Spring Statement 2022Tax
The Chancellor, Rishi Sunak, has today delivered his Spring Statement, whereby he announced plans which he put forward as following three main ‘themes’; helping families with the cost of living, boosting productivity and growth in the private sector, and sharing the proceeds of growth fairly by reducing income tax rates and national insurance.
Below is a summary of the key tax related measures and announcements:
National Insurance thresholds
The annual National Insurance Primary Threshold and Lower Profits Limit, for employees and the self-employed respectively, will increase from £9,880 to £12,570 from July 2022.
This will align the national insurance thresholds with the personal allowance for income tax, meaning individuals can earn up to these thresholds without paying any income tax or National Insurance.
Whilst it is unusual for such thresholds to be changed part way through a tax year, the commencement date of July is to allow payroll software developers and employers time to update their systems.
Directors in particular may wish to consider the impact of this on their remuneration planning in future years and potentially increasing their salary up to this increased threshold.
Reducing Class 2 National Insurance payments for low earners
From next month, self-employed individuals with profits between the Small Profits Threshold and Lower Profits Limit will not pay class 2 National Insurance Contributions (NICs).
This means the threshold, below which self-employed individuals do not pay National Insurance, is equivalent to an annualised threshold of £9,880 between April to June, and £12,570 from July.
Increasing Employment Allowance
The Employment Allowance will increase from April 2022, meaning eligible employers will be able to reduce their employer NICs bills by up to £5,000 per year, increasing from the current allowance of £4,000.
Eligible employers are those who had employer’s Class 1 National Insurance liabilities of less than £100,000 in the previous tax year.
Basic rate of income tax
From April 2024, the basic rate of income tax for non-savings, non-dividend income, will decrease from 20% to 19%. This is the first cut in the basic rate of income tax in 16 years.
Research and Development tax relief
There were already some reforms announced in the autumn budget in regards to research and development (R&D), including expanding the scope of what counts as qualifying expenditure to include data and cloud costs, and refocussing support towards innovation in the UK.
These changes are expected to take effect in April 2023.
Further intended reviews were announced today, including a review of all R&D reliefs to ensure the UK remains a competitive location for research whilst tackling abuse of the reliefs.
One area they may look at is aligning the R&D schemes available to SMEs and large companies, as currently SMEs have a far more generous tax relief for R&D.
Currently, the SME scheme provides for a potential tax saving of £24.70 for every £100 of qualifying expenditure, whereas the large scheme only gives between £10.53 and £13.00 of tax relief on every £100.
They may look to make the large company scheme more attractive; however, the longevity of the SME scheme appears to be under question with the government stating they will ‘consider what more can be done to tackle abuse of R&D tax reliefs, particularly the SME scheme’.
Many will recall that there was a temporary “super deduction” announced in the March 2021 budget, allowing companies to claim tax relief of 130% on “main rate” capital expenditure (such as machinery) and 50% on “special rate” capital expenditure (such as integral features within a trading premises).
This is expected to cease from 31 March 2023.
On top of the super deduction, there is the ‘annual investment allowance’ which is a first year capital allowance that allows a deduction from taxable profits at the rate of 100% on expenditure on plant and machinery of up to £1,000,000 per annum.
This is set to reduce to £200,000 from 31 March 2023.
These reductions to capital allowances are expected to take effect at the same time as the main corporation tax rate increases from 19% to 25%, which could have a significant impact on businesses’ tax bills.
The government acknowledges that more needs to be done ahead of April 2023 to encourage business investment.
No firm decisions have been made in this regard; however, some areas they may look at include permanently increasing the annual investment allowance, increasing the rate of writing down allowances, or introducing some further first year allowances similar (but slightly less generous) to the super deduction.
Enterprise Management Incentive scheme
Enterprise Management Incentive (EMI) schemes are an employee option scheme used by many SMEs to help retain and reward key employees in their business tax efficiently.
There is a similar scheme, the Company Share Option Plan (CSOP), which is not as widely used, mainly because employees can only be granted options over £30,000 worth of shares, whereas under EMI this limit (at grant date) is £250,000.
However, companies can only implement an EMI scheme if they are below a certain size (being fewer than 250 employees and less than £30 million of gross assets), whereas CSOPs do not have such restrictions.
The CSOP scheme will be reviewed to support companies that grow beyond the EMI limits.
One way this might be reformed is to increase the £30,000 limit to make the scheme potentially more lucrative for employees.
Zero-rating for domestic installation of energy saving materials
The current law sets a reduced VAT rate of 5% for the supply and installation of energy saving materials; if the supply of the materials and installation are being made by the same person. In addition, the law restricts the relief to installations that are seen to fulfil “social policy” or the cost of the materials does not exceed 60% of the final charge for a residential installation.
A European ruling also excluded wind and water turbines from the definition of energy saving materials (ESM) in 2019.
Today’s announcement states that not only will wind and water turbines become ESMs again, the ‘complex eligibility conditions will be removed’, as well as the rate dropping from 5% to 0%. The measures will take effect from 1 April 2022 for five years, so the supplies will return to 5% on 1 April 2027.
So, from 1 April 2022, the 0% rate:
- Will no longer be restricted by the social policy conditions or the 60% test
- Include wind and water turbines as ESMs
If you have already paid a deposit on supply and installation works that are to take place after 1 April, you should contact your supplier to discuss the impact of this VAT reduction.
It’s important to note that this extension to the zero-rate does not apply in Northern Ireland due to the NI Protocol, but funding equivalent to the VAT reduction will be paid to the NI Authority to enable a fiscal level playing field.
Fuel Duty Cut
From 6pm on 23 March 2022, a fuel duty cut of 5p per litre will be implemented throughout the UK (including Northern Ireland). This is to apply to petrol and diesel is to be in place for a 12-month period.
Our team are of course here to help if you wish to discuss any of today’s announcements in more detail.
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