The Chancellor, Kwasi Kwarteng, unveiled major changes to tax and National Insurance in a mini-Budget announced on 23rd September. Our Chief Accountant, Emily Coltman, explains the key takeaways for small businesses.
National Insurance rate increase reversed
In April 2022 the rates of National Insurance (NI) increased by 1.25% for one year and the plan was to replace this increase with a Health and Social Care Levy from April 2023.
The increase will be reversed from 6th November 2022 and the Health and Social Care Levy will no longer be introduced as planned.
This means that from 6th November 2022, NI rates will revert to:
- Class 1 Employee’s NI (for most employees): 12%
- Class 1 Employer’s NI: 13.8%
- Class 4 NI for the self-employed: 9%
Class 2 NI for the self-employed was not affected by the increase last time and therefore will not be changed.
Employees whose NI is calculated on a monthly basis will see the changes take effect from their first pay packet after 6th November. HMRC has advised that those who pay NI on an annual basis, such as the self-employed and company directors, will pay revised annualised rates of NI. This rate will be announced at a later date.
Increase in tax rate on dividends reversed
This will be reversed from April 2023, so that dividends will once again be taxed at 7.5%, 32.5% and 38.1% for basic-rate, higher-rate and additional-rate taxpayers - assuming the decision to retain the additional rate extends to dividend income.
Cancellation of Corporation Tax rise
The rate of Corporation Tax was planned to increase to 25% from April 2023, but this rise has been cancelled. The rate of tax paid by limited companies on their profits will therefore remain at 19% for the foreseeable future.
This will mean changes to calculations for the super-deduction, due to be announced at a later date. The super-deduction is the 130% first-year capital allowance for qualifying plant and machinery assets and 50% first-year allowance for qualifying special rate assets.
Cuts to Income Tax rate
The basic rate of Income Tax for England and Northern Ireland will be cut from 20% to 19% from April 2023. It remains to be seen whether this rate will change in Scotland and Wales.
The mini-Budget initially included plans to abolish the top rate of Income Tax - the additional rate levied on income of £150,000 or higher at 45% - from April 2023. But on 3rd October the government announced that the plan to scrap the 45% rate was being abandoned, with the Chancellor saying it had become “a massive distraction”.
Annual Investment Allowance permanent level set at £1m
From April 2023 the limit for the Annual Investment Allowance was set to fall back to £250,000 a year but this will now be set permanently at £1m.
IR35 to be simplified
The Chancellor announced a simplification to IR35, namely that the reforms made in 2017 and 2021 will be repealed from April 2023. This means that it will once again become solely the responsibility of the contractor, not the engager, to determine whether or not their work comes under IR35. The contractor will determine if their work should be taxed as employment income and will be responsible for paying any additional tax and NI.
Energy bills support update
Ahead of the mini-Budget, Business Secretary Jacob Rees-Mogg on Wednesday announced the government’s Energy Bill Relief Scheme, which spells out the details of the support for businesses announced by Prime Minister Liz Truss earlier this month.
Under the scheme, the government will provide a discount on wholesale gas and electricity prices for all UK businesses for a six-month period from 1st October 2022, which they say will be “less than half the wholesale prices anticipated this winter”. Businesses do not need to contact suppliers, as the discount will be applied to their bills automatically.
Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.