Personal taxation Archives

As Rachel Reeves prepares to deliver her first budget as Chancellor of the Exchequer on 30 October, businesses and individuals are bracing for significant economic shifts. With an apparent £22 billion deficit, Reeves is expected to announce a range of measures aimed at driving growth while maintaining monetary responsibility.

Reeves is favouring real-term growth in public spending through a combination of tax increases and selective borrowing. These policy adjustments will have broad implications for taxpayers, businesses, and many more.

As a leading firm in legal and financial advisory services, Tees offer expert advice and solutions for individuals and companies looking to understand the impact of the proposed measures.

Potential budget highlights

Income tax adjustments

Reeves is likely to adjust income tax thresholds, potentially pushing more earners into higher tax brackets. With the Institute for Fiscal Studies (IFS) estimating that lowering the personal allowance or basic-rate limit by 10% could yield billions, those in higher brackets need to prepare for greater tax liabilities.

Pension tax relief reforms

Significant reforms to pension tax relief could be on the table, with the potential to raise up to £15 billion annually. These changes are expected to affect those benefitting from higher-rate tax relief, potentially making pension contributions more costly for both individuals and employers.

Capital gains tax (CGT) increases

Reeves may also increase CGT rates or broaden the taxable base, potentially aligning it more closely with income tax. While this could generate revenue, it risks impacting investment portfolios.

Inheritance tax (IHT) adjustments

Changes to IHT, particularly around pensions, business assets, and agricultural land, are expected to raise additional revenue. Caps on exemptions and potential reforms to relief on Alternative Investment Market (AIM) shares could have a significant impact on estate planning.

Fuel duty increases and environmental taxation

Ending the freeze on fuel duty could raise £6 billion annually, a move aligned with environmental goals. This may impact businesses with high fuel consumption, particularly in logistics and transport sectors.

Windfall taxes on banks and private equity

The October budget may introduce windfall taxes on banks and higher taxes on private equity profits, targeting the substantial gains these sectors have seen amid rising interest rates.

Windfall Taxes on Banks – As banks benefit from widened net interest margins, a proposed one-off windfall tax could significantly impact their profitability and lending capacity. While this measure aims to generate revenue for the Treasury, it may lead to reduced lending, particularly affecting small and medium-sized enterprises (SMEs) that rely on bank financing.
Increased Taxes on Private Equity Profits – Reeves is also expected to align the taxation of carried interest in private equity with income tax rates, currently at 28%. This could discourage investment in higher-risk ventures and shift private equity firms toward lower-return strategies, potentially slowing innovation and start-up funding in the UK.

Revised fiscal rules

Reeves may introduce or revise fiscal rules, creating space for increased investment without destabilising public finances. Businesses looking to benefit from potential growth areas, including green infrastructure and housing, will need strategic advice to take full advantage of these opportunities.

As the UK prepares for Reeves’ budget, Tees is ready to assist clients in understanding and responding to the challenges and opportunities presented by these potential measures. Our team of legal and financial experts are equipped to provide tailored advice, helping businesses and individuals alike plan in a changing economic environment.

About Tees

Tees is a leading UK-based legal and financial advisory firm with over 110 years of experience. It offers expert services in a wide range of areas, including tax planning, wealth management, corporate law, and estate planning.

Our team of specialists can help individuals and businesses navigate complex legal and financial matters, ensuring they are well-positioned for the future.

We provide bespoke financial planning, pension advice, wealth management, estate planning, and corporate law services, helping clients adapt to changing regulations, maximise their financial potential, and achieve their long-term goals. Additionally, we can assist businesses in transitioning to greener alternatives, managing the financial impact of increased fuel duties, and capitalising on new government investments.

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Chancellor of the Exchequer, Jeremy Hunt, delivered his first spring budget on the 15th of March declaring it was “A budget for growth.” The fiscal update included a range of new measures, some of which had been widely trailed prior to budget day, in order to achieve growth “by removing obstacles that stop businesses investing; by tackling labour shortages that stop them recruiting; by breaking down barriers that stop people working; and by harnessing British ingenuity to make us a science and technology superpower.”

OBR forecasts

The Chancellor began his statement by unveiling the latest economic projections produced by the office for budget responsibility (OBR) which he said showed the UK would meet the Prime Minister’s priorities to “halve inflation, reduce debt and get the economy growing.” In relation to the first priority, Mr Hunt said the latest OBR figures suggest inflation will fall from an average rate of 10.7% in the final quarter of last year to 2.9% by the end of 2023. This sharp decline is partly due to some of the chancellor’s budget measures, including the three-month extension to the household energy price guarantee (EPG), which the government had confirmed earlier in the day.

Mr Hunt also said the OBR forecast suggests the UK economy will now avoid a technical recession this year (defined as two consecutive quarters of economic decline) and then expand in each of the remaining years of the five-year forecast period. According to the updated figures, the economy is expected to shrink by 0.2% this year, a significant upgrade from last autumn’s forecast of a 1.4% contraction, with growth then predicted to hit 1.8% in 2024 and 2.5% in 2025, before easing back towards its medium-term potential growth rate of 1.75% by 2028.

The Chancellor’s growth strategy focuses on the four pillars ‘everywhere, enterprise, employment and education,’ as previously outlined in his Bloomberg speech in January.

Everywhere

Mr Hunt spoke about the government’s plans for ‘levelling up,’ including the launch of 12 new investment zones. Across these “12 potential Canary Wharfs,” £80m of support per zone will be available for skills, infrastructure and tax reliefs. Mr Hunt also mentioned specific projects selected for local investment, including:

£200m for local regeneration projects and £400m for new levelling up partnerships across England
£8.8bn over the next five-year funding period for the city region sustainable transport settlements
Up to £8.6m for the Edinburgh festivals, as well as £1.5m for the repair of Cloddach bridge, near Elgin, and £20m for the restoration of the Holyhead breakwater in Anglesey
Up to £3m to extend the tackling paramilitarism programme in Northern Ireland.

Enterprise

To provide the right conditions for businesses to succeed: A ‘full expensing’ policy will apply from the 1st of April 2023 until the 31st of March 2026 to allow investment in IT, plant or machinery to be deducted in full and immediately from taxable profits
an increased rate of relief for loss-making research and development (R&D)-intensive small and medium size enterprises (SMEs) – eligible companies will receive a £27 credit from HMRC for every £100 of R&D investment
an extension of higher reliefs for theatres, orchestras, museums and galleries for two further years
the medicines and healthcare products regulatory agency (MHRA) will receive £10m extra funding over two years
all of the recommendations from Sir Patrick Vallance’s review of pro-innovation regulation of digital technologies are accepted
£900m of funding for AI research resources and an exascale computer as well as a commitment to £2.5bn ten-year quantum research and innovation programme through the government’s new quantum strategy
innovation accelerators programme – £100m funding for 26 transformative R&D projects
AI challenge prize – £1 million prize every year for the next ten years to researchers that drive progress in critical areas of AI.

Employment

The Chancellor turned next to employment, with a suite of new measures to “remove the barriers that stop people who want to from working.” To achieve this, he announced:

Mature workers

The expansion of the DWP’s ‘midlife’ MOT scheme, aiming to reach up to 40,000 individuals per year (up from the current 8,000)
new ‘returnerships’ scheme to make existing skills programmes more accessible to older workers and help them upskill and retrain
a pension tax relief overhaul; see details in the personal taxation and pensions section.
people with long-term illnesses and disabilities
a white paper on disability benefits reform
the abolition of the work capability assessment for disability benefits claimants
a new voluntary employment scheme for people with disabilities
£406m to increase support for working adults with mental health, musculoskeletal and cardiovascular problems.

Welfare recipients

An increase to the Administrative Earnings Threshold
a stronger sanctions regime for universal credit claimants.

Care leavers

A 50% increase in funding for the staying close programme
an increase in the qualifying care relief threshold to £18,140 per year plus £375 to £450 per person cared for per week for 2023/24 and these thresholds will then be index-linked, representing a tax cut worth approximately £450 per year on average.

Education

Mr Hunt then turned to Education, stating that he wants to reform the childcare system, currently “one of the most expensive systems in the world.”

His new proposal will offer 30 free hours of childcare each week to pre-school-age children aged nine months or above in English households where both parents work. It will be phased in on the following timeline:

April 2024 – eligible two-year-olds will receive 15 hours of free childcare per week
September 2024 – qualifying children aged nine months to two years will receive 15 hours
September 2025 – eligible children aged nine months to three years will receive 30 hours.

Also, schools and local authorities will be funded to increase the availability of wraparound care, to enable parents of school-age children to drop them off between 8 am and 6 pm.

To tackle the problem of unaffordable upfront costs, Mr Hunt also announced support for the 700,000 families on universal credit. Another major change involves each staff member in England being able to look after five two-year-olds instead of four, as is already the case in Scotland.

Personal Taxation and Pensions

To encourage over-50s to extend their working lives, the government is increasing tax relief limits on pension contributions and pots – the annual allowance will be raised from £40,000 to £60,000 from April 2023; the lifetime allowance (LTA) charge will be removed from April 2023, and the LTA will be abolished from April 2024. The maximum amount that can be accessed tax free (pension commencement lump sum) will be frozen at its current level of £268,275 (25% of current LTA). From April, the minimum tapered annual allowance (TAA) and the money purchase annual allowance (MPAA) will increase from £4,000 to £10,000 and the adjusted income threshold for the TAA will also rise, from £240,000 to £260,000.

As a reminder, the following changes were previously announced in the Autumn statement 2022:

The income tax additional rate threshold (ART) at which 45p becomes payable is lowered from £150,000 to £125,140 from April 2023. The ART for non-savings and non-dividend income will apply to taxpayers in England, Wales and Northern Ireland
the dividend allowance reduces from £2,000 to £1,000 from April 2023 and to £500 from April 2024
the annual capital gains tax exemption reduces from £12,300 to £6,000 from April 2023 and to £3,000 from April 2024
The stamp duty land tax nil-rate threshold for England and Northern Ireland is £250,000 for all purchasers and £425,000 for first-time buyers, remaining in place until 31 March 2025.

In addition:

The income tax personal allowance and higher rate threshold remain at £12,570 and £50,270 respectively until April 2028 (rates and thresholds may differ for taxpayers in parts of the UK where income tax is devolved)
the basic state pension will increase in April 2023 from £141.85 per week to £156.20 per week, while the full new state pension will rise from £185.15 to £203.85 per week. The standard minimum income guarantee in pension credit will also increase in line with inflation from April 2023 (rather than in line with average earnings growth)
inheritance tax (IHT) nil-rate bands remain at £325,000 nil-rate band, £175,000 residence nil-rate band, with taper starting at £2m – fixed at these levels until April 2028
national insurance contributions (NICs) upper earnings limit (UEL) and upper profits limit (UPL) are frozen until April 2028
The ISA (individual savings account) allowance remains at £20,000 and the JISA (junior individual savings account) allowance and child trust fund annual subscription limits remain at £9,000.

Other key points

Potholes fund – an extra £200m for local road maintenance in England in 2023/24
alcohol duty – rates frozen until August 2023 then uprated by RPI, draught relief increased to 9.2% for beer and cider and 23% for wine from 1 August 2023
fuel duty rates – maintaining the rates of fuel duty at the current levels for an additional 12 months
defence spending – an extra £4.95bn for defence over 2023/24 and 2024/25
support for veterans – an additional £33m over the next three years
swimming pool support fund – over £60m for public swimming pools across England
support for charities and community organisations – £100m (England)
plastic packaging tax rate – uprated in line with CPI from 1 April 2023
launching ‘great British nuclear’ – supporting new nuclear builds, £20bn available for carbon capture, utilisation and storage (CCUS), and extending the climate change agreement scheme for a further two years
devolved administrations – receiving an additional £630m through the Barnett formula over 2023/24 and 2024/25 (Scottish government £320m, Welsh government £180m and Northern Ireland executive £130m).

Closing comments

Jeremy Hunt signed off his announcement saying, “today we build for the future with inflation down, debt falling and growth up. The declinists are wrong and the optimists are right. We stick to the plan because the plan is working.”

If you have any queries or need more information on any of the areas covered, or any other financial matter, please do not hesitate to contact us.

Information within this document is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on individual circumstances.

All details are believed to be correct at the time of writing (15 March 2023)