Our Initial Budget Musing

How to increase taxes without increasing tax rates

This has clearly been the title of Jeremy Hunt’s bedtime reading since he was appointed, and every possibility has been explored and exploited from reducing or freezing thresholds and reducing tax free allowances to cutting reliefs.

Don’t take it personally…….

In September, the 45% additional rate of income tax was set to be abolished, in October that plan was reversed, reinstating the additional rate and in November, the latest chancellor has gone a step further, extending the reach of the additional rate by reducing the income threshold at which it applies.

From April 2023, the threshold at which the additional rate of 45% will become payable falls from £150,000 to £125,140.  This will not only bring more people into the net of the 45% rate but will cost those already paying at that rate an additional £1,243 a year.  If some of your income is made up of dividends, then you can add up to £393.50 onto that, because the dividend allowance of £2,000 is reducing to £1,000 per annum from April 2023. It will fall again in April 2024 to £500 per annum.

If you are not an additional rate payer, you will still be impacted by the freezing of the personal allowance and the NI thresholds until April 2028.  Given that the OBR has predicted inflation of 9.1% in the current year and 7.4% next year, the reality of this allowance freeze will be a reduction in spending power for all taxpayers.

If you plan to raise some cash by selling a few family heirlooms, then perhaps it would be wise to make use of the current annual exempt amount of £12,300 per individual, because next year the exempt amount for chargeable gains is coming down to £6,000 and the year after that to £3,000. With a CGT rate of 20%, this could mean additional tax of £1,260 to pay on a disposal from April 2023. The tax on a disposal of residential property not covered by private residence relief will increase by £1,764 which represents the £6,300 reduction in the annual exempt amount at the 28% rate which applies to residential property when you are a higher rate taxpayer.

“Businesses must also pay their fair share…” said Mr Hunt

The Corporation Tax main rate will rise to 25% in April 2023 for businesses with profits over £250,000. The small profits rate of 19% will apply where a company’s profits are up to £50,000. Above this figure, the 25% rate will be applied, but a sliding scale of relief will bring the rate down progressively.

Despite reaffirming the government’s commitment to research and development, the R&D tax relief scheme that applies to Small and medium sized enterprises has been dramatically cut. Additional relief currently available at 130% is being reduced to 86% and the repayable credit that can be claimed by loss making companies will fall from 14.5% to just 10%.  On the other hand, the much less generous Research and Development Expenditure credit scheme which applies to larger companies is increasing from 13% to 20%.

HMRC have not yet issued their usual plethora of documentation which sometimes contains some surprises as well as more detail around budget announcements.  Come back tomorrow, when we hope to have the full story for you!