Tax: A new, improved autumn statement?

In the aftermath of the disastrous economic consequences of Kwasi Kwarteng’s radical mini-budget, his successor, Jeremy Hunt, presented a less controversial autumn statement in November. Individuals and businesses should familiarise themselves with the changes announced therein. Some of the key upcoming changes have been highlighted below.

Individuals

Income tax and NICs

While no changes have been announced to the rates of income tax or NICs, individuals in England, Wales and Northern Ireland can expect to pay more over time as a result of the reduced thresholds. The additional rate threshold, at which the highest earners are subject to a 45% rate of income tax, will be lowered from £150,000 to £125,140 from 6 April 2023. Additionally, the personal allowance and 40% rate threshold of income tax, and the NICs primary threshold and lower profits limit, will be frozen until April 2028 – two years later than the date announced at the Spring Budget 2021.

The tax-free allowance for dividend income is also due to be reduced, falling from £2,000 to £1,000 from 6 April 2023 and then to £500 from 6 April 2024.

December’s Scottish Budget has confirmed that income tax thresholds in Scotland will be treated in the same way, but changes are coming to the Scottish rates of income tax, with the higher rate and top rate of tax due to increase by 1%, to 42% and 47% respectively.

Capital gains tax

The CGT annual allowance will be cut from £12,300 to £6,000 for the tax year 2023-24, and further reduced to £3,000 from April 2024. For business owners who are poised to make significant gains, this reduction will have little impact, but those making small gains, such as employee shareholders, will be most affected. This may also increase the administrative burden on those individuals, and on HMRC, as those who would not previously have been required to fill out a self-assessment tax return may now have to do so.

Businesses

Research and development (“R&D”)

While the Government has committed to increasing spending on R&D, small and medium sized enterprises in R&D-heavy sectors will be disappointed by the changes to the tax incentives available to them. The R&D tax credit for SMEs will be cut from 14.5% to 10% from 1 April 2023, and the SME additional deduction for R&D costs will be cut from 130% to 86%. However, the Government has increased the rate of the research and development expenditure credit (“RDEC”), which benefits large businesses, from 13% to 20%. While helpful to large businesses, the RDEC does not benefit startups, as it is these small businesses which rely on the cash repayments provided by the R&D tax credits for SMEs as a source of financing. Given that the Government has announced its intention to consult on the design of a “simplified, single RDEC-like scheme for all”, we can expect further changes in this area.

Energy and environment

Given the current economic and political conditions, the planned increase in the rate of the energy profits levy from 25% to 35% from 1 January 2023 and its extension to the end of March 2028 will not have come as a surprise to anyone in the industry.

The news that a new temporary electricity generator levy – a 45% windfall tax on the “extraordinary returns” of low-carbon electricity generators – will be introduced from 1 January 2023 to 31 March 2028 is likely to be more controversial. Industry experts have expressed concern that this levy will disincentivise investment in renewable energy projects at a time when the Government is trying to encourage it.

The Government also plans to introduce vehicle excise duty on electric cars from April 2025 onwards. While it is arguable that this policy, in removing an incentive to purchase an electric car, is at odds with the Government’s plan to achieve net zero transport, many industry experts believe that this change was inevitable, as the Government will have to find some way to replace the tax which it currently receives from petrol and diesel vehicles when the sale of those vehicles is banned in 2030.

Conclusion

Given that many of Hunt’s proposals had been released in advance of the budget, little in it came as a surprise to the markets, and accordingly there was no real economic shock following his announcements. As such, the Chancellor can take solace in the fact that his budget did not have the grave and immediate consequences that his predecessor’s did. However, it remains to be seen whether it will be enough to support the ailing UK economy through a period of soaring inflation, conflict and instability in Europe, and a cost of living crisis.