant or tax professional if you need to).
IR35 (off-payroll) determination reversal
While many media outlets have focused on the tax and NIC cuts, the Chancellor slipped in an additional U-turn with his mini-budget.
The off-payroll status determination rules that have applied to the public sector since 2017, and large businesses in the private sector since 2021 (along with employment agencies in some situations), are to be repealed as of April 2023.
Known informally as IR35 rules, the reversal removes the legal requirement for employers and agencies they use to determine if contract workers operating through intermediaries are “inside IR35″—that is, they’re deemed employees, so should pay the same tax and NICs as an employee.
This added a significant admin cost for businesses, if nothing else. It also raised the ire of contractors.
The IR35 reversal presumably also cancels plans for IR35 status determination requirements to be rolled out to smaller businesses.
With the repeal of the legislation, contractors themselves are relied upon to determine their status.
What this means for your business
IR35 is derided by contractors, and there have been suggestions that it made contracting less attractive.
But it should be noted the repeal of the legislation announced by the Chancellor doesn’t mean IR35 is going away.
The government is simply changing how it’s enforced.
However, this might be enough to mean that contracting once again becomes an attractive option for certain kinds of workers and sectors.
Such contractors should not forget that if their conditions while working for the employer means they’re “inside IR35”, according to government guidelines, then they’re still required to pay the same tax and NICs as a regular employee (e.g. they might choose to work through an umbrella company, or set up PAYE within their personal services company).
If they don’t do so, and HMRC takes issue, then they could be faced with a huge income tax and NIC bill.
Investment zones across the UK
Up to 38 local authorities across the UK may soon have investment zones within them.
Startup businesses willing to have their premises within these zones, or to co-locate there, can receive some extremely generous tax cuts, as follows:
- 100% relief on business rates on newly occupied or expanded business premises.
- 100% enhanced capital allowance relief for plans and machinery for the first year.
- Zero-rate Class 1 employer NICs on salaries for new employees who are paid up to £50,270.
- No stamp duty on land bought for commercial or residential development.
- Enhanced Structures and Buildings Allowance relief of 20% per year.
It’s worth mentioning that the above applies only to activities within the zone.
In other words, if you have a second business premises elsewhere, you can’t apply zero-rate NICs relief to employees working there.
Nor can you buy plant and machinery for use outside the zone and claim the enhanced capital relief allowance (although the Annual Investment Allowance could apply—see above).
What this means for your business
The government has an eye not just on encouraging new business (and business growth), although that’s clearly a key part of the investment zone strategy.
It also wants to build the economies in the 38 local-authority areas chosen for the zones and, yes, the phrase “levelling up” was used during the announcement.
It’s for this reason that the zones are likely to be within some of the country’s more deprived areas.
No time limit has been set on how long the investment zone scheme will last, and no caps mentioned with regard to business size.
This is simultaneously good and bad.
Often, this level of help is limited to businesses of a certain turnover size, and as such the business can face the financial shock of suddenly having to pay real-world taxes once a growth milestone is passed.
No such limitation has been mentioned with the investment zones.
Theoretically, your business could turn over £100m and still get relief on Class 1 NICs for employee salaries under £50k, for example.
The government’s largesse with investment zones will presumably continue until such time as the scheme is tweaked by a future government.
In short, if you’re looking to start a business in a year or two, or expand your businesses, it makes a lot of sense to contact your nearby local authorities and see what’s on offer in any investment zone they may have.
The tax savings could be substantial.
Other key measures in the mini-Budget
A number of other things were announced in the mini-Budget, some of which are as follows:
VAT-free shopping for tourists
The introduction of a “digital, VAT-free shopping scheme” for non-UK visitors will see VAT on high street and airport purchases refunded via an easy-to-use scheme that no longer relies on paper-based forms.
There are no dates around this measure and a consultation will commence soon.
Good news for the hospitality sector arrives in the form of a freeze on the duty rates for all alcohol categories from 1 February 2023.
The government also published its response to the Alcohol Duty Review consultation on the same day as the mini-Budget, with the aim to reform and simplify alcohol duties as of August 2023.
There are a variety of changes to residential Stamp Duty Land Tax (to give it its full title).
The changes take effect immediately and see an increase to £250,000 for the threshold where stamp duty is payable (up from £125,000).
For first-time buyers, the threshold increases to £425,000, from £300,000, with first-time buyers are able to claim relief on properties valued at up to £625,000 (increased from £500,000).
The 1.25% increase to the income tax on dividends in April 2022 is reversed. However, you’ll have to wait until April 2023 for this change to take effect.
Seed Enterprise Investment Scheme (SEIS)
This scheme that allows startups and entrepreneurs to source early stage funding gets a bump as of April 2023.
Companies will be able to raise up to £250,000 of SEIS investment, and the gross asset limit is increased to £350,000 (and the age limit raised to three years).
The annual investor limit is doubled to £200,000.
Company Share Option Plan (CSOP)
From April 2023, businesses using CSOP will be able to issue up to £60,000 of tax-advantaged share options to employees.
This is double the current £30,000 limit.
Final thoughts: Preparing for a difficult future
We’ve covered the main topics above, but even more new policies and approaches to issues such as tax and business growth were announced in The Growth Plan 2022. Interested parties are advised to have a thorough read of the policy document itself.
According to the government, the mini-Budget means employees will take home an extra £330 a year from the NIC reduction, while basic rate taxpayers will be £130 better off from the income tax changes, and higher rate taxpayers £360 better off.
The government says businesses across the UK will save a total of £18.7bn by 2026/27 due to the corporation tax changes.
While these are all to be welcomed, smart businesses should rifle through the detail of the Growth Plan and plan accordingly.
The now-permanent Annual Investment Allowance offers an incredibly generous capital expenditure boost for businesses looking to grow, for example.
Meanwhile, the Investment Zone scheme offers seemingly unbelievable tax breaks for businesses willing to establish or expand in those areas.