TaxationWeb’s Lee Sharpe has some points, calculations and guidance on the 2022 Spring Statement.
The Chancellor made his 2022 Spring Statement Speech on Wednesday 23 March.
On the whole, it does not appear to have gone down that well. From a tax (NICs) perspective, one might observe that the Chancellor has shown the mark of a true amateur by returning to the scene of his last crime – not once, not twice, but thrice at least. I suspect that professionals and public will find different routes to the same verdict, but they do say that God loves a trier so, with that in mind, let us examine the evidence and at least try to pend judgment ‘til the end.
The Speech Itself
I think it would be fair to say that Mr. Sunak is more of a politician than he is a Chancellor, and that the speech was made with more than just one eye on career development (and I don’t mean on his dream for everyone else to enjoy more investment in employee training – more on which later).
I do not want to get bogged down knee-deep in bumfluffery so early on but the speech, while mercifully short, left me with the distinct impression that someone was trying to blame Russia’s invasion of Ukraine for having messed up their plans. That doesn’t wash, because we had already been talking about spiralling inflation, the impact of the Health and Social Care Levy, etc., and the squeeze on take-home pay for months before Putin went demonstrably COVID-stir crazy.
In particular, the ‘big reveal’ of a 1% reduction in the Basic Rate of Income Tax from April 2024 reeked of the kind of sleight of hand that you indulge only when it’s your kid’s first attempt at a magic trick, not when it’s a grown adult several years into the job saying that we’ll all soon have to pay a lot more in NICs, etc., but not to worry because he’s pretty sure he’ll be able to deliver a tax cut just before the next election. It feels a bit like he’s promising to get the next round of drinks in while openly rifling through your wallet in front of the entire pub. I think I may have spotted an alumnus of the GG Osborne Finishing School of the Brass Neck.
Anyway, onwards to the Chancellor’s Tax Plan.
Spring Statement Tax Plan
The Chancellor set out three key objectives, being to:
- Help families with the cost of living
- Support growth in the economy, and
- Let people keep more of what they earn (no, seriously)
We shall look at these in turn.
Cost of Living
There are some important – and urgent – developments. It is difficult not to consider them in light of the Chancellor’s various Health and Social Care policy announcements from September 2021, that increased NICs for employees and employers, tax on dividends and introduced a brand new Health and Social Care Levy. It doesn't matter if the Chancellor says he has an alibi from the Russian president: those are definitely his dabs on the weapons used in ithe previous assault.
- Aligning NIC Starting Thresholds (sort of) – the Primary Earnings Threshold will be increased to the level of the Income Tax Personal Allowance of £12,570 (per year), but basically pro rata from 6 July 2022 (to give HMRC and employers time to prepare).
Now, this is a serious amendment and will cost billions a year to introduce and maintain, (so it should save many taxpayers a lot of money), but it has obviously been rushed out at the last minute, to fend off a brewing mutiny over the Chancellor’s last raid on NICs in late 2021, and will be a major headache to implement, part-way through a tax year.
The method of delivery conjures the imaginary scene of some tense dialogue set in the back of a getaway car, just before some unfortunate sidekick’s broken body is bundled out of the passenger door in front of the local hospital A&E, while said car is still rolling. “For the love of God, Rishi, we’ve got to do something – the poor guy needs proper medical attention: he’s not going to make it if you just keep driving aimlessly around town!” pleads Boris, comically-pointless balaclava perched precariously atop his panic-stricken countenance, eyes twitching nervously in the back from one tinted car window to another, on perpetual lookout for the fuzz. I think a few payroll software developers may even be able to smell burning rubber, as Boris the Teflon King and Tricky Rishi make good their escape. Or maybe it’s just their software support phonelines, positively melting in anticipation of the coming July payroll run. Anyhew, it does look like the Health and Social Care Levy will live to fight another day with all its limbs intact, although I wouldn’t bet on anyone wanting to pay good money for a sequel.The Chancellor cannot seem to stop messing with his... mess.
Daydream aside, this strange timing will make NICs quite complex for 2022/23, depending on the earnings period and the date of payment in 2022/23:
|Primary Earnings Threshold -||Weekly||Monthly||Annually||Director|
|On or after 06/07/22||242||1,048||12,570|
Employed earnings paid on or after 6 July 2022 should therefore suffer less NICs at the main rate of 12%/13.25%. Generally, those with regular earnings, or more earnings towards the end of the year, should see tangible benefit. But those who earn mostly in the first few months (such as if made redundant) may not see as much, if at all, since the draft legislation wants earlier payments not to be over-written once the change comes in (but see also directors, who are usually NIC’d on a cumulative basis for the year as a whole).
NICs are triggered only once sums are “placed unconditionally at the employee’s disposal”. I have a feeling that not many bonuses will be voted in the first quarter of 2022/23 but, realistically, given that the Upper Earnings Limit is staying the same, there seems little scope for serious mischief – directors have been catered for specifically with their own annualised limit and HMRC does have powers to make “directions” to employers in the NICs regulations (SI 2001/1004) if things appear to be getting out of hand.
- The self-employed Lower Profits Limit will likewise be raised to £11,908 for the 2022/23 tax year, effective from 6 April 2022 (which is arithmetically equivalent to also adopting £12,570pa from 6 July 2022).
Going forwards, the employed earner’s Primary Earnings Threshold and the self-employed Lower Profits Level will be maintained at £12,570 from 2023/24 and then follow whatever becomes of the Income Tax Personal Allowance. This alignment is the kind of thing that Chancellors have toyed with for many years, and is a key stepping stone to the ultimate harmonisation of NICs and Income Tax. So ironic, really, that the Chancellor has clearly been bounced into such an expensive and momentous decision at such pace. I am optimistic that good things will come out of it, nonetheless.
- Finally for employee NICs, a reduction in Self-Employed Class 2 NICs between the Small Profits Threshold and Lower Profits Limit – Self-employed people with profits of up to the Lower Profits Limit (to be £11,908 for 2022/23, thenceforth £12,570, etc.) will also pay no Class 2 NICs, but will still be able to ‘earn’ their credit (for State Pension, for example) so long as they reach the Small Profits Threshold, to be £6,725. This will apply for 2022/23 and onwards. There is more work to do on this as, so far, the draft legislation merely grants the government various powers to achieve it, without saying much on the how.
Employment Allowance increase – help for employers by increasing the maximum Employment Allowance from £4,000 to £5,000, from April 2022. This is effectively a credit for smaller employers to offset their Employers’ Secondary NIC bills and it will perhaps draw the sting of the NICs hike / Health and Social Care Levy, for the smallest employers, but it seems to me that it has been introduced as a foil for businesses more widely. I think it might have been an attempt to distract businesses from realising that, while the above NIC changes do much to reverse the impact of the NICs hike/Health and Social Care Levy for individuals, businesses are still looking at some serious additional costs starting in 2022, and even worse for Corporation Tax from April 2023. But if it was (were) such an attempt, I don’t think it has worked.
Fuel Duty reduction – 5p off per litre (petrol or diesel) for 12 months from 6pm on 23 March 2022. That is basically returning the extra VAT that the extra Chancellor has been making on the rise in forecourt prices so far this year (for diesel, at least). So, again, not much really to be grateful for.
VAT on Installation of Energy-Saving Materials – a new 0% or zero-rate of VAT will apply from 1 April 2022 and last for five years to 31 March 2027, at which point expenditure on such installations will revert to the more standard 5% reduced rate, by default – unless the government decides otherwise in the interim.
Energy-Saving Materials and their installation include:
- Solar panels – thermal and photovoltaic
- Heat pumps – ground- or air-sourced
- Turbines – wind or water, are back on the list
- Draught stripping and insulation
- Controls for central heating and hot water systems, including thermostats, thermostatic radiator valves and timers
- Micro combined heat and power
- Wood-fuelled boilers
At first blush, this is another quite serious measure, and millions of homes could benefit. This is clearly a “green-friendly” policy and should significantly cut the cost of installing energy-efficient measures in residential properties. But it will apply only to the overall (supply-and-fit) cost of installing such items.
So, if I pay someone to install solar panels, they can apply 0% VAT to their sales invoice to me for the panels and their installation. That should mean a significant reduction in my project cost (assuming inflation doesn’t get there first) but if I buy the panels to install them myself, then I have to pay 20% standard-rate VAT. The Tax Impact and Information Note projects that this new measure will cost the Exchequer (and thereby save homeowners) only £50million - £60million a year, which is a tiny sum compared to the cost of putting the UK’s entire housing stock on a more carbon-neutral footing – that will be £billions.
I would add that we are still waiting to hear about whatever is supposed to replace the car crash that was the Green Homes Grant. I do hope that this isn’t it, otherwise we are missing a couple of noughts on the end of those projected tax savings (the Green Homes Grant was supposed to be worth £billions). I suppose it could just be a small error by HMRC in its TIIN calculations (such as not factoring in the removal of the "social policy" requirement that heavily curtailed eligibility). Wouldn’t be the first time.
Boosting Growth and Productivity
The Chancellor has pulled some impressive buzzwords out of his focus group. The Plan devotes two whole pages to setting out how the UK government intends to deal with some of its most serious long-term issues:
Capital – a commitment to do something to address the chronic lack of capital investment by private business, once current measures such as super-deductions and the enhanced £1million Annual Investment Allowance run out of steam.
People – a stated ambition to encourage more employee training (but no mention of the self-employed)
Ideas – a commitment to promote R&D by adding mathematics activities to the pool of costs, (as well as cloud and data costs, which got the official nod in November 2021), and a partial climbdown on enforcing UK-only activity, so the government will continue to allow claims for non-UK R&D, basically where it cannot be undertaken here (such as deep ocean research, or clinical trials being co-ordinated in another country)
A couple of quick points on growth and productivity:
- When it comes to capital investment and Capital Allowances, the government is expressly contemplating rewinding the reduction in tax relief in the special rate pool in 2019 (i.e., moving it from 6%pa back up to 8%pa) and the reduction in the main rate pool from as far back as 2012 (i.e., from 18%pa back up to 20%pa).
Simplistically, if you look back and in particular past the temporary distracting measures of boosting the Annual Investment Allowance for a year or two, or the simply-super-deduction that really only tries to encourage businesses not to freeze capital investment for a couple of years before the Corporation Tax changes in April 2023, then the Chancellor is giving serious thought to just reversing most of the underlying structural Capital Allowances strategy of the last decade.
- When it comes to R&D tax incentives, the Chancellor is going to have to reconcile his concerns about how ineffectual the current regime is, with HMRC’s concerns about how claims by SME companies appear to be running away with themselves. I am not saying that HMRC shouldn’t be concerned about some of the smaller company R&D claims out there. But I am suggesting that the answer might actually be to assist and enforce proper implementation of the R&D regime as it currently stands, rather than change the rules. Again.
The Chancellor wants to let people keep more of what they earn by reducing the Basic Rate of Income Tax from 20% down to 19%. But only from April 2024, which is more than 2 years away! Unsurprisingly, this headline has fallen rather flat, given that the public appears now to be all too aware of the crunch that will start in April 2022, and likely get only worse in April 2023.
Don’t Mention the D-Word(s)
One thing notable by its absence is any corresponding mention of a 1% reduction in the dividend Ordinary (Basic) Rate of Income Tax from April 2024. (In fact, page 29 of the Spring Statement has a footnote to the main policy decisions and costings table 3.1 (note 3) which says it relates to "Non-dividend income"). I infer that this is deliberate, particularly given the additional reference to "non-savings, non-dividend income" at 3.9, so OMB company directors/shareholders, already hit hard by the changes to dividend taxation in 2016, and soon to be hit again when Corporation Tax rates are pushed back up with effect from April 2023, will be made worse off again in 2024, when compared to salaried and self-employed earners who are looking at a 1% tax rate reduction. This looks to me like yet another measure that will be forcing directors/shareholders of OMB companies to pay for the pandemic assistance they mostly never received.
As an aside, I doubt landlords will be too pleased about the implications for (whatever remains of) their relievable amounts, come 6 April 2024 either - or when their advisers cotton on, or government intervenes; whichever the sooner (although I don't hold out much hope, on the strength of what commentary I haven't seen so far).
The other issue that seems to have escaped a lot of serious attention is the combination of high rates of inflation and keeping tax thresholds static, a.k.a. “fiscal drag”, where taxpayers are dragged into higher tax bands – or proportionately more so – as their salaries or profits rise to keep pace with inflation. This does not happen where the thresholds and bands are also adjusted for inflation, of course, but can become really quite painful if, say, someone had recently threatened to keep the Higher Rate Threshold at £50,270 until someone agreed to make them prime minister as far out as (and including) 2025/26.
This may be illustrated by the following scenario, where inflation runs at exactly 10% for 2 years – this currently seems quite unlikely but not impossible.
Illustration of Fiscal Drag on Take-Home Earnings
Let’s say I am a working mother with two schoolchildren and a spouse who is a feckless failed writer of nugatory financial means. In March 2022, my annual salary is £45,000, and my take-home pay for 2021/22 has been £34,514. My salary is increased by 10% for 2022/23 to keep pace with inflation. (Let’s also say I have an annual earnings period and will apply the new 2022/23 PET of £11,908 across the board, because I am a shadow director, and I therefore don’t have to do 12 monthly calculations to accommodate when the PET increases in July 2022. Just roll with it: it makes the whole thing much simpler.)
If everything else had stayed the same for 2022/23, my take-home pay on an uprated gross salary of £49,500 would have been £37,574 – an increase of £3,060. Which looks great, but in fact I would have needed take-home pay of £37,966 just to keep pace with inflation, because proportionately more of my income has been taxed and NIC’d. So I would already have fallen almost £400 behind.
Factoring in the introduction of the new NICs part of the Health and Social Care Levy in 2022/23 would actually result in even lower take-home pay of £37,116, which is only £2,602 more than in 2021/22. Fortunately, the hike in Primary Earnings Threshold that the Chancellor just announced in the Spring Statement will also now apply from 6 July 2022, (but annualised for directors), so my take-home pay for 2022/23 will nudge back up to £37,385, or £2,870 more than in 2021/22. But even after the Chancellor’s emergency intervention, I am still about £600 adrift on the previous year’s net salary in real terms, after adjusting for inflation. Just the price of a couple of coffee mugs, if you’re a Chancellor of rather ample means.
Let’s assume that my salary is increased again by 10% for 2023/24 to £54,450 gross. By this point, I would be needing annual take-home salary of £41,762 just to keep pace with inflation, compared to 2 years prior. But this time, my take-home pay goes up to just £39,268, which is a further rise on the previous year of only £1,883, because of:
- Hitting the 40% Higher Rate tax bracket, which is set to stay at £50,270 until 2025/26 – another 2 whole years beyond this little jaunt
- Losing my “Marriage Allowance” from my good-for-nothing husband, (the Transferable Tax Allowance is also pegged to the £50,270 Higher Rate Threshold), and
- Having £838 of my Child Benefit clawed back, thanks to breezing past £50,000 of adjusted net income (another threshold that’s been around for a dog’s age)
So I have ended up with less than half of the extra net income I would need in 2023/24 just to keep up with inflation.
It’s now more like I’ve just been amply mugged by a Chancellor, who’s being rather mean.
|To Demonstrate Effects of Fiscal Drag, Traversing Thresholds||2021/22||2022/23||2023/24|
|Gross salary if inflation @ 10%pa||49,500||54,450|
|Net Salary 2021/22||34,514|
|Net salary ACTUALLY NEEDED if inflation @ 10%pa||37,966||41,762|
|Health and Social Care Levy: Temporary NICs hike||458|
|But: Increase to align NICs starting threshold just announced||( 269)|
|Exposure to 40% Income Tax, earnings over £50,270||836|
|Loss of "Marriage Allowance"||252|
|Clawback of some Child Benefit||839|
|Actual net salary||34,514||37,385||39,268|
|Shortfall on the net salary ACTUALY NEEDED||( 0)||( 581)||( 2,494)|
The italicised adjustments will not add up vertically to give the corresponding shortfall for the year, because there are numerous other components to the changed calculation from one year to the next.
Given that the employer is also suffering an increase in NICS/Levy of 1.25%, it might conceivably be the case that the employer offers to increase gross salary but including employers’ NIC/Levy to keep pace with inflation. The outcome for the employee is then worse, effectively because she has to fund the employer’s increased proportion of costs out of her net salary as well. This is not included in the model.
I have assumed that the new starting threshold for the Health and Social Care Levy proper, in 2022/23, will also be tied to the Personal Allowance of £12,570. It would be somewhat surprising if it were not, under the circumstances.
Assuming earnings exceed £11,908 in 2022/23, the effect of uprating the Primary Earnings Threshold for a director from the previously-planned £9,880 will be to save a fixed amount of £268.71 in the tax year (as per the example). Those earning below £31,377 are better off after the new Threshold alignment, even factoring in the temporary hike in NICs to accommodate for the Levy; those earning more than £31,377 are progressively worse off thanks to the higher NIC rate being charged in 2022/23 outstripping the fixed saving from moving the starting point.
(As an aside, I am aware that other advisers are suggesting the break-even point is as high as £41,389, rather than £31,377. This is cobblers. The correct calculation to adopt when asking if you will pay more primary NICs in 2022/23 despite raising the Primary Earnings Threshold from £9,880 to £12,570 from 6 July 2022 is clearly:
9,880+(11,908-9,880 )x 0.1325/.0125 and NOT 9,568+(12,570-9,568)x 0.1325/.0125 because:
- We already knew that the PET was going up from £9,568 to £9,880 in line with inflation so not factoring it in is careless, and
- Using £12,570 instead of £11,908 assumes all of your earnings will be “paid” on or after 6 July 2022 but that HM Inspector is not going to issue a Direction under the 2001 Regs. to help you / your employer change your minds. Which is crazy – unless you really won’t have actually earned anything at all in the first 3 months of the 2022/23 tax year.)
Mileage will vary for ‘ordinary’ employees – particularly those whose incomes fluctuate significantly from one pay period to another – because the 2022/23 in-year increase in the Primary Earnings Threshold will work a little differently for them. For example, they will get the best out of the uprated Primary Earnings Threshold if their minimum monthly earnings (for the tax year as a whole) exceed £12,570.
For the self-employed, those with profits below £26,509 will be better off after the new Threshold alignment, even factoring in the temporary hike in NICs to accommodate for the Levy. The lower tipping point is because self-employed NIC rates are a couple of points below those for employees :
The pay rises in the illustration for employees above may seem far-fetched but it is important to keep in miind that such large increases each year are in fact absolutely necessary to keep up with high levels of inflation, and even in a good year where salaries confound expectations and do keep up with inflation, static tax bands and thresholds can be a real… drag.
It seems to me that the very late decision to align the starting point of the main NIC rates with the Personal Allowance is a good policy but it is amazing that such a sweeping change, agonised over for so many years by Chancellors of various hue, should be thrown into the pot in such a cack-handed way. I haven’t been able to canvass opinion from anyone running payroll bureaux or software companies, mainly because I don’t think any of them have come down out of orbit yet.
The VAT reduction for installations of Energy-Saving Materials should also be roundly welcomed, but I am a little bit concerned about how small a difference it is forecast to make. Something smells wrong there, and for once I find myself hoping that it actually is a miscalculation by HMRC.
While I have concentrated on the tax aspects of the Spring Statement I will venture that comments such as “…a long-term funding solution for the NHS and social care is not incompatible with reducing taxes on working families”, and “it has been our mission to promote tax cuts for working people and simplify the system”, will not age well. I give it a month or two.
There are numerous references to hard-working families and “keeping more of what you earn” as incentive for people to work hard but there appears to be very little in the Spring Statement to help those on low incomes or on benefits. Encouraging people to work harder, only works if they can.
From a technical perspective, I find it fascinating that this Chancellor seems quite happy to quietly rewind major tax strategy from the last decade or so. This time it is capital investment and Capital Allowances - if not as yet definite, then a definite maybe. But in Budget 2021, he really did unwind his predecessors’ long-held policy of reducing Corporation Tax. This does make me wonder whether some of the most fundamental tax policy changes over the past few years have been founded on detailed research and calculation, or just deeply-held ideology and conviction. I think it is telling that the government appears to be out of any new ideas, but will keep tinkering with policies so that, most of the time, we cannot really work out whether or not they are actually... working out. Maybe that’s the real problem? What implications for government’s approach to taxation policy, if the about-face proves successful? What if - perish the thought - higher taxes do actually mean higher revenue to government? (I am not saying I partiicularly want higher taxes just for fun but rather that we have been told for a great number of years that the secret to unlocking the UK's potential lies in reducing taxes, so that people are incentivised to work harder and produce more, invest more, etc., etc. But - and as I highlighted in my article on Budget 2021 - the old calculus simply does not stand up well against the new).
The glossy Spring Statement Tax Plan is more of a prospectus or manifesto than a serious piece of work. Those in doubt should look at the roadmap at the end on page 9: read that and you’d think we were all headed for sunlit uplands. There is no mention of the much-more-important hikes to NICs and dividend taxation in April 2022, corresponding with the Health and Social Care Levy in April 2023, and the large increase in Corporation Tax rates that will also bite from April 2023. There are roughly 2 million smaller Owner-Managed Business / family-sized companies in the UK, and the effect on the amounts that their owners will be able to take home after the Corporation Tax and dividend changes will be very significant
The 2021 Budget forecast that increasing the Corporation Tax Main Rate to 25% would take more than £17billion a year in extra taxes by 2025/26; freezing the Personal Allowance and Higher Rate Threshold a 'mere' £8billion. I think the government will fight quite shy of revealing just how much extra extra tax it hopes to raise, as a result of snowballing inflation (although the tax will admittedly be worth less, too).
But if the reports in the mainstream press are anything to go by, the public has not been overly swayed by the Chancellor’s cunning Plan. It puts me in mind of a lovely lady colleague with whom I worked many years ago, who once walked out of a meeting and into our shared office with the words “I’m getting a bit sick and tired of the promise of jam tomorrow”. Perhaps Mr. Sunak would have made a more credible performance if he’d not tried quite so hard to cast himself as the Chancellor Who Would Cut Taxes.