I was particularly keen to understand what The Chancellor had planned to address the cost of living crisis in the UK. War in Ukraine compounds issues facing the country, following first Brexit and then COVID-19. On one hand, clearly, there is a need to recover the Treasury’s purse after hundreds of billions of pounds were spent supporting businesses and individuals across the country. On the other, the cost of living crisis means the UK is arguably not exactly primed to take on consequential tax rises that are not properly thought through.
In his Spring Statement, The Chancellor announced a few measures, and whilst it will provide some relief, does it go far enough? Below are six key points from the budget and how they will affect you and your businesses.
1. National Insurance Primary Threshold increasing to £12,570 (the same as the income tax allowance)
The biggest change is the increase in the threshold for paying National Insurance for both employees (the Primary Threshold) and self-employed persons (Lower Profits Limit). This is the point at which these people start to pay National Insurance. Whilst this will provide an immediate benefit in pay packets, the benefit begins to erode away with the new 1.25% percentage point increase in National Insurance coming into effect from April, with what is known as the Health and Social Care levy. For an employed person, we calculate that anyone earning less than £41,389 per annum will be better off, anyone earning above this figure will be worse off.
2. Employers thresholds appear to be staying the same, however, the employment allowance will be increased to £5,000
Eagle-eyed readers will note I specifically mentioned employees and the Primary Threshold. For employers – and I’m thinking particularly for owner-managed businesses here – there is a different offering, in that the Employment Allowance has been increased from £4,000 to £5,000. It’s a little harder to explain the impact on businesses here. Each business has its own considerations around Employer’s NI. However, in a similar fashion, the benefit will taper away if you have a higher Employer’s NI bill because of that same levy.
If your Employer’s NI bill was £4,500 for example and you utilised that £4,000 allowance, then you’ll be saving money. I work out, broadly, the breakeven to be just over £16,000 in Employer’s National Insurance before the Health and Social Care levy begins to pinch and exceed that extra £1,000 benefit.
3. Basic rate income tax to fall in April 2024 to 19%
One of the big announcements was the cut in the basic rate income tax band from 20% to 19%, which will come into effect in April 2024. That’s over two years away and this delay is in my view deliberate, to give the government headroom to find the funding for the tax.
This is going to give the average taxpayer a £175 a year saving, but the timing being in two years means it’s not going to affect pockets today and will not do anything to support the cost of living crisis we’re feeling right now.
4. Reforms to Capital Allowances & R&D
The UK falls a little below other countries when it comes to capital spending as a percentage of GDP and the Chancellor is looking to address this.
Limited Companies at the moment are benefitting from something called the Super Deduction which grants an extra 30% on the value of qualifying spending for tax relief purposes, however, this is coming to an end in April 2023. In place of it, the only ‘incentive’ to spend on capital is to offset a rising rate of corporation tax to 25%. This was why the measure was brought in place; to avoid deferring large capital purchases until this tax rate increases.
The Chancellor recognises this, so we will keep our ears open for further announcements on how to encourage the UK to spend more and spend big in the coming years.
5. Fuel Duty
The dependence on Russian energy has driven up fuel prices across the country. I worked out the other day, for example, a tank of fuel is now costing me £20 more a time than it did a couple of years back; and I’m fortunate enough not to need to travel every day!
To alleviate this, a 5p reduction in fuel duty per litre (6p if you add VAT on that), came into effect at 6 pm on the 23rd of March.
6. VAT
Energy-saving materials now benefit from zero rate status, such as solar panels, heat pumps, and insulation. Encouraging both energy efficiency and greener energy sources, these measures in theory are designed to work to help reduce the UK’s carbon footprint and lessen our dependence on fossil fuels.
Is it enough?
The Chancellor had to strike a balance as mentioned earlier and, in my opinion, he’s put in place a few things now which will reduce the burden slightly, stealthily reversing some tax raises through these changes. It’s important to remember his statement in that context.
National insurance changes are essentially nullifying the earlier planned increase for the Health and Social Care levy for some, employed in such a way that those on lower incomes will see a net benefit now, even with the levy in place. It’s also too early to talk about the reduction in income tax. Two years is a long time in this day and age, so whether it’s going to be as effective or not by then remains to be seen.
Duty reductions on fuel are also a little bit of an illusion; the VAT that the Treasury has collected on the rising price of fuel is going to cover the cost of this duty. My other question is what can be done to prevent fuel sellers from absorbing this reduction within their margins. My local petrol station was a little slow in reflecting the 6 pm change…
I’m excited to know more about what the reforms on R&D and capital spend will bring. The super deduction was a nice introduction but currently, self-employed businesses have no equivalent. Whilst this was a measure geared to deter pausing spending on capital before the corporation tax rise, the acknowledgment the UK is behind the OECD average will hopefully lead to some reform, hopefully with something a little more permanent and available for all types of business.
Finally, the VAT saving on energy-saving materials to me seems an opportunity for our trade clients who currently, or could work with these products. I have long been championing my clients to invest in skills, training, and marketing in these areas. The government is keen to encourage the use of renewables and move away from fossil fuels and this only enhances the opportunity available.
To the average consumer (and I consider myself as this), is it going to persuade me to fit solar panels and a heat source pump into my home? Certainly, a reduction in VAT will help, but I do feel the government needs to do a little more to eradicate gas boilers from homes.
If you want to discuss anything in the Spring Statement, why not reach out to us today.