The new chancellor has just announced the tax changes in his mini-budget.
Below I summarise the budget’s main points for contractors and limited companies.
Kwarteng’s new plans come with tax cuts and reversals of previously planned tax hikes.
The goal is to boost growth and leave households and businesses with more disposable income.
Time will tell if this will help us weather the storm better…
Here are the main points:
1. Corporation tax to remain at 19%
This is BIG news for limited companies and business owners. In a previous budget, the corporation tax rate was to increase to 25%!
The planned hike would have come with extra headaches for those who own more than 1 limited company, due to the associated company rules.
Kwasi Kwarteng cancelled that. The corporation tax rate will remain at 19%.
UPDATE 2023: This is no longer the case. Corporation tax will be up to 25% in 2023. Read this article to understand how corporation tax works in 2023 and how to reduce it. It contains a free corporation tax calculator, too, to use with your own numbers.
2. Dividend tax rate increase (+1.25%) reversed from April 2023
The higher +1.25% dividend tax is already in place but we will go back to the previous levels starting April 2023.
From April 2023, dividend tax rates will be as follows:
- 7.5% Basic rate taxpayer
- 32.5% Higher rate taxpayer
- 38.1% Additional rate taxpayer
Again, another relief to company owners and investors.
3. Basic income tax rate reduced 20% -> 19% from April 2023
This applies to all UK taxpayers with income higher than £12,570 (personal allowance).
The tax will be lower from April 2023.
This together with the National Insurance contribution hike being cancelled will leave more ££ in taxpayer pockets.
But a more drastic tax cut happened on the higher end of the spectrum.
4. Additional rate income tax down to 40% from April 2023
Currently, high-income folks with >£150,000 of income pay 45% income tax.
From April 2023, this will be cut to 40% except in Scotland (46%).
5. National Insurance rate hike 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 not be introduced at all.
6. IR35 reforms repealed
IR35 legislation taxes the self-employed as if they were employees, if they work in a similar setting.
In theory, this can work. In practice, it’s very hard to apply, vague and unclear.
The recent reforms tried to improve the situation by putting businesses in the driving seat. Businesses had to make the call on whether the consultant/contractor was acting as a disguised employee.
The rules are a mystery even to HMRC. This resulted in unnecessary paperwork, IR35 insurances, more consultancy firms, and more admin costs to businesses and taxpayers.
It mostly ended up with businesses using fewer contractors, often applying blanket inside-IR35 rules and pushing rates higher to attract people.
Now, the IR35 reforms will be repealed and the responsibility for judging the IR35 status will go back to the contractor.
Check out this article if you’re wondering whether you are better off outside IR35 or in a perm role.
7. Stamp duty tax thresholds up
If there’s one place where constant tinkering takes place, this is the stamp duty land tax! They love to touch this, don’t they.
This time the Chancellor increased the thresholds, effectively cutting the tax paid on purchasing homes.
No Stamp Duty on homes up to £250,000 (previously £125,000), first-time buyers only pay Stamp Duty on homes over £425,000 (previously £300,000) & first-time buyers relief available on homes up to £625,000 (previously £500,000).
Other plans include low tax investment zones for businesses, higher SEIS scheme limits, and alcohol price hikes cancelled.
The vision is growth.
It’s a growth plan and to get Britain growing, we need to get rid of the burden of taxation. You can’t tax your way to growth.Mr Philp
Right now the economic situation is not great.
The tax cuts look like a relief in the short term. Longer-term we’re borrowing from future generations / future selves.
Maybe the growth uptick will happen, maybe not.
One criticism is that the new tax cuts will add more pressure to the UK’s ability to pay its debts. This is crucial in a climate where interest rates are rising, which means the debt gets more expensive.
No, the UK government will not default on its debt. It issues its own currency! But it might be forced to print more money to pay it resulting in higher inflation. Add the burden of weak sterling and we have a dangerous situation ahead of us.
The markets did not take the Truss plans well. It’s the first time I see the sterling so weak in my 12 years in the UK.
And I’m not talking about Raheem 😉
A year ago GBP-USD was close to 1.40 so that’s a big drop. A quick google shows the last time so low was in 1985.
We live in a global world. A weak currency is good in countries where exports are high so your trade partners can buy cheap and raise your standard of living. When you’re importing a lot more than you’re exporting, a weak currency can cause problems.
Higher inflation and higher interest rates.
The bond market has not taken the tax cuts with much optimism (10y bonds link).
When faced with uncertainty, the markets will always act in a ‘Sell first, ask questions later’ mode anyway.
On the plus side, this will deliver some income to new bond holders who finally see some of it.
Focusing on what we can control
In 2019 I wrote ‘Does anyone own bonds, nowadays‘? The 10-year yield was 1% per year… Not very attractive admittedly.
But a 4% yield? That’s a different story. Perhaps some people will start owning bonds and the 60/40 portfolio is not dead yet.
I know, I know, inflation at 10% makes a 4% return look like a joke in real terms. But in reality, what’s the risk-adjusted alternative? Fixed-rate deposits at 3% or cash?
Higher interest rates also make overpaying your mortgage another option. This is a tax-free return on your money after all. It is something I consider doing when the remortgage comes due in 2024.
Will I continue to invest in this climate?
Of course, I will. This is the only way to protect our wealth against inflation long-term (and against a dropping currency..).
Focusing on what I can control is key here. Own skills, spending/saving, income, asset allocation, fees.
At some point the interest rates will stop rising, the tide will turn and the world will keep turning.
What are your thoughts?
Will the plan work?
Please share your comments below.