Big spender – balancing the books

Few people will have envied the new Chancellor’s task in setting today’s Budget.

The stated aim was to support ‘working people’. To an extent, the plans outlined do that. Promises not to raise the rates of income tax, self-employed or employee national insurance and VAT have been kept. However the tax-free personal allowance remains frozen until April 2028, which does raise the effective rate of tax paid by individuals over time, even though the tax rates themselves are staying put. (Hitting lower-income taxpayers proportionately harder than those on the highest incomes.) And new national insurance and minimum-wage rates paid by employers will indirectly affect individual workers to an extent, as employers may need to tighten their belts, possibly taking on fewer employees in response. There will also be impacts on consumers, if employer businesses increase prices of their products.

A few ‘crowd pleasers’ for devotees of draught beer, and drivers with gas-guzzler cars. And a slight weighting of certain taxes towards multiple property owners and users of private jets.

Some of the £40bn extra revenue to be raised, which is needed for the very considerable spending outlined, will come from capital taxes. Capital gains tax rates rise, and some inheritance tax reliefs will freeze or decrease in future. And there will be a withdrawal of tax reliefs currently available to non-domiciled UK taxpayers. Capital taxes and those paid by people who are internationally mobile offer more opportunities for (legitimate) tax planning than some other taxes: for example, people may change their decisions about selling assets, rewrite their Wills, or replan a move to or from the UK.

So it will be interesting to see whether the amount raised provides fully for the much-needed big spend, including on health and infrastructure.

‘The rest is drag’

The March Budget featured a cut in the main rates of national insurance. This drops in April 2024 to 6% for the self employed, and to 8% for employees.

This is a quick way to be seen to boost after-tax income for earners. However, most other rates and allowances are static. In particular, the tax-free personal allowance is frozen, and the basic rate band remains the same. The tax-free thresholds for lower-income trades and for savings have not moved, and the allowance for tax-free dividend income is halved. At a time when we have been experiencing high inflation, this ‘fiscal drag’ catches more taxpayers into higher rates of tax, and means that some who have not previously needed to submit tax returns will need to start to do so, without their financial circumstances having changed.

The VAT registration threshold goes up £5,000 to £90,000. This is welcome, but long overdue as it has not risen since 2017, and was due to be reviewed in 2022.

The move to abolish Class 2 National Insurance is a welcome simplification. This has taken some years to work through, and has caused a good deal of administrative hassle to HMRC, taxpayers and advisers along the way.

Year-end planning suggestions include the following:

  • Consider pension top ups or charitable donations before 6 April, so that these fit into the 5 April 2024 tax return. For taxpayers whose top rate of tax is 40%+, these can save tax during 2025.
  • For families with children, the changes to child benefit rules mean that less of this will be taxed away. Child benefit applies for households with a child up to 20 years old, if they are still in education. You can check here whether you are eligible.
  • The start of April is the time to begin gathering records for the next tax return. Most banks offer options to download statements in pdf or spreadsheet (Excel or .csv) format. I suggest doing a whole-year download and keeping both. A .csv version can be a useful starting point for checking transactions for the tax return. There is no need to download month by month: A download from 1 April 2024 through to 5 April 2024 should cover all relevant transactions.

HMRC’s Making Tax Digital project for income tax returns stretches further into the future. The two key suggestion to be reasonably prepared are:

  • Ensure you have a personal tax account and can log in. HMRC will use these increasingly and there is certain information tax advisers are not able to access, which taxpayers can see by using their HMRC login.
  • Keep self-employment records on a spreadsheet, or in a software program which records each transaction individually (and which can be downloaded or exported, to work on for the tax return).

Ides of March

HMRC staff scheduled strike action for today. Not the most auspicious backdrop to today’s Budget.

Jeremy Hunt has been Chancellor for five months now. It feels longer than five months, maybe because the UK has been getting through its Chancellors quicker than a disappointed customer at an evening’s speed dating.

Looming large for many of my clients is the impact of the recent cuts in funding to the arts. These have been badged as a levelling up, however together with the reduction of funding for arts subjects in Higher Education, they are devastating for many individuals, and a heavy blow for creative and performing arts in and around London in particular.

Key income tax rates and allowances can be seen here. Much was made of the welcome but limited measures to help lose on benefits and lower incomes, families with childcare costs, and of plans to curb inflation which potentially will help anyone struggling with increased costs of living. The lifting of certain limits on pension contributions is largely a response to senior health workers choosing to retire early rather than stay in work, after previous changes to the rules on taxation of pension contributions backfired. Preannounced but not mentioned are static or decreasing tax thresholds. On top of high inflation, this means that more people will pay more tax next year.

End of tax year planning and actions

Make sure you are signed up to HMRC online services with Gateway access and a ‘Tax Account’ here if you aren’t already. (Or retrieve your login details if you need to!) This is becoming essential as more and more tax information and organisation is done online.

For any clients whose 2023 payments on account we reduced, check whether the estimates we used still seem realistic, depending on how recent months have gone. If income has been better than expected, that’s great, but if the payments on account were reduced, it is worth checking whether in hindsight, these should be readjusted.

The capital gains tax tax-free allowance is reducing to £6,000 this April, then to £3,000 in April 2024. Anyone with sales at a gain coming up (such as investment properties, or valuable instruments which have gone up in value), to get the current, higher allowance, the sale needs to be done (or at least unconditional contracts exchanged) by 5 April this year.

Anyone unsure whether they have a complete record of national insurance payments since 2006, do check your NIC record online or by phoning 0300 200 3500. It is possible in some cases to make additional, voluntary contributions if you wish until July of this year. Details are here.

For clients with 31 March or 5 April accounting dates, consider spending on tax-deductible items you are planning to buy in the next few months during March, to get the benefit of these in the next tax return.

For taxpayers who pay tax at 40%, consider making an extra payment into your personal pension or your chosen charities to arrive by 5 April, to save tax in the 2023 tax return. For clients who are not usually higher-rate taxpayers but have had increased income recently, we can run a quick estimated calculation to help you think about making pension or charity payments (and for pension payments, to make sure you stay within the current limits for tax relief).

Pushbacks

The change to how tax-return information is provided, Making Tax Digital, has been delayed again. April 2026 is now (for now) the planned start date. The current plan is for quarterly returns via spreadsheets or software from most self-employed taxpayers and landlords, with a ‘mop-up’ submission to bring everything together and make any amendments needed to the quarterly information.

Still going ahead are the new rules pushing self-employed taxpayers towards a 31 March or 5 April accounting year end if they don’t use this already.

More time has been given for taxpayers to pay extra voluntary National Insurance Contributions, to fill any gaps in their NIC record and secure entitlement to the State Pension. Details here, including information on how to check whether your NIC record is fully up to date. This is especially important for clients who have had form A1s for work outside the UK in past years, since this can interfere with how Class 2 national insurance is collected or billed. Extra payments can now be made until this July. Anyone not sure how up to date their NICs, check your NIC record as soon as possible, to give time to decide on and pay any top-up they choose to make to their NICs.

A Budget by any other name

New Chancellor in the House.

Key points for individuals from today’s announcements are:

  • the removal of this July’s national insurance rise. That comes in November, which will be a significant challenge for payroll departments to put in place in only six weeks. Taxpayers who receive income taxed at source under Pay As You Earn should keep a careful eye on payslips received from the second week of November onwards, from which point take-home pay should very slightly increase, back to what it was during May and June 2022.
  • from April 2023, a 1% drop in the basic rate of income tax to 19%. This will match the corporation tax rate which will remain at 19%: whatever anyone’s view of the rate, there are benefits to these being aligned for individuals and companies.
  • the top rate of income tax, 45%, will cease from next April.

The direction is very clearly towards lower, not higher, tax. In the absence of any hint of a ‘wealth tax’, this will be funded by public borrowing – all the more so if the Chancellor’s attempt to assist businesses does not pull the economy promptly out off the current recessionary droop.

Today’s announcement was explicitly not a Budget. It has been referred to as a ‘fiscal event’. Also a ‘mini budget’ – inappropriate given the significant changes. The more serious aspect of how this has been branded is that as a non-Budget, the changes announced are not subject to the same level of Parliamentary scrutiny which is part of the usual Budget cycle.

A real Budget will follow later this financial year. It will be interesting to consider what further will be announced then. Today’s tax drops are a high-risk strategy, so an actual later Budget will be an opportunity to rebalance, perhaps having observed which areas from today cause the most push back. The major tax break promised to those with the highest incomes will not escape the public’s notice during hard times.

 

 

Spring 2022 – not the Budget

The Chancellor has said previously that he prefers a ‘once-a-year’ approach to tax changes. Volatile circumstances have not helped him stick to this resolution.

The Spring Statement is not when significant changes are supposed to be rolled out. However the measures which go some way towards helping with the rising cost of living during such uncertain times are welcome. Fuel duties have been immediately reduced. NIC thresholds for employees change in July so that a larger amount of income is free of NIC, similar to the personal allowance for income tax. However this is against a backdrop of rising NICs, with the new Health and Social Care Levy, effectively an extra form of NIC, to come.

One thing he did seem confident to pre-announce was a planned income tax cut in 2024. So that will be a crowd pleaser, just in time for the next general election. Some things apparently never change.