How do you get people to feel better about bad news? By making them think “well that could have been worse…” Since he came into office the Chancellor has been sowing the seeds of terrible news on tax in his Autumn Statement. Now that we have the bad news it is clear he hopes people feel that it wasn’t as bad as it could have been.
Indeed, it seems pretty clear Mr Hunt is hoping people will not think of his measures as being tax increases at all. Fiscal drag is the term often used for pushing up tax take not by increasing rates but by freezing thresholds. Many of the tax measures reflect fiscal drag in its purest form… There is no increase in the headline rates of the main taxes (quietly overlooking the previously announced increase in the corporation tax rates of course). However, plenty of people will be dragged further into the tax net over the coming years.
Personal allowances and the tax bands will be frozen for a further two years until 2028 – so as wages (hopefully!) increase more will pay tax for the first time or will be tipped into higher rate bands. Similarly, as property prices increase more people will pay inheritance tax with the freezing of the nil rate band again for a further two years.
As an extension to this logic, the tax-free dividend allowance of £2,000 will reduce to £1,000 next tax year and £500 the year after. Similarly, the capital gains tax annual exemption will fall to £6,000 in 2023/24 and £3,000 the year after… So no tax rises, but as if by magic plenty of people will pay more tax.
The final income tax measure is to reduce the threshold for the 45% tax rate to £125,140 from £150,000 – oh what a contrast from the mini budget of but a few weeks ago which aimed to remove the 45% rate altogether… Why such an odd number you may ask? Simply because that is the income level at which an individual’s tax free personal allowance will have tapered to zero – a process which starts when income exceeds £100k.
In theory this would cost someone earning over £150,000 an extra £1,200 in tax per year. However, many who may now have to pay the tax rate will be business owners running their business through their own company. Because they control the amount of personal income they receive my bet is that many will simply cap the amount they take as personal income at £100,000 – so they pay tax at a top rate of 40% and keep their full personal allowance. I am not a great believer in the theory that increasing tax rates tends to reduce the tax take but on this occasion I think there may well be some truth in it.
Other measures that will affect individual will be the reversal of the cut to stamp duty land tax in England and Northern Ireland introduced in the Mini Budget. Rates will return to their previous levels from April 2025. This was one of the few measures introduced by the Chancellor’s predecessor which survived the initial round of reversals – but not for long it seems!
Those driving electric cars have benefited from significant tax advantages for some time but as these vehicles become more common they are going to be chipped away. Electric cars will be subject to vehicle excise duty from April 2025 and the benefit in kind rates will increase in future years, albeit only by 1% per year. This seemed inevitable as we transition away from internal combustion engines although the changes still mean electric vehicles are an attractive option for company car drivers.
From a business tax point of view the key measure affecting most will be the reform to the R&D tax credit system. In response to much publicised abuse of the system the Chancellor has responded by cutting the benefits for Small and Medium Sized entities. The current enhanced rate of deductions is 130% of qualifying expenditure – this will fall to 86% while the repayable tax credit will decrease from 14% of qualifying spend to 10%. The changes apply from April 2023.
There is no doubt there has been abuse of the system and a few bad apples have spoiled the barrel for everyone else. However surely the answer was not to cut the credit but to police it better and stop the abuse in the first place. This hardly chimes with innovation being one of the Chancellor’s pillars of a return to growth. The one bright spot is that the scheme for larger companies will see the expenditure credit available increase from 13% to 20% - clearly it is only SMEs that abuse the system, at least in the Chancellor’s mind…
The other business tax measure which directly impacts a few but may have broader repercussions is the increase and broadening of the windfall tax on energy companies which is slated to raise £14 billion next year. A cynic might suggest at some point those companies will find a way to recoup that cost from consumers, but of course I would never be that person…
What wasn’t there?
As ever this is caveated by the fact that the “devil is in the detail” and measures often emerge in the days following the announcement. However, based on what has been published at the time of writing Business Asset Disposal Relief (the tax break formerly known as Entrepreneur’s Relief) seems to have survived, as does higher rate relief for pension contributions and the various inheritance reliefs for agricultural and business property. Notably there do not appear to be any changes to the non-dom tax rules either but I never thought that was likely at this stage of the game.
All were subject of much speculation before the announcement – not by me I hasten to add as even I have learned that making predictions is a bit of a fool’s game in such uncertain times!
When is a tax rise not a tax rise? It is an exercise in semantics but, windfall taxes and a few other detail changes the Chancellor did not actually raise tax rates at all in his statement. However, by subtle (well OK, not very subtle) means he has managed to bring more people into the tax system and increased the tax those already in the system will pay. Equally much of the pain is deferred over the coming years rather than kicking in immediately.
As a result many may feel that is really could have been worse but most if not all will pay more, it will just be drip fed through over time and in less obvious ways. To that extent you could argue the Chancellor’s expectation management campaign may well have succeeded – at least for now…