The Chancellor’s autumn statement 2022 has been much awaited albeit with huge anxiety. Though branded as aimed to boost the UK economy, it rather brings gloomy news for all tax-payers, both businesses and individuals. Below is a summary of the most relevant information.
Corporation tax increase
Sadly, no good news here as the corporation tax will increase from 19% to 25% starting April 2023. Many businesses will find this news unpleasant to say the least amidst growing prices and increased cost of living.
Income tax bands frozen until April 2028
Income tax rates and personal allowances will remain at the same level until at least April 2028 as part of the fiscal drag, resulting in more workers falling into higher tax brackets as wages increase with inflation. The threshold at which people start paying the top 45% rate of Income Tax will be reduced from £150,000 to £125,140, which effectively means that more of the tax paying people will be dragged into the highest tax rate.
VAT rate frozen
The threshold for VAT (Value Added Tax) has been frozen at current level, namely at 20% until 2026. Important tariffs will be removed on over 100 types of goods used by UK businesses.
Tax-free dividend allowances will be cut over the next two years. The Dividend allowance will reduce from £2000 to £1,000 starting April 2023 and then further to £500 starting April 2024. This means that you will pay more tax on dividends than previously.
Capital Gains Tax
Tax-free allowances for CGT (Capital Gains tax) will also be cut over the next two years.
The Capital Gains Allowance will be reduced from £12300 to £6,000 per year starting in April 2023, then further £3000 from April 2024.
This reduction means that many small gains will now have to be reported to HMRC which did not have to before; this further means the cost of keeping HMRC happy goes up because the compliance burden increases for many smaller investors and for owners of second properties who may wish to sell after April 2023.
They will also be impacted by the extra cost of having to submit self-assessment tax returns or Capital Gains tax returns that they did not have to do before these new measures come into effect.
The property values which Business Rates are based upon have been revalued which will increase the rateable value of properties. Targeted support packages over the next five years will help small businesses transition over to these higher rateable values.
A windfall tax is an extra tax imposed by the government on a company. The idea is to target firms which benefit from something they were not responsible for – in other words, a windfall.
The energy industry will have an expanded windfall tax, moving from 25% to 35%. This will be a temporary tax beginning on 1 JAN 2023 and ending in March 2028. There will also be a 40% tax on profits from older renewable and nuclear electricity. Finally, a temporary 45% levy on extraordinary returns from electricity generators will be put in place to raise £14 billion in 2023.
R&D Tax Relief
Before the autumn statement was released by the chancellor, there was an expectation that R&D Tax Relief for SMEs (small and medium size enterprises) will have its additional deduction rate reduced from 130% to 100%, in order to compensate for the planned increase in the Corporation Tax rate from 19% to 25% from 1 April 2023.
This expected rate change would have retained an effective 25% corporation tax liability saving. However, with the new announcement by the chancellor, this SME R&D Tax Relief additional deduction rate has in fact been reduced to 86%, a much larger reduction than previously expected. This effectively reduces the Corporation Tax liability saving to 21.5%, which means an approximate reduction in the resulting Corporation Tax liability savings of approximately 3% – 3.5%.
What this means in lay terms is that under the current R&D rates, a £100,000 qualifying R&D spend would have resulted in a Corporation Tax liability reduction of £24,700 for a profit-making company. However, with the new R&D rates, a £100,000 qualifying R&D spend will now result in a Corporation Tax liability reduction of £21,500 for a profit-making company.
Loss making companies that qualify for R&D could have previously claimed a repayable R&D Tax Credit on the R&D related surrendered loss. For these companies, there has been a further reduction in value relating to the scheme such that the rate of repayable Tax Credit on surrendered losses has been reduced from 14.5% to 10%, with the effect of creating a marginal Tax Credit rate of 18.6% instead of 33.35%.
What this really means is that under the current R&D rates, a £100,000 qualifying R&D spend would have resulted in a Repayable Tax Credit of up to £33,350 for a loss-making company. But with the new R&D rates, a £100,000 qualifying R&D spend will now result in a repayable Tax Credit of up to £18,600 for a loss-making Company.
It can be argued that reducing the tax benefits of undertaking R&D in the UK has very little fiscal benefit and coupled with the increase in corporation tax to 25% from 1 April 2023 sends the message that the UK is not really a good place to invest.
If you’re considering switching to electric vehicles for your business you are still likely to make a saving, but it is important to note that such vehicles will no longer be exempt from Vehicle Excise Duty from April 2025.
The freeze on the inheritance tax nil rate band threshold of £325000 per taxpayer has been extended to April 2028.
The National living wage increase
The National Living Wage will be increased from £9.50 an hour for over-23s to £10.42 from April 2023.
NIC rate frozen
The NIC (National Insurance Contribution) rate has been frozen at current level until April 2028.
Pension and benefits
Both pensions and benefits will rise in line with inflation, the triple lock is being protected, meaning the full state pension will rise to £10,600 in April 2023. Protection of the triple lock ensures pensions cannot be overtaken by the rate of inflation and cost of living crisis.
On the journey together
Rest assured, I will be keeping an eye on further developments, always keeping you informed about any changes that may impact your business.
Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the tax advice you need.
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