Chancellor Rishi Sunak delivered his budget dubbed best of both worlds budget on Wednesday. His announcements speak of a confidence in economic growth and official forecasts adjusting to signal more favourable predictions.
Best of Both Worlds Budget
Despite Mr Sunak’s business boosting announcements offering the best of both world budget, the Institute for Fiscal Studies says that average real wages will be lower by 2026 than in 2008 as the UK faces a squeeze on living standards between stalling wages and high inflation. Inflation is expected to reach 4.4 per cent next year, fuelled by post-pandemic supply chain disruption and rising energy prices, the Office for Budget Responsibility warns. Mr Sunak said the pressures caused by supply chains and energy prices “will take months to address”. In its report prepared for the Budget, the Office for Budget Responsibility (OBR) altered its prediction for economic growth in 2021 to 6.5%.
The chancellor used his best of both worlds budget to wrap up his £407bn of emergency spending during the pandemic, while acknowledging that the fight against Covid is not over yet. But his “mission” now is to cut taxes before the next general election. Mr Sunak also announced significant changes to fuel duty and alcohol duties: fuel duty will be frozen at 57.95p per litre for 2022/23, and drinks will be taxed in proportion to their alcohol content, making the system ‘fairer and more conducive to product innovation in response to evolving consumer tastes’. Meanwhile, the government will give £11.5 billion to help build up to 180,000 affordable homes, whilst an additional £4.7 billion will be invested in the core schools budget in England. Announcing the allocation of the first round of the Levelling Up Fund, the chancellor committed £1.7 billion of local investment in local areas, whilst the UK Shared Prosperity Fund will provide £2.6 billion to help people find jobs. The chancellor made a record number of pre-announcements in recent days, making this a technical budget. The ‘rabbit in the hat’ announcement that he held back was a change to universal credit, which will mean that people keep 45p of every extra pound they earn from December, rather than the 37p they keep at present. He called it a “£2bn tax cut for the lowest-paid workers in the country”. This follows the recent ending of the £20 a week top-up, which represented £6bn in financial support for families reliant on the system.
What New Policies Have Been Announced?
Here we identify what has been freshly announced on in the best of both worlds budget:
Tax on Dividends
The first £2,000 of dividends is chargeable to tax at 0% (the Dividend Allowance). Dividends received above the allowance are taxed at the following rates for 2021/22:
- 7.5% for basic rate taxpayers
- 32.5% for higher rate taxpayers
- 38.1% for additional rate taxpayers.
In September 2021 the government announced an increase to the rates of dividend tax by 1.25% from 6 April 2022 to help fund the new planned investment in health and social care. The new rates will therefore be
- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers
- 39.35% for additional rate taxpayers
Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the Dividend Allowance. To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed. Dividends on shares held in ISAs and pension schemes are not subject to dividend tax and thus will not be affected by the increase in rates.
The Universal Credit taper rate is reduced from 63% to 55%, meaning Universal Credit claimants will be able to keep an additional 8p for every £1 of net income they earn.
Pension Age Increase
From April 2028 an increase to the normal minimum pension age will come into effect. The earliest age that most savers can access their pension savings without paying a fee will rise to 57. The current age is 55. This measure will affect individuals born after 5 April 1973 whose earliest date to access their pension benefits will see a two-year delay to those born on or before that date.
National Living Wage (NLW) and National Minimum Wage (NMW)
The government will increase the NLW for individuals aged 23 and over by 6.6% from 1 April 2022, following the recommendations of the independent Low Pay Commission. The government has also accepted the recommendations for the other NMW rates to be increased.
From 1 April 2022, the hourly rates of NLW and NMW will be:
- £9.50 for those 23 years old and over
- £9.18 for 21-22 year olds
- £6.83 for 18-20 year olds
- £4.81 for 16-17 year olds
- £4.81 apprentice rate for under 19s, and 19+ in their first year
Making Tax Digital for Income Tax
Making Tax Digital (MTD) is the incoming system that requires businesses to maintain digital accounting records. Sole trader businesses and landlords with business income of more than £10,000 per annum it was expected, would be required to enter the MTD regime for income tax purposes from 6 April 2023. HMRC recently announced that this will be delayed until 6 April 2024. Early adoption of digital record keeping and voluntary submission of MTD for income tax data remains possible. Following the deferral for sole trader businesses and landlords, general partnerships will not be required to comply with MTD for income tax until 6 April 2025 and the date other types of partnerships (for example limited liability partnerships) will be required to comply will be confirmed in the future.
Residential Property Developer Tax
From 1 April 2022 a new tax will be charged on company profits derived from UK residential property development. This will be charged at 4% on profits exceeding an annual allowance of £25 million. For companies that are part of a group, the £25 million allowance will be allocated by the group between its companies.
The government will temporarily increase cultural tax reliefs for theatres, orchestras, museums and galleries between 27th October 2021 to 31st March 2024. This increases the relief organisations can claim when they invest in new productions and exhibitions. Adjustments will also be introduced to help target the cultural reliefs and protect the scheme from abuse, which will apply from 1 April 2022.
Research and Development Relief Reform
Reform to Research and Development (R&D) tax reliefs for companies will support modern research methods by expanding qualifying expenditure to include data and cloud costs, refocus support towards innovation in the UK and target abuse and improve compliance. Effective from April 2023.
Cross-border Group Relief
The government is aligning corporation tax group relief rules relating to European Economic Area (EEA) resident companies, with those for non-UK companies resident elsewhere in the world, following the UK’s exit from the European Union (EU). This applies to accounting periods ending on or after 27th October 2021.
Online Sales Tax
We have heard the introduction of an online sales tax talked about before. Now the government has announced that it plans to consult and explore the arguments for and against the introduction of an ‘Online Sales Tax’. They state that should such a tax be introduced in future, it would be to raise revenue to fund business rates reductions.
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