3 October 2022
The UK chancellor has abandoned plans to abolish the 45% additional rate of income tax on income above £150,000. This announcement follows widespread criticism of the unfunded tax cut from across the political spectrum, and internationally including from the International Monetary Fund, and turmoil in the financial markets. Labour made it clear at their conference last week that they would reverse the abolition of the 45% rate (but retain the cut to the basic rate).
The other headline tax cuts announced at the mini Budget on 23 September 2022 will go ahead – these include the reduction to the basic rate of income tax from 20% to 19% from April 2023, a permanent increase in the 0% band for stamp duty land tax, the reversal of rises in national insurance and to dividend tax rates, and the cancelling of the increase in the corporation tax rate to 25% from 19%.
The justification for the abolition of the 45% additional rate was to help stimulate growth in the economy – one question that remains is whether the government will now look at capital tax reliefs intended to incentivise entrepreneurship and investment in business as an alternative. Extensions to the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) and enhancements to the Seed Enterprise Investment Scheme (SEIS) have already been announced together with the creation of new investment zones, but further changes could be on the horizon. HMRC's statistics show that the capital gains tax (CGT) receipts for 2020/2021 were up 42% from the previous tax year, partly as a result of a reduction in the level of gains that qualify for business asset disposal relief, so the government may consider it has some scope for introducing new CGT reliefs for businesses.
Maintaining the corporation tax rate at 19% (rather than increasing it to 25%) is also intended to encourage reinvestment in business in order to generate growth. However, this measure also benefits families who wish to pool investments and invest for longer-term growth through a family investment company (FIC). Investing through a FIC, which is subject to tax on income and gains at 19%, means a family have potentially over 20% extra income to reinvest compared with an individual investor subject to tax at individual tax rates.
The government has said that it will announce further non-tax changes intended to help stimulate growth in October, with a medium-term Fiscal Plan to follow on 23 November, and a Budget in spring 2023. Even with this U-turn on the 45% tax rate - made because it was becoming a "distraction" – we may well not have seen the last of more radical tax changes.
See our commentary on the mini Budget that took place on 23 September – Not such a 'mini' Budget!