"The Growth Plan" Analysis

The Growth Plan announced on 23rd September 2022 focussed on addressing the impact of soaring inflation and high energy bills.

The plan set out several tax cuts to reduce the impact of increases in the cost of living and to drive economic growth.

Key changes include the reversal of recent National Insurance rate rises, a reduction in the basic rate of income tax, an increase in the stamp duty threshold and scrapping the forthcoming Corporation Tax hike.

See our article here for the main headline announcements and tax changes.

The following focuses on what the changes mean for you from an investment and financial planning perspective.

Income Tax

The Changes

With effect from 6 April 2023:

• the basic rate of income tax will be reduced from 20% to 19%

• the 45% additional rate of Income Tax will be abolished

• the additional rate on dividend income will be similarly abolished

• the basic rate of dividend tax will be returned to 7.5%; while the highest rate of tax applicable to dividends throughout the UK will be 32.5%

A four-year transition period for Gift Aid relief will apply, to maintain the income tax basic rate relief at 20% until April 2027.

Planning Considerations

The abolition of the additional rate of tax that currently applies to those with income in excess of £150,000 means that a personal savings allowance (PSA) of £500 will now be available to anyone earning in excess of £50,270 (basic rate taxpayers will continue to benefit from a PSA of £1,000). All investors should therefore be encouraged to make use of these tax-free allowances.

Owners of UK investment bonds will need to bear in mind that the reduction in the basic rate of income tax means that the basic rate tax credit, given in respect of tax paid by the life company on the underlying funds, will reduce to 19%. This will have an impact on the additional tax payable on termination of onshore bonds by higher rate taxpaying investors who will now suffer an ‘encashment rate’ of 21%.

The reduction in dividend tax rates restores the relative position of Collectives v Insurance Bonds in relation to reinvested income.

As the reduction in the dividend rates of tax do not take effect until 6 April 2023, you have time to plan ahead.

Director/shareholders may want to consider delaying any further extraction of retained profits as dividends until the 2023/24 tax year. This will enable advantage to be taken of the lower rates of dividend tax that will apply from 6 April 2023 - and will be especially advantageous for those who are additional rate taxpayers in the current year.

Where possible, dividends should be tailored to take advantage of any unused dividend allowances and basic rate bands of other family shareholders as well - this will be especially important from April 2023 given that dividends within the basic rate band will be taxed at just 7.5%.

If individuals have a way of postponing receipts of any other sources of income to benefit from the lower tax rates applying from 6 April 2023 they may consider doing so, as potential tax savings could be significant.

In terms of general planning, investing couples should aim to use their dividend and personal savings allowances in full (and ensure that they do not lose out on the ability to transfer the transferable marriage allowance where eligible to do so).

They should also try to arrange their investment holdings in such a way as to fully utilise both personal allowances and starting/basic rate tax bands.

You may also wish to continue to maximise contributions to ISAs and, where dividends are likely to exceed the dividend tax allowance and/or the higher rate tax threshold, give consideration to investing into VCTs (which pay tax-free dividends) and investment bonds (for tax-deferral).

National Insurance

The Changes

The Health and Social Care Levy is being cancelled and the 1.25% increase in National Insurance Contributions (NICs), which took effect on 6 April 2022, is being reversed with effect from 6 November 2022.

Planning Considerations

For employees under pension age who earn less than £242 a week/£1,048 a month, these changes will make no difference - because they don't pay NIC.

Others will benefit from an increase in their overall net pay.

Salary exchange arrangements, where an employee opts to give up salary in exchange for a higher employer pension contribution, offer NICs savings for both employees and employers.

Significant savings continue to apply following the latest changes to NICs rates – helping many employees and employers with the cost of pension funding during the current cost of living crisis.

Employers should consider whether salary exchange will be beneficial for them and their workforce.

Employees who have not taken up their employer’s offer of salary exchange should consider what savings might be available to them.

Dividend Allowance

The Changes

From 6 April 2023 the dividend tax rates will reduce to 7.5% for basic rate taxpayers and 32.5% for higher rate taxpayers.

The dividend allowance will remain at £2,000 for all individual taxpayers.

Planning Considerations

The 0% dividend allowance means that, regardless of your tax rates, a married couple or civil partners can receive up to £4,000 of dividend income with no tax liability, provided that they each have sufficient dividend income to utilise their allowance.

Utilising this allowance remains an important planning tool, especially for higher and additional rate taxpayers.

Business owners should ensure they are drawing income in the most optimal way, taking into account the decrease in dividend tax rates.

Director/shareholders may want to consider delaying any further extraction of retained profits as dividends until the 2023/24 tax year. This will enable advantage to be taken of the lower rates of dividend tax that will apply from 6 April 2023 - and will be especially advantageous for those who are additional rate taxpayers in the current year.

Where possible, dividends should be tailored to take advantage of any unused dividend allowances and basic rate bands of other family shareholders as well - this will be especially important from April 2023 given that dividends within the basic rate band will be taxed at just 7.5%.

Pensions

The Changes

There were no announcements directly related to pensions allowances. However, the changes related to Income Tax and National Insurance rates will have an impact on pensions savings.

Planning Considerations

The removal of additional rate tax from tax year 2023/24 means that this will be the last year in which high earners can benefits from 45% tax relief on their pension contributions.

The decrease in the basic rate of tax to 19% from tax will mean that basic rate taxpayers will need to pay slightly more into their relief at source plans to achieve the same contributions.

For example, an individual will now need to pay £2,916 to achieve a gross contribution of £3,600. However, there is a transitional year which means the change will not apply until 6 April 2024.

The removal of the additional rate of tax will mean that annual allowance charges will now be at a maximum of 40%.

Although nothing has yet been announced, we would expect that the special lump sum death charge that applies to post 75 death payments into trust will reduce from 45% to 40%. We will await confirmation of this.

Any high earners in the additional rate tax band should consider making full use of their annual pensions allowances (plus and carry forward) before the end of the tax year to ensure they benefit from 45% relief.

Whilst the benefits of making contributions via salary sacrifice will reduce slightly from 6 November 2022, it still offers the most tax efficient method of making pension contributions for most employees.

Property Related Tax Changes

The Changes

The nil-rate tax threshold for Stamp Duty Land Tax (SDLT) has been increased from £125,000 to £250,000 for purchasers of residential property who are replacing their main residence.

The nil-rate threshold for First Time Buyers’ Relief is increased from £300,000 to £425,000 and the maximum amount that an individual can pay while remaining eligible for First Time Buyers’ Relief is increased to £625,000.

First-time buyers purchasing property in excess of £625,000 will pay the standard residential rates.

Purchasers of additional residential properties will pay just 3% SDLT on the first £250,000 of the purchase price instead of paying 3% on the first £125,000 and 5% on the next £125,000 .

The revised rates of SDLT will apply in England and Northern Ireland to transactions with effective dates on or after 23rd September. The effective date of the transaction will usually be the completion date.

The planned Corporation Tax rate increase (from 19% to 25%) has also been reversed which will be relevant to property investors holding residential property within a company.

Planning Considerations

The increase in the 3% SDLT threshold for purchasers of additional residential properties from £125,000 to £250,000 represents a SDLT saving of £2,500 for purchasers of buy-to-let investments and second homes worth £250,000 or more.

Property investors holding property within company structures will also be relieved to learn that the planned increase to the corporation tax rate has been reversed.

Under the previous government’s plans, the rate of Corporation Tax was to increase from 19% to 25% from April 2023 for firms making more than £250,000 profit; while companies making between £50,000 and £250,000 would also face a rise in Corporation Tax, with the rate increasing incrementally from 19% to 25% depending on how much profit was being made.

From a general perspective, property investor clients will want to continue to consider the merits of holding buy-to-let properties jointly (if married or in a civil partnership) to make use of two capital gains tax annual exempt amounts on disposal, and potentially the personal allowance and basic rate band of a lower-earning spouse/civil partner in relation to rental income.

Clients who are considering buying new properties may want to consider purchasing those properties within a corporate structure to take advantage of lower rates of corporation tax – especially now that the proposed rate increase (that was set to take effect from 1 April 2023) has been reversed.

And for property investors who will need to extract post-corporation tax rental profit as dividend, the announcement that dividend tax rates (for dividends in excess of the £2,000 0% tax band) will reduce to 7.5% for basic rate taxpayers, and to 32.5% for higher and additional rate taxpayers, from 6 April 2023, will be welcome news.

Bespoke tax advice will be essential as the most tax-efficient approach will depend on the circumstances and objectives of the client.

SEIS, EIS, VCT & Investment Zones

The Changes

From April 2023, companies will be able to raise up to £250,000 of SEIS investment, a two-thirds increase.

To support these increases, the annual investor limit will be doubled to £200,000.

Planning Considerations

Where the risk appetite of a client is appropriate, a SEIS provides generous taxation benefits for individual clients.

Equally, business owners should explore whether they can utilise the benefits to raise funds within their business.

The information provided in the statement was limited regarding EIS and VCT investments. However, it was confirmed that the government remains supportive of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) and sees the value of extending them in the future.

The timescales for the Investment Zones have yet to be announced. Depending on the specifics announced regarding Investment Zones there may be opportunities for clients and businesses based in the potential Investment Zones. More info to follow as soon as it is released.

Trust Taxation

The Changes

There have been no announcements in relation to trusts. However, the income tax changes announced and coming into force from 6 April 2023 will have a significant positive impact on trusts.

Planning Considerations

Trusts pay income tax at the highest rates on almost all income, therefore will see a reduction in tax due.

If trustees of a particular trust have a way of postponing receipts of any trust income (including realising chargeable event gains on an investment bond) until the next tax year they may consider doing so, as potential tax savings could be significant.