Robert Young, Hanover Financial Management, pensions and employee benefits specialist reflects on the latest budget update and dissects what these changes actually mean for individuals with businesses, pensions, savings and investments.
Pensions
Pensions tax relief
There are two ways in which tax relief is granted on employee pension contributions, net pay and relief at source. Currently, low earners receive tax relief under the relief at source method as the pension providers claim the 20% basic tax relief directly from the Government. As a result low earners who pay little or, no tax still receive the tax credit.ar
However, under the net pay scheme, pension contributions are deducted from pay before tax is calculated so higher earners receive tax relief at their highest marginal rate directly in payroll but lower earners who pay little or no tax lose out.
The Government have stated that they will introduce legislation to make top-up payments directly to the pension arrangements of low earning savers. It is anticipated that payments will start to be paid from 2025 to 2026 in respect of contributions made from 2024 to 2025. This will bring the two tax relief methods into line.
Allowances
No changes have been proposed about the annual allowance or money purchase annual allowance which remain at £40,0000 and £4,000 respectively.
The Lifetime Allowance is to remain fixed at this year’s amount of £1,073,100. It will no longer rise in line with the Consumer Price Index (CPI). This will not just impact high earners, but particularly in the short term will impact long-serving employees at a senior level in the medical and teaching professions.
This means more pension savers may be impacted by the LTA charge so this is an important issue to consider in deciding how to take retirement benefits.
Green NS&I product
The Chancellor announced in the budget a “Green Bond” launching in the summer by National Savings and Investments (NS&I). These bonds will raise funds for “green” projects and help the country on its journey to being carbon neutral, while at the same time helping to boost saving. The terms are not yet known but with government backing through NS&I it is anticipated these will prove to be popular, given the growing demand for sustainable investments.
National Insurance
The previously announced increase in National Insurance contributions to help cover the increasing cost of social care and the funding of the NHS was confirmed. National Insurance contributions will increase by 1.25% for the 2022/23 tax year.
Although National Insurance rates will return to current levels on 6 April 2023, the extra 1.25% will remain but as a separate Health and social care levy which will be ring-fenced to ensure that the funds raised are used for social care and the NHS. Unlike National Insurance contributions, this levy will apply to those over State Pension Age.
Employers pay on earnings over the Secondary Threshold and this will increase from £8,840 in 2021/22 to £9,100 in 2022/23.
Other
Employees currently pay 12% on earnings between the Primary Threshold and Upper Earnings Limit and 2% on earnings over the Upper Earnings Limit. So these rates will rise to 13.25% and 3.25% respectively. The Primary Threshold is £9,568 in the current 2021/22 tax year and will rise to £9,880 for 2022/23 and the Upper Earnings Limit which is £50,270 for 2021/22 will remain frozen at this level.
Salary exchange arrangements where an employee elects to give up salary in return for a higher employer pension contribution, offer National Insurance savings for both employees and employers and the maximum potential savings will rise significantly in 2022/23. Employers who have not previously considered this should now do so.
Dividends
In order to help fund social care and the NHS, dividend tax rates will also rise by 1.25% from 2022/23. The £2,000 dividend allowance will remain but thereafter the tax rates will be:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers
- 39.35% for additional rate taxpayers
Shareholding directors will be used to managing their remuneration strategy with a mix of salary, dividends and employer pension contributions. Many will have adopted a strategy of main dividends and although this is likely to remain more tax-efficient than paying salary, the position should be reviewed in the light of these changes to determine the impact on post-tax income. Pension contributions remain even more tax-efficient up to the annual allowance.
Income tax
In England, the personal allowance and basic rate tax bands will remain frozen for 2022/23 so the personal allowance remains at £12,570 and higher rate tax will start to be paid on income over £50,270. Scotland and Wales set their own rates.
The tapering of this relief for those earning over £100,000 is to remain so that £1 of the allowance is lost for every £2 of income over £100,000 reducing to zero once income reaches £125,140. The effective tax on income in this band is 60% so employees with income at this level should certainly consider making additional pension contributions or exchanging income for additional employer pension contributions.
Inheritance tax
Tax (IHT) threshold is to remain frozen at £325,000 and the residential nil rate band will also be fixed at £175,000 until 5 April 2026. The result is that more and more people will fall into the IHT net so now is a good time to take advice and review what actions you can take to reduce or remove your liability to IHT.
Capital Gains tax
The annual exempt amount is to remain frozen at £12,300 until April 2026.
State pension
The Budget confirmed that the earnings element of the triple lock will not apply for 2022/23 so the increase will be 2.5% or the increase in CPI which for September was 3.1%. As a result of this the New State Pension is anticipated to rise from £179.60 per week to £185.15 per week in 2022/23.
With costs such as energy costs rising significantly and much faster than the inflation index, and energy costs being a major expense for many retired people, this change is likely to have a significant impact on the standard of living for many who are retired.
Normal minimum pension age
The Budget confirmed that the previously announced change would proceed and legislation is to be included in the Finance Bill 2021-22. This will increase the earliest age at which most pension savers will be able to access their pension arrangements without incurring an unauthorised payments tax charge, from age 55 to age 57. This increase, however, is not to take effect until April 2028.
Aspects of the budget relating to businesses and business owners
Corporation tax
It was confirmed that the Corporation Tax rate is to increase to 25% but only for financial years beginning on or after 1 April 2023 and for businesses with profits over £250,000. For small businesses with profits below £50,000, the rate will remain at 19%. There will be marginal relief introduced for businesses with profits between £50,000 and £250,000. Businesses both incorporated and unincorporated will be able to carry back trading losses for three years rather than just one year in 2020/21 and 2021/22 subject to certain thresholds. Businesses should look at the fine details of these changes and take advice on their impact.
Support for hospitality and leisure businesses
Recognising that the hospitality and leisure sectors have been particularly hard hit through the recent lockdowns as a result of the coronavirus, the Chancellor announced measures that should enable 90% of businesses in these sectors to receive at least 50% off their business rates in 2022/23.
In addition, it was announced that the business rate system would be reviewed and reformed to make it fairer, more responsive ad more supportive of investment.
Research and Development (R&D)
To ensure that the United Kingdom remains at the forefront of innovation, an increase to £20bn in public investment in R&D by 2024/25 was announced which represents around a 25% increase.
Plans to reform R&D tax reliefs to support modern research methods and further support to private R&D investment by increasing the funding for core Innovate UK programmes were also announced. The changes will also be designed to be more focused on domestic activity.
Shipping
The budget announced the first reform to Tonnage Tax since 2000, with changes to be introduced from April 2022. The changes aim to attract ships to register in the UK and for more shipping companies to base their headquarters in the UK, use the UK maritime services industry and fly the UK flag. The changes have been generally well-received by the UK maritime industry as a move to strengthen the UK maritime industry.
To discuss the impact of the budget on your business, investments, pensions or savings please get in touch. We will be happy to discuss your requirements and ensure your funds are working effectively for you.
For more financial advice, don't hesitate to get in touch with a member of our team.
Hanover Financial Management Limited is an appointed representative of Culver Financial Management Limited which is authorised and regulated by the Financial Conduct Authority No. 114852. Hanover Financial Management Limited is registered in England and Wales with number 8586887. Culver Financial Management Limited is registered in England and Wales with number 01157569. The Financial Conduct Authority does not regulate tax advice or trusts. The value of investments can fall as well as rise. You may not get back what you invest.
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